<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b)of the Act:
Title of each class Name of each exchange on which registered
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Common Stock - $0.01 par value New York Stock Exchange, Inc.
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 12, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $8,112,875,618. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant, and certain investment companies managed
by Charles Schwab Investment Management, Inc. were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 12, 1998 was
267,742,421* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1997 Annual Report to Stockholders by reference to portions of that
document. Part III of this Form 10-K incorporates certain information contained
in the registrant's definitive proxy statement for its annual meeting of
stockholders to be held May 11, 1998 by reference to portions of that document.
* Reflects the September 1997 three-for-two common stock split.
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THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
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<S> <C>
Part I
Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 9
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 9
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 10
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 10
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 11
Part III
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 11
Item 11. Executive Compensation ------------------------------------------------------------------------------- 14
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 14
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 14
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 14
Exhibit Index ---------------------------------------------------------------------------------- 15
Signatures ------------------------------------------------------------------------------------- 21
Index to Financial Statement Schedules --------------------------------------------------------- F-1
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<PAGE>
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. As used herein, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Mayer & Schweitzer, Inc.
(M&S), a subsidiary acquired in 1991, is a market maker in Nasdaq and other
securities that provides trade execution services to broker-dealers and
institutional customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and Charles Schwab Europe
(formerly known as ShareLink). CSIM, incorporated in 1989, acts as the
investment adviser for Schwab's proprietary mutual funds. The Company refers to
certain funds for which CSIM is the investment adviser as the
SchwabFunds-Registered Trademark-. CSTC, incorporated in 1992, provides custody
services for independent investment managers and serves as trustee for employee
benefit plans, primarily 401(k) plans. Charles Schwab Europe, acquired in 1995
to expand the Company's international operations, is a retail discount
securities brokerage firm located in the United Kingdom.
New developments in the Company's business during 1997 include the
continued expansion of products and services tailored to meet customers' varying
investment and financial needs. During 1997, Schwab announced alliances with
three investment banking firms to provide certain of its customers initial and
secondary public stock offerings managed by these firms. Additionally, the
Company began to offer access to futures and commodities trading to certain of
its most active customers. The Company is also enhancing the ways it helps
investors develop and evaluate their investment choices. In 1997, the Company
introduced a number of new Internet-based investment services, including the
Asset Allocation Toolkit-TM- for portfolio allocation guidance, and the Mutual
Fund OneSource-Registered Trademark- Online and Market Buzz-TM- sites for
research and information. The Company also broadened its multi-channel delivery
systems to make investing more accessible to more people. During 1997, Schwab
introduced a speech recognition telephone trading service that enables customers
to trade any of the funds in the Mutual Fund Marketplace-Registered Trademark-
using vocal commands.
During 1997, the Company's Board of Directors declared a three-for-two
common stock split, distributed September 1997, effected in the form of a stock
dividend. Share and per share information throughout this report have been
restated. The Board increased the quarterly cash dividend 20% to $.04 per share
in 1997.
(b) Financial Information About Industry Segments. The Company operates in
a single industry segment: securities brokerage and related financial services.
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1997. As of December
31, 1997, approximately 28% of Schwab's total customer accounts were located in
California. The next highest geographic concentrations of total customer
accounts were approximately 8% in Florida, 7% in New York and 6% in Texas.
(c) Narrative Description of Business. 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 primary focus is serving retail investors, directly or
through independent investment managers, who want access to a broad selection of
products and services, as well as investment news and information, tailored to
meet their financial needs. The Company, through Schwab, serves over 4.8 million
active customer accounts(a). Customer assets totaled $353.7 billion at December
31, 1997.
The Company, through Schwab and M&S, engages in market-making activities
in exchange-listed, Nasdaq and other equity securities. Regulatory changes
and changes in industry customs and practices are significantly impacting
these market-making activities. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Company's 1997
Annual Report to Stockholders, which is incorporated herein by reference
to Exhibit No. 13.1 of this report, and "Regulation" below.
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. Such fluctuations
are affected by many national and international economic and political factors
that cannot be predicted, including broad trends in business and finance, the
availability of credit and capital, legislation and regulation affecting the
United States and international business and financial communities, currency
values, and the level and volatility of interest rates.
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(a) Accounts with balances or activity within the preceding twelve months.
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Sources of Revenues
(Dollar amounts in thousands)
Year Ended December 31,
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1997 1996 1995
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Type of Revenue Amount Percent Amount Percent Amount Percent
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<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 527,321 22.9% $ 423,232 22.9% $ 356,069 25.1%
Nasdaq 465,137 20.2% 393,882 21.3% 283,024 19.9%
Options 103,372 4.5% 66,210 3.5% 53,333 3.8%
Mutual funds 78,193 3.5% 70,805 3.8% 58,470 4.1%
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Commissions 1,174,023 51.1% 954,129 51.5% 750,896 52.9%
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Mutual fund service fees 427,673 18.6% 311,067 16.8% 218,784 15.4%
Interest revenue
Margin loans to customers 489,197 21.3% 339,433 18.3% 264,025 18.6%
Investments, customer-related 380,443 16.5% 316,760 17.1% 283,031 19.9%
Other 30,395 1.4% 24,667 1.4% 21,064 1.6%
Interest expense (546,483) (23.8%) (425,872) (23.0%) (357,223) (25.2%)
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Interest revenue, net of
interest expense 353,552 15.4% 254,988 13.8% 210,897 14.9%
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Principal transactions 257,985 11.2% 256,902 13.9% 191,392 13.5%
Other 85,517 3.7% 73,836 4.0% 47,934 3.3%
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Total $2,298,750 100.0% $1,850,922 100.0% $1,419,903 100.0%
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This table should be read in connection with the Company's
consolidated financial statements and notes in the Company's
1997 Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
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Shifts in customer investment preferences or in customer usage of Schwab's
multi-channel delivery systems also could reduce trading revenues, which include
commission and principal transaction revenues. Since trading 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
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views its developmental spending as essential for future growth and therefore
tries 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 in
this report, the Company's earnings and common stock price may be subject to
significant volatility from period to period. The Company's results for any
period are not necessarily indicative of results for a future period.
The table above sets forth on a comparative basis the Company's revenues
for the three years ended December 31, 1997.
Competition
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 and offer a wider range of
services and financial products than the Company, particularly given the
continued consolidation within the financial services industry. In addition, the
recent expansion and customer acceptance of conducting financial transactions
online has attracted competition from software development companies and
providers of online services. In 1997, price competition continued to intensify
in the area of online investing as competitors sought to gain market share in
this rapidly growing area. The Company experienced declines in its average
commission per revenue trade as the proportion of its customers using electronic
brokerage channels, which provide discounts from the Company's standard
commission rates, has increased. As the Company focuses on further enhancements
to its electronic service offering, average commission per revenue trade is
expected to continue to decline. The Company primarily competes on the basis of
quality of customer service, breadth of products and services offered at prices
that management believes represent superior value, accessibility to the Company
through its multi-channel delivery systems, and technological innovation and
expertise.
Most discount brokerage firms and online-only financial services providers
charge commissions lower than Schwab. Full-commission brokerage firms also offer
discounted commissions to selected retail brokerage customers. Many brokerage
firms employ substantial funds in advertising and direct solicitation of
customers to increase their market share of commission dollars and other
securities-related income. Such competition may negatively impact the Company's
customer asset growth, revenue growth and profit margin.
Advertising and Marketing Programs
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. The Company's
advertising and market development expense was $130 million in 1997, compared to
$84 million in 1996 and $53 million in 1995. Expenditures for these programs
helped Schwab open 1,164,000 new accounts in 1997, compared to 985,000 in 1996
and 698,000 in 1995. New customer accounts represent a significant portion of
the growth in customer assets, which the Company believes is critical to growth
in revenues. Accounts opened during 1997 generated 17% of Schwab's commission
revenues during the year, compared to 16% in 1996 and 13% in 1995.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications. Schwab
advertisements appear regularly on national and local cable television and
periodically on radio and independent television stations. Schwab also engages
extensively in targeted direct mail advertising through monthly statement
"inserts" and special mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers both a broad range of products and services tailored to
meet customers' varying investment and financial needs, as well as access to
extensive investment news and information.
Accounts and Features. The Company offers the purchase and sale of
securities which include exchange-listed, Nasdaq and other equity securities,
options, mutual funds, unit investment trusts, variable annuities and fixed
income investments, including United States Treasuries, zero-coupon bonds,
listed and OTC corporate bonds, municipal bonds, GNMAs and CDs. In 1997, the
Company began to offer certain of its customers initial and secondary public
stock offerings, and access to futures and commodities trading. Customers
approved for margin transactions may borrow a portion of the price of certain
securities purchased through Schwab, or may sell securities short. Customers
must have specific approval to trade options; as of December 31, 1997, 258,000
accounts were so approved. To write uncovered options, customers must go through
an additional
<PAGE>
approval process and must maintain a significantly higher level of equity in
their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept, on a weekly basis, into certain
SchwabFunds-Registered Trademark- money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One-Registered Trademark- brokerage account. A customer may access
available funds in his or her Schwab One account either with a personal check or
a VISA-Registered Trademark- debit card. When a Schwab One customer is approved
for margin trading, the checks and debit card also provide access to margin cash
available. For cash balances awaiting investment, Schwab pays interest to Schwab
One customers. Alternatively, qualifying Schwab One customers seeking tax-exempt
income may elect to have cash balances swept into state-specific municipal
tax-exempt SchwabFunds money market funds or a tax-exempt municipal trust (for
Florida taxpayers only).
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three
SchwabFunds money market funds. During 1997, active IRAs increased 20% to
1,604,000 accounts and customer assets in all IRAs increased 35% to $88.2
billion. Schwab also acts as custodian and broker for Keogh accounts.
Customer Financing. Customers' securities transactions are conducted on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually three business days after the trade is executed. However, for purchases
of certain types of securities, such as certain mutual fund shares, a customer
must have a cash or money market fund balance in his or her account sufficient
to pay for the trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers may
sell securities short in a margin account subject to minimum equity and
applicable margin requirements and the availability of such securities to be
borrowed and delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During 1997, Schwab's outstanding margin loans to customers
averaged $6.4 billion.
In permitting a customer to engage in transactions, Schwab faces credit
risk if the customer fails to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 of the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by Schwab
at interest costs lower than Schwab's costs of borrowing from alternative
sources, Schwab's cost of funds is reduced and its net income is enhanced. Such
interest savings contribute substantially to Schwab's profitability and, if a
significant reduction of customer cash balances were to occur, Schwab's
borrowings from other sources may have to increase and such profitability would
decline. To the extent Schwab's customers elect to have cash balances in their
brokerage accounts swept into certain SchwabFunds money market funds, the cash
balances available to Schwab for investments or for financing margin loans are
reduced. However, Schwab receives mutual fund service fees from such funds based
on the daily average invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's 1997 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" below.
Mutual Funds. At December 31, 1997, Schwab's Mutual Fund
OneSource-Registered Trademark- service enabled customers to trade 825 mutual
funds in 121 fund families without incurring transaction fees. The service
allows investors to access multiple mutual fund companies, avoid brokerage
transaction fees, and achieve investment diversity among fund families. In
addition, investors' record keeping and investment monitoring are simplified
through one consolidated statement. Fees received by Schwab for providing
services, including record keeping and shareholder services, from the Mutual
Fund OneSource program are based upon daily balances of customer assets invested
in the participating funds through Schwab and are paid by the funds and/or fund
<PAGE>
sponsors. Customer assets held by Schwab that have been purchased through the
Mutual Fund OneSource-Registered Trademark- service, excluding Schwab's
proprietary funds, totaled $56.6 billion at the end of 1997.
Schwab's Mutual Fund Marketplace-Registered Trademark- (including Mutual
Fund OneSource) provides customers with the ability to invest in nearly 1,400
mutual funds in 219 fund families sponsored by third parties. Customer assets
invested in the Mutual Fund Marketplace, excluding the Mutual Fund OneSource
service, totaled $48.0 billion at the end of 1997. Schwab charges a transaction
fee on trades placed in the funds included in the Mutual Fund Marketplace
(except on trades through the Mutual Fund OneSource service). These fees are
recorded as commission revenues. Commissions from customer transactions in
mutual fund shares comprised approximately 7% of Schwab's total commission
revenues during the last three years.
Schwab's proprietary funds, collectively referred to as the
SchwabFunds-Registered Trademark-, include money market funds, equity index
funds, bond funds, asset allocation funds, and funds that primarily invest in
stock, bond and money market funds. Qualifying Schwab customers may elect to
have cash balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds were
$55.8 billion at the end of 1997. Fees received by the Company from the
SchwabFunds, for providing transfer agent services, shareholder services,
administration and investment management, are based upon daily balances of
customer assets invested in these funds.
Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade
execution services in Nasdaq and other securities to broker-dealers, including
Schwab, and institutional customers. As a market maker in Nasdaq and other
securities, M&S generally executes customer trades as principal. While
substantially all Nasdaq security trades originated by the customers of Schwab
are directed to M&S, the majority of M&S' trading volume comes from parties
other than Schwab.
Schwab has specialist operations on the Pacific Exchange and the Boston
Stock Exchange to make markets in exchange-listed securities. The majority of
trades originated by the customers of Schwab in exchange-listed securities for
which Schwab makes a market are directed to these operations. At December 31,
1997, Schwab had 14 specialists on the Pacific Exchange and 3 specialists on the
Boston Stock Exchange that collectively made markets in 900 and 100 securities,
respectively.
In the normal course of their market making in exchange-listed, Nasdaq and
other securities, Schwab and M&S maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
M&S' ownership of securities, short inventory positions represent obligations of
Schwab and M&S to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, long or short inventory positions may result in gains
or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Market Risk" in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
Services for Independent Investment Managers. To attract the business of
accounts managed by independent investment managers, Schwab has a dedicated
business unit which includes experienced registered representatives assigned to
individual managers. Independent investment managers participating in this
program who custody customer accounts at Schwab may use SchwabLink-Registered
Trademark- and the SchwabLink Web-TM- site for investment managers. SchwabLink
is a computer-based information network which enables investment managers to
access information about their customers' accounts directly from Schwab's
computer databases and to enter their customers' trades online. The SchwabLink
Web site enables investment managers to use the Internet to communicate directly
with Schwab service teams, as well as receive news and information. During 1997,
Schwab customer assets held in accounts managed by over 5,300 active independent
investment managers increased $32.9 billion, or 45%, to a total of $105.8
billion. Independent investment managers and other professional investors
generated approximately 12% of Schwab's total commission revenues during the
last three years.
Retirement Plan Services. Schwab serves company 401(k) plans directly
through a dedicated sales force, as well as indirectly through alliances with
national and regional third-party administrators. Schwab offers SchwabPlan-TM-,
a comprehensive 401(k) retirement plan, which enables employers to offer a wide
range of investment options as well as employee education to their 401(k)
retirement plan participants. During 1997, Schwab continued to develop its
retirement plan services business, with customer assets in corporate 401(k) and
other plans growing $4.9 billion, or 48%, to $15.1 billion.
Multi-Channel Delivery Systems
The Company differentiates itself with multi-channel delivery systems which
allow customers to choose how they prefer to do business with the Company. In
addition to its branch office network, the Company maintains four regional
customer telephone service centers as well as electronic brokerage channels.
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Branch Office Network. At December 31, 1997, Schwab operated 272 domestic
branch offices in 47 states, as well as a branch in each of the Commonwealth of
Puerto Rico and the United Kingdom. In addition, in 1997, the Company opened new
offices in Hong Kong and the Cayman Islands. The Company's office network plays
a key role in building its business. With the customer service support of
regional customer telephone service centers and electronic brokerage channels,
branch personnel are focusing a significant portion of their time on business
development. Customers can use branch offices to open accounts, deliver and
receive checks and securities, obtain market information, place orders, and
obtain related customer services in person, yet most branch activities are
conducted by telephone and mail.
The Company is enhancing the ways in which it may help investors by using
the branch office network to assist 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.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle customer trading and service calls twenty-four hours-a-day,
seven days-a-week. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows the branch office network to be maintained at lower staffing
levels and to focus on business development.
The Company's customer service approach is to use teams led by registered
representatives in the service centers, who work closely with branch office
network personnel. Additionally, certain teams at these centers provide
specialized services to active and affluent investors. Each registered
representative has immediate access to the customer account and market-related
information necessary to respond to customer inquiries. For most customer
orders, registered representatives can enter the order and confirm the
transaction immediately. As a result of this approach, the departure of a
registered representative generally does not result in a loss of customers for
the Company.
Electronic Brokerage Channels. 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 automated telephonic
access. These channels are designed to provide added convenience for customers
and minimize Schwab's costs of responding to and processing routine customer
transactions. To assist customers in using online channels, the Company
maintains two online customer support centers that operate both during and after
normal market hours.
Online channels include PC-based services such as SchwabLink-Registered
Trademark-, and the Charles Schwab Web Site-TM- (formerly known as
SchwabNOW!-TM-) -- an information and trading service on the Internet. The
Company's online channels handled 37% of total trades in 1997. Automated
telephonic channels include TeleBroker-Registered Trademark- -- Schwab's
touch-tone telephone trading service, and VoiceBroker-TM- -- Schwab's voice
recognition quote service. Schwab's automated telephonic channels handled 73% of
total customer calls received in 1997. Trades placed through electronic
brokerage channels provide discounts from the Company's standard commission
rates.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its multi-channel delivery systems, as well as other
applications such as clearing functions, account administration, record keeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered United States securities exchanges, M&S, the National
Securities Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds, such as security price information, as well as internal
malfunctions, such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains carefully monitored backup and recovery functions. These include
logging of all critical files intraday, duplication and storage of all critical
data outside of its central computer site every 24 hours, and maintenance of
facilities for backup and communications in San Francisco. They also include the
maintenance and periodic testing of a disaster recovery plan that management
believes would permit Schwab to recommence essential computer operations if its
central computer site were to become inaccessible. To reduce the exposure to
system failures caused by external
<PAGE>
factors, including earthquakes, the Company's primary data center is located in
Phoenix.
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. See also "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Year 2000" in the Company's
1997 Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
customer fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab takes the
risk of the other party's failure to settle the trade. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" note in the Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Employees
As of December 31, 1997, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 12,700 full-time employees.
Regulation
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The Securities and Exchange
Commission (SEC) is the Federal agency charged with administration of the
Federal securities laws. Schwab and M&S are registered as broker-dealers with
the SEC. Schwab and CSIM are registered as investment advisers with the SEC.
Additionally, Schwab is regulated by the Commodities Futures Trading Commission
(CFTC) with respect to its introduced futures and commodities trading
activities.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers (NASD) and the national securities exchanges such as the New
York Stock Exchange (NYSE), which has been designated by the SEC as Schwab's
primary regulator with respect to its securities activities. The NASD has been
designated by the SEC as M&S' primary regulator with respect to its securities
activities. During 1997, the Chicago Board Options Exchange (CBOE) was Schwab's
designated primary regulator with respect to options trading activities; the
NYSE has been designated as such for 1998 and 1999. The National Futures
Association has been designated by the CFTC as Schwab's primary regulator with
respect to its introduced futures and commodities trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC or
CFTC) governing the industry and conduct periodic examinations of
broker-dealers. Securities firms are also subject to regulation by state
securities authorities in the states in which they do business. Schwab was
registered as a broker-dealer in 50 states, the District of Columbia and Puerto
Rico as of December 31, 1997. M&S was registered as a broker-dealer in 32 states
and the District of Columbia as of December 31, 1997.
The principal purpose of regulations and discipline of broker-dealers and
investment advisers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisers. The regulations to which broker-dealers and investment
advisers are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping, fee arrangements, disclosure to clients, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers. The SEC,
CFTC, self-regulatory organizations and state securities authorities may conduct
civil or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or
<PAGE>
expulsion of a broker-dealer or an investment adviser, its officers, or
employees. Schwab and M&S have been the subject of such administrative
proceedings.
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which have significantly altered the manner
in which orders related to both Nasdaq and listed securities are handled. These
rules were implemented in phases between January 20, 1997 and October 13, 1997.
Additionally, in June 1997, most major United States securities markets,
including Nasdaq and the NYSE, 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
changes to reduce 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 1997 as
compared to 1996. Since the change to trading securities in increments of
one-sixteenth dollar per share was not implemented until 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 the average during substantially all of 1997. Recent and future
regulatory changes, changes in industry customs and practices, and changes in
trading systems are expected to continue to result in declines in average
revenue per principal transaction, and are expected to have a material adverse
impact on M&S' revenues and profit margin. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Revenues --
Principal Transactions" and "Commitments and Contingent Liabilities" note in the
Notes to Consolidated Financial Statements in the Company's 1997 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
As registered broker-dealers and NASD member organizations, Schwab and M&S
are required by Federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of between-investment cash balances. SIPC is funded through assessments
on registered broker-dealers. In addition, in 1997, Schwab purchased from a
private surety company additional account protection of up to $99.5 million per
customer, as defined, for customer securities positions only. Stocks, bonds,
mutual funds and money market funds are considered securities and are protected
on a share basis for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
Schwab is also authorized by the Municipal Securities Rulemaking Board to
conduct transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the CBOE govern the
amount of margin customers must provide and maintain in writing uncovered
options.
As a California state-chartered trust company, CSTC is primarily regulated
by the California State Banking Department. Since it provides employee benefit
plan trust services, CSTC is also required to comply with the Employee
Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to
oversight by both the Internal Revenue Service and Department of Labor. CSTC is
required under ERISA to maintain a fidelity bond for the protection of employee
benefit trusts for which it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority (SFA) in the United Kingdom,
and engages in business development activities on behalf of Schwab.
Charles Schwab Europe is registered as a broker-dealer with the SFA in the
United Kingdom.
Net Capital Requirements
As registered broker-dealers, Schwab and M&S are subject to the Uniform Net
Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule), which
has also been adopted through incorporation by reference in NYSE Rule 325.
Schwab is a member firm of the NYSE and the NASD, and M&S is a member firm of
the NASD. The Net Capital Rule specifies minimum net capital requirements and is
designed to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
<PAGE>
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 of the Securities Exchange Act
of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than 15 consecutive
business days; NYSE Rule 326 also prohibits the expansion of business if net
capital is less than 5% of aggregate debit items for more than 15 consecutive
business days. The provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings during
the following six months) would result in a reduction of a firm's net capital to
the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital Resources
- -- Liquidity" in the Company's 1997 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1997, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $156 million and had total regulatory net capital
of $823 million. At December 31, 1997, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $667 million, $512 million and $434 million,
respectively.
At December 31, 1997, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital of
$5 million. At December 31, 1997, the amount in excess of its minimum required
net capital was $4 million.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. In 1997, Schwab entered into a lease for 396,000 square
feet of office space located at 211 Main Street in San Francisco, California.
The lease expires in 2018 and includes two ten-year extension options at then
current market rates. In addition to these locations, Schwab also leases space
in other buildings for its San Francisco operations aggregating 755,000
additional square feet at year-end 1997. M&S' headquarters are located in leased
office space in Jersey City, New Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception.
The Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
330,000 and 164,000 square feet, respectively. The Company leases the service
centers located in Orlando and Denver, with 217,000 and 163,000 square feet,
respectively.
The Company owns its primary data center facility located in Phoenix with
105,000 square feet.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is set forth
under the caption "Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of
Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
<PAGE>
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the ticker symbol SCH. The number of common stockholders of record as of
March 12, 1998 was 6,667.
The other information required to be furnished pursuant to this item is set
forth under the caption "Quarterly Financial Information (Unaudited)" in the
Company's 1997 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is set forth
under the caption "Selected Financial and Operating Data" in the Company's 1997
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Company's 1997 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1997 and
1996 are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 6,353 $ 6,544
Average interest rate 5.42% 5.33%
Margin loans to customers:
Average balance outstanding $ 7,702 $ 4,812
Average interest rate 7.74% 7.55%
Average yield on interest-earning assets 6.69% 6.27%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $ 11,180 $ 9,137
Average interest rate 4.63% 4.42%
Other interest-bearing sources:
Average balance outstanding $ 1,217 $ 926
Average interest rate 4.43% 4.24%
Average noninterest-bearing portion $ 1,658 $ 1,293
Average interest rate on funding sources 4.07% 3.90%
Summary:
Average yield on interest-earning assets 6.69% 6.27%
Average interest rate on funding sources 4.07% 3.90%
- -----------------------------------------------------------------
Average net interest margin 2.62% 2.37%
=================================================================
</TABLE>
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1996 to the fourth quarter of 1997 was primarily due to higher levels
of average earning assets.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Market Risk" in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 8. Financial Statements and
Supplementary Data
The information required to be furnished pursuant to this item is set forth
in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1997 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
<PAGE>
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of
the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the SEC pursuant to Regulation 14A within 120 days after
December 31, 1997 (the Proxy Statement) under the captions "The Board of
Directors" and "Principal Stockholders." Information regarding Lawrence J.
Stupski has been omitted from the Proxy Statement, pursuant to Instruction 3 to
Item 401(a) of Regulation S-K, due to his retirement as Vice Chairman and
Director effective January 1998 and May 1998, respectively.
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2001, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================================
Executive Officers of the Registrant
Name Age Title
---- --- -----
<S> <C> <S>
Charles R. Schwab 60 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 49 President, Co-Chief Executive Officer,
Chief Operating Officer, and Director
Timothy F. McCarthy 46 President and Chief Operating Officer, Charles Schwab
& Co., Inc.
Karen W. Chang 49 Enterprise President - General Investor Services
John Philip Coghlan 46 Enterprise President - Retirement Plan Services
Linnet F. Deily 52 Enterprise President - Services for Investment Managers
Lon Gorman 49 Enterprise President - Capital Markets and Trading
Daniel O. Leemon 44 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 43 Executive Vice President and Chief Information Officer
Susanne D. Lyons 40 Enterprise President - Retail Investor Specialized Services
Gideon Sasson 42 Enterprise President - Electronic Brokerage
Steven L. Scheid 44 Executive Vice President and Chief Financial Officer
Tom Decker Seip 48 Enterprise President - Mutual Funds and International
Luis E. Valencia 53 Executive Vice President and Chief Administrative Officer
==============================================================================================================================
</TABLE>
Mr. Schwab has been Co-Chief Executive Officer of the Company since January
1, 1998, and Chairman and a director of the Company since its incorporation in
1986. Mr. Schwab was Chief Executive Officer of the Company from 1986 to 1997.
Mr. Schwab was a founder of Schwab in 1971 and has been its Chairman since 1978.
Mr. Schwab is currently a director of The Gap, Inc., Transamerica Corporation,
Siebel Systems, Inc., AirTouch Communications, Inc. and a trustee of The Charles
Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab
Annuity Portfolios, all registered investment companies.
Mr. Pottruck has been Co-Chief Executive Officer of the Company since
January 1, 1998, Chief Operating Officer and a director of the Company since
1994, and President of the Company since 1992. Mr. Pottruck has been Chief
Executive Officer of Schwab since 1992 and was President of Schwab from 1988 to
1997. Mr. Pottruck joined Schwab in 1984. Mr. Pottruck was named a director of
Decibel Instruments, Inc., McKesson Corporation and Preview Travel, Inc. in
1997.
Mr. McCarthy has been President and Chief Operating Officer of Schwab and
First Executive Vice President of the Company since September 1997. Mr. McCarthy
was Executive Vice President - Financial Products and International Group of the
Company and Schwab from 1996 to 1997, and was Executive Vice President - Mutual
Funds of the Company and Schwab and Chief Executive Officer of CSIM from 1995 to
1997. Before joining Schwab in 1995, Mr. McCarthy was Chief Executive Officer of
Jardine Fleming Unit Trusts Ltd., a mutual fund company, from 1994 to 1995. From
1987 to 1994, Mr. McCarthy held various executive positions with Fidelity
Investments, including President of Fidelity Investments Advisor Group,
President of National Financial Institutional Services and Executive Director of
Fidelity Brokerage Group.
Ms. Chang has been Enterprise President - General Investor Services of
Schwab and Executive Vice President of the Company since October 1997. Ms. Chang
was Executive Vice President - Retail Branch Network of the Company and Schwab
from 1996 to 1997 and Senior Vice President - Retail Branch Network of the
Company and Schwab from
<PAGE>
1994 to 1996. Prior to joining Schwab in 1994, Ms. Chang was Senior Marketing
Vice President of American Express Company from 1989 to 1994.
Mr. Coghlan has been Enterprise President - Retirement Plan Services of
Schwab since October 1997 and Executive Vice President of the Company since
1992. Mr. Coghlan was Executive Vice President of Schwab and General Manager of
Schwab Institutional from 1992 to 1997. Mr. Coghlan joined Schwab in 1986,
became Vice President in 1988 and became Senior Vice President in 1990.
Ms. Deily has been Enterprise President - Services for Investment Managers
of Schwab and Executive Vice President of the Company since October 1997. Ms.
Deily was Executive Vice President and General Manager - Services for Investment
Managers of the Company and Schwab from 1996 to 1997. Before joining Schwab in
1996, Ms. Deily was Chairman, President and Chief Executive Officer of First
Interstate Bank of Texas from 1991 to 1996.
Mr. Gorman has been Enterprise President - Capital Markets and Trading of
Schwab and Executive Vice President of the Company since October 1997. Mr.
Gorman was Executive Vice President - Capital Markets and Trading of the Company
and Schwab from 1996 to 1997. Before joining Schwab in 1996, Mr. Gorman was a
Managing Director of Credit Suisse First Boston Corporation from 1988 to 1996.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon
held various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
Ms. Lepore has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 1993. Ms. Lepore joined Schwab in 1983 and
became Senior Vice President in 1989.
Ms. Lyons has been Enterprise President - Retail Investor Specialized
Services of Schwab and Executive Vice President of the Company since October
1997. Ms. Lyons was Executive Vice President - Retail Marketing of the Company
and Schwab from 1996 to 1997 and Senior Vice President - Active Trader of the
Company and Schwab from 1994 to 1996. Ms. Lyons was Senior Vice President -
Retail Service Delivery of the Company and Schwab from 1993 to 1994 and Senior
Vice President - Retail Marketing of the Company and Schwab from 1992 to 1993.
Ms. Lyons joined Schwab in 1992.
Mr. Sasson has been Enterprise President - Electronic Brokerage of Schwab
and Executive Vice President of the Company since November 1997. Mr. Sasson was
Senior Vice President - Electronic Brokerage of the Company and Schwab from 1995
to 1997. Before joining Schwab in 1995, Mr. Sasson was Vice President -
Information Services of International Business Machines Corporation in 1995. Mr.
Sasson was Vice President, Systems Engineering of FYI Online, a joint venture of
MCI Communications Corporation and Equifax, Inc., from 1992 to 1995.
Mr. Scheid has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since 1996. Before joining Schwab in 1996, Mr. Scheid was
Executive Vice President of Finance of First Interstate Bancorp from 1994 to
1996 and was Principal Financial Officer from 1995 to 1996. From 1990 to 1994,
Mr. Scheid was Chief Financial Officer of First Interstate Bank of Texas.
Mr. Seip has been Enterprise President - Mutual Funds and International of
Schwab and Executive Vice President of the Company since October 1997, and Chief
Executive Officer of CSIM since December 1997. Mr. Seip was Executive Vice
President - Retail Brokerage of the Company and Schwab from 1994 to 1997. Mr.
Seip was President of CSIM from 1992 to 1994 and Chief Operating Officer of CSIM
from 1991 to 1994. From 1992 to 1994, Mr. Seip was Executive Vice President -
Mutual Funds and Fixed Income Products of the Company and Schwab. Mr. Seip
joined Schwab in 1983.
Mr. Valencia has been Executive Vice President and Chief Administrative
Officer of the Company and Schwab since 1996. From 1994 to 1996, Mr. Valencia
was Executive Vice President - Human Resources of the Company and Schwab. Before
joining Schwab in 1994, Mr. Valencia served as a Managing Director of Commercial
Credit Company, a subsidiary of Travelers Group Inc. engaged in consumer finance
for Travelers Group Inc., from 1993 to 1994. From 1975 to 1993, Mr. Valencia
held various positions with Citicorp, including President and Chief Executive
Officer of Transaction Technology, a subsidiary of Citicorp, from 1990 to 1993.
<PAGE>
Item 11. Executive Compensation
The information required to be furnished pursuant to this item
is incorporated by reference from portions of the Proxy Statement
under the captions "Director Compensation," "Executive Compensation,"
"Employment and Severance Agreements," "Executive Compensation Table,"
"Option Grants," "Options Exercised" and "Certain Transactions."
Item 12. Security Ownership of Certain Bene-
ficial Owners and Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the caption
"Principal Stockholders."
Item 13. Certain Relationships and Related
Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under the
caption "Certain Transactions."
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form
8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are set forth in
the Company's 1997 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
On December 24, 1997, the Registrant filed a Current Report on Form 8-K
relating to (i) fourth quarter and year-end expected earnings and (ii)
announcement of the settlement of certain class-action litigation.
<PAGE>
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
3.7 Third Restated Certificate of Incorporation, as amended on May 6, 1996,
of the Registrant, filed as Exhibit 3.7 to the Registrant's Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
3.8 Second Restated Bylaws, as amended on July 17, 1996, of the Registrant,
filed as Exhibit 3.8 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any instrument
with respect to long-term debt for which securities authorized thereunder exceed
10% of the total assets of the Registrant and its subsidiaries on a consolidated
basis. Copies of instruments with respect to long-term debt of lesser amounts
will be provided to the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former
shareholders of Schwab Holdings, Inc. *
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab & Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated February 21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta Systems,
Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush Street
Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant and
certain members of the Board of Directors of Registrant, filed as Exhibit 10.34
to the Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.57 Registration Rights and Stock Restriction Agreement, dated as of March
31, 1987, between the Registrant and the holders of the Common Stock, filed as
Exhibit 4.23 to Registrant's Registration Statement No. 33-16192 on Form S-1 and
incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant, filed as
Exhibit 10.72 to the Registrant's Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25, 1990, filed
as Exhibit 10.87 to the Registrant's Form 10-Q for the quarter ended September
30, 1995 and incorporated herein by reference.
<PAGE>
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, effective January 1, 1992, dated
December 20, 1991, filed as Exhibit 10.101 to the Registrant's Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992, dated June 30,
1992, filed as Exhibit 10.116 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock Ownership
Plan and Trust. +
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended,
effective January 1, 1994, filed as Exhibit 10.132 to Registrant's Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee Directors,
filed as Exhibit 4.4 to the Registrant's Registration Statement No. 33-47842 on
Form S-8 and incorporated herein by reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and incorporated
herein by reference. +
10.143 Form of Nonstatutory Stock Option Agreement, filed as Exhibit 10.143 to
the Registrant's Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit 10.144 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated
herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995, filed as Exhibit 10.146 to the Registrant's Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference. +
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995 (formerly the
Annual Executive Bonus Plan), filed as Exhibit 10.147 to the Registrant's Form
10-K for the year ended December 31, 1994 and incorporated herein by reference.+
10.149 Employment Agreement dated as of March 31, 1995 between the Registrant
and Charles R. Schwab, filed as Exhibit 10.149 to the Registrant's Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference. +
10.152 The Charles Schwab Profit Sharing and Employee Stock Ownership Plan,
amended July 6, 1995, effective January 1, 1995 and April 1, 1995, filed as
Exhibit 10.152 in the Registrant's Form 10-Q for the quarter ended June 30, 1995
and incorporated herein by reference. +
<PAGE>
10.155 Forms of Restricted Share Award Agreements, incorporating performance
vesting provisions and/or supplemental cash payment provisions, filed as Exhibit
10.155 in the Registrant's Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by letter
agreement dated September 21, 1995 and by Second Amendment to Agreement of Sale
dated September 22, 1995, between American Express Company and Charles Schwab &
Co., Inc., regarding American Express Western Regional Operations Center located
at 2423 Lincoln Drive, Phoenix, Arizona, filed as Exhibit 10.156 in the
Registrant's Form 10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference.
10.157 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
effective January 1, 1996, filed as Exhibit 10.157 to the Registrant's Form 10-K
for the year ended December 31, 1995 and incorporated herein by reference. +
10.158 Credit Agreement dated June 28, 1996 between the Registrant and the
banks listed therein, filed as Exhibit 10.158 to the Registrant's Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
10.159 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended September 17, 1996, with form of Non-Qualified Stock Option
Agreement (Executive Officer Stock Option Plan (1987)) attached, filed as
Exhibit 10.159 to the Registrant's Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference. +
10.160 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
September 17, 1996, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached (supersedes Exhibit 10.73), filed as Exhibit 10.160 to
the Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.161 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended
September 17, 1996 (supersedes Exhibit 10.141), filed as Exhibit 10.161 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference. +
10.162 The Charles Schwab Corporation Deferred Compensation Plan, as amended
September 17, 1996, filed as Exhibit 10.162 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co. and
Charles Schwab & Co., Inc. dated October 8, 1996, filed as Exhibit 10.163 to the
Registrant's Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.
<PAGE>
10.164 Office Lease of Pacific Telesis Center Telesis Tower between Post-
Montgomery Associates and Charles Schwab & Co., Inc. dated October 4, 1996,
filed as Exhibit 10.164 to the Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan,
restated to include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan
(1987)) attached, (supersedes Exhibit 10.159) filed as Exhibit 10.166 to the
Registrant's Form 10-Q for the quarter ended March 31, 1997 and incorporated
herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of Non-Qualified Stock
Option Agreement attached, (supersedes Exhibit 10.160) filed as Exhibit 10.167
to the Registrant's Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference. +
10.168 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 13, 1996 (supersedes Exhibit 10.152) filed as Exhibit
10.168 to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996, dated May
8, 1996 filed as Exhibit 10.169 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference. +
10.170 The Charles Schwab Corporation 1992 Stock Incentive Plan Restated as of
May 12, 1997 (supersedes Exhibit 10.161) filed as Exhibit 10.170 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.171 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8) filed as Exhibit
10.171 to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.172 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.143) filed as
Exhibit 10.172 to the Registrant's Form 10-Q for the quarter ended June 30, 1997
and incorporated herein by reference. +
10.173 Form of Nonstatutory Stock Option and Performance Unit Agreement of The
Charles Schwab Corporation 1992 Stock Incentive Plan filed as Exhibit 10.173 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.174 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.144) filed as
Exhibit 10.174 to the Registrant's Form 10-Q for the quarter ended June 30, 1997
and incorporated herein by reference. +
<PAGE>
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified Stock
Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form of
Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as Exhibit 10.179
to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit 10.180 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.181 Commercial office lease of 211 Main Street between Main Plaza, LLC and
Charles Schwab & Co., Inc. dated August 8, 1997 filed as Exhibit 10.181 to the
Registrant's Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference.
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147) filed as
Exhibit 10.182 to the Registrant's Form 10-Q for the quarter ended September 30,
1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's Form 10-Q
for the quarter ended September 30, 1997 and incorporated herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached (supersedes Exhibit 10.160). +
10.187 The Charles Schwab Corporation 1992 Stock Incentive Plan (Restated to
include Amendments through October 22, 1997) (supersedes Exhibit 10.170 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997). +
<PAGE>
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock Option
Agreement (Executive Officer Stock Option Plan (1987) attached (supersedes
Exhibit 10.159). +
10.189 Annual Executive Individual Performance Plan as amended January 1,
1998. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171). +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172). +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of The
Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit
10.173). +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174). +
10.195 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 1, 1997 (supersedes Exhibit 10.168). +
11.1 Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1997 Annual Report to
Stockholders, which have been incorporated herein by reference. Except for such
portions, such annual report is not deemed to be "filed" herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
27.2 Restated Financial Data Schedule (electronic only).
27.3 Restated Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's
Registration Statement No. 33-16192 on Form S-1, as amended and declared
effective on September 22, 1987.
+ Management contract or compensatory plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ CHARLES R. SCHWAB
-------------------------
Charles R. Schwab
Chairman, Co-Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 27, 1998.
Signature Title
--------- -----
/s/ CHARLES R. SCHWAB Chairman, Co-Chief Executive Officer
- ----------------------- and Director
Charles R. Schwab (principal executive officer)
/s/ DAVID S. POTTRUCK Co-Chief Executive Officer,
- ------------------------ Chief Operating Officer, President and Director
David S. Pottruck (principal executive officer)
/s/ STEVEN L. SCHEID Executive Vice President
- ------------------------ and Chief Financial Officer
Steven L. Scheid (principal financial and accounting officer)
/s/ NANCY H. BECHTLE Director
- ------------------------
Nancy H. Bechtle
/s/ C. PRESTON BUTCHER Director
- ------------------------
C. Preston Butcher
/s/ DONALD G. FISHER Director
- ------------------------
Donald G. Fisher
/s/ ANTHONY M. FRANK Director
- ------------------------
Anthony M. Frank
/s/ FRANK C. HERRINGER Director
- ------------------------
Frank C. Herringer
/s/ STEPHEN T. McLIN Director
- ------------------------
Stephen T. McLin
/s/ GEORGE P. SHULTZ Director
- ------------------------
George P. Shultz
/s/ LAWRENCE J. STUPSKI Director
- ------------------------
Lawrence J. Stupski
/s/ ROGER O. WALTHER Director
- ------------------------
Roger O. Walther
<PAGE>
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts F-7
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1997 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated February 23, 1998; such consolidated financial
statements and report are included in your 1997 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the financial
statement schedules of the Company appearing on pages F-3 through F-7. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Francisco, California
February 23, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 79,802 $ 74,785
Advances to subsidiaries 350,606 250,276
Investments in subsidiaries, at equity 1,083,122 820,289
Other assets 4,618 5,004
------------------------------------------------------------------------------------------------------------------------
Total $ 1,518,148 $ 1,150,354
========================================================================================================================
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 12,031 $ 17,799
Borrowings 361,000 278,000
------------------------------------------------------------------------------------------------------------------------
Total liabilities 373,031 295,799
Stockholders' equity 1,145,117 854,555
------------------------------------------------------------------------------------------------------------------------
Total $ 1,518,148 $ 1,150,354
========================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest revenue $ 30,699 $ 26,287 $ 18,879
Interest expense (20,546) (19,091) (13,886)
-------------------------------------------------------------------------------------------------------------------------
Net interest revenue 10,153 7,196 4,993
Other revenues 544 268 1,032
Other income (expenses) 4,423 (3,400) (2,984)
-------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 15,120 4,064 3,041
Income tax expense 5,692 1,568 1,235
-------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 9,428 2,496 1,806
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 199,869 154,922 134,418
Dividends paid by subsidiaries 60,980 76,385 36,380
-------------------------------------------------------------------------------------------------------------------------
Total 260,849 231,307 170,798
Net income $ 270,277 $ 233,803 $ 172,604
=========================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 270,277 $ 233,803 $ 172,604
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (199,869) (154,922) (134,418)
Change in other assets 279 (157) (50)
Change in accrued expenses and other liabilities (4,122) (7,805) 4,455
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 66,565 70,919 42,591
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Advances to subsidiaries (51,939) (8,554) (25,042)
Increase in net investment in subsidiaries (50,614) (10,132) (16,206)
Cash payments for businesses acquired (1,200) (4,709) (63,696)
Other (1,720)
------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (103,753) (23,395) (106,664)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 111,000 64,000 70,000
Repayment of borrowings (28,000) (26,000)
Dividends paid (37,091) (31,495) (24,249)
Purchase of treasury stock (18,234) (28,171) (17,345)
Proceeds from stock options exercised and other 14,530 7,729 12,972
------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 42,205 (13,937) 41,378
------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,017 33,587 (22,695)
Cash and cash equivalents at beginning of year 74,785 41,198 63,893
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 79,802 $ 74,785 $ 41,198
==================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
</TABLE>
F-5
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
1. Introduction and basis of presentation
The condensed financial statements of The Charles Schwab Corporation (the
Parent Company) should be read in conjunction with the consolidated
financial statements of The Charles Schwab Corporation and subsidiaries
(the Company) and notes thereto found in the Company's 1997 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No.
13.1 of this report.
2. Supplemental cash flow information
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income taxes paid (received) $ 2,608 $ (48) $ (182)
========= ========= =========
Interest paid:
Borrowings $ 18,773 $ 16,887 $ 11,101
Other 364 339 183
--------- --------- ---------
Total interest paid $ 19,137 $ 17,226 $ 11,284
========= ========= =========
</TABLE>
3. Common stock split
The Company's Board of Directors declared a three-for-two common stock
split, distributed September 1997, effected in the form of a stock
dividend.
F-6
<PAGE>
<TABLE>
<CAPTION>
=================================================================================================================================
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at ------------------------ Balance at
Beginning Charged End
Description of Year to Expense Other Written off of Year
----------- ------- ---------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997:
Allowance for doubtful accounts $ 5,518 $ 3,896 $ 195 $(1,892) $ 7,717
=======================================================================
For the year ended
December 31, 1996:
Allowance for doubtful accounts $ 3,700 $ 2,651 $ 99 $ (932) $ 5,518
=======================================================================
For the year ended
December 31, 1995:
Allowance for doubtful accounts $ 3,204 $ 1,349 $ 272 $(1,125) $ 3,700
=======================================================================
=================================================================================================================================
</TABLE>
F-7
<PAGE>
EXHIBIT 10.120
ESOP LOAN AGREEMENT
by and between
THE CHARLES SCHWAB CORPORATION
and
THE CHARLES SCHWAB PROFIT SHARING AND
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Effective as of January 19, 1993
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
ESOP LOAN AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The ESOP Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Loan to Borrower. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Promissory Note.. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Time for Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Repayments of Principal.. . . . . . . . . . . . . . . . . . . . . 3
2.2 Payment of Interest.. . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Prepayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Not Payable on Demand.. . . . . . . . . . . . . . . . . . . . . . 4
2.5 Limitation on Repayment.. . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Representations and Warranties of the Borrower . . . . . . . . . . . . . 5
3.1 Authorizations. . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Compliance with Obligations and Laws. . . . . . . . . . . . . . . 5
3.3 Restrictions on Transfer. . . . . . . . . . . . . . . . . . . . . 6
ARTICLE 4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Representations and Warranties of the Company. . . . . . . . . . . . . . 7
4.1 Due Incorporation.. . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Corporate Authority.. . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Compliance with Laws and Obligations. . . . . . . . . . . . . . . 8
4.4 Company Sales.. . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Exempt Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pledge of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1 Pledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.2 Release of Shares from Pledge.. . . . . . . . . . . . . . . . . . 9
5.3 Default.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.4 Miscellaneous.. . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.1 Amendments, Consents, Waivers and Modifications.. . . . . . . . . 11
6.2 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.3 Survival of covenants, Etc., Successors and Assigns.. . . . . . . 12
6.4 Communications. . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 13
6.6 Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.7 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.8 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.10 Capacity of Trustee. . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
-i-
<PAGE>
ESOP LOAN AGREEMENT
THIS AGREEMENT, effective as of 1/19, 1993, by and between CHARLES SCHWAB &
CO., INC., a California corporation (the "Company"), and THE CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (the "Borrower").
W I T N E S S E T H:
WHEREAS, the borrower has been established by the Company to provide stock
ownership interests to eligible employees, and the Borrower is designed to
qualify as an employee stock ownership plan under Section 4975(e)(7) of the
Internal Revenue Code of 1986, as amended (the "Code"), and Section 407(d)(6) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); and
WHEREAS, the Borrower wishes to acquire common shares of the Company or an
affiliate (the common shares of the Company are hereinafter referred to as
"Company Stock" and the common shares acquired hereunder by the Borrower are
referred to herein as the "Shares"); and
WHEREAS, the Borrower desires to borrow, and the Company desires to lend,
the sum of $15,000,000 (such amount hereinafter referred to as the "Principal
Amount" and such loan as the "ESOP
-1-
<PAGE>
Loan") in order to finance the Borrower's purchases of Company Stock;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
THE ESOP LOAN
1.1 LOAN TO BORROWER. Subject to the terms and conditions herein set
forth, the Company agrees to lend to the Borrower the Principal Amount.
1.2 USE OF PROCEEDS. The Borrower hereby agrees that it will use the
entire proceeds of the ESOP Loan to acquire Company Stock through open market
purchases or from the Company, to the extent the Company makes such Company
Stock available for purchase.
1.3 PROMISSORY NOTE. The indebtedness of the Borrower for the Principal
Amount is evidenced by a promissory note (the "Promissory Note") between the
Company and the Borrower in the form attached hereto.
1.4 INTEREST. Interest (including interest on overdue payments) shall
accrue on the unpaid Principal Amount at the simple interest rate of seven and
nine tenths percent (7.9%) per annum.
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ARTICLE 2
TIME FOR REPAYMENT
2.1 REPAYMENTS OF PRINCIPAL. The borrower shall make principal payments
to the Company on the ESOP Loan according to the following schedule:
<TABLE>
<CAPTION>
Principal Payment Due Date
----------------- --------
<S> <C>
$ 623,899 December 31, 1994
$ 673,187 December 31, 1995
$ 726,368 December 31, 1996
$ 783,751 December 31, 1997
$ 845,668 December 31, 1998
$ 912,476 December 31, 1999
$ 984,561 December 31, 2000
$ 1,062,341 December 31, 2001
$ 1,146,266 December 31, 2002
$ 1,236,821 December 31, 2003
$ 1,334,530 December 31, 2004
$ 1,439,958 December 31, 2005
$ 1,553,715 December 31, 2006
$ 1,676,458 December 31, 2007
</TABLE>
2.2 PAYMENT OF INTEREST. Interest shall be payable on the outstanding
daily unpaid Principal Amount from the date of execution of this Agreement until
payment in full. Such payment shall be made in annual installments.
2.3 PREPAYMENT. The Borrower may prepay principal in whole or in part at
any time, without any premium or penalty. Any such prepayment shall be applied
to the principal installments in the manner determined by the Company in its
sole discretion.
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<PAGE>
2.4 NOT PAYABLE ON DEMAND. Under no circumstances will the outstanding
balance of the ESOP Loan be payable on demand, except in the event of default.
For this purpose, the only event of default shall be the Borrower's failure to
make the payments specified in Sections 2.1 or 2.2.
2.5 LIMITATION ON REPAYMENT. Notwithstanding anything to the contrary
contained herein, in the absence of default, payments of principal and interest
on the ESOP Loan shall not exceed the sum of all contributions that are made by
the Company or any affiliated corporation to the Borrower to meet its
obligations under this Agreement, any earnings on such contributions and any
cash dividends on the Shares (whether or not such shares have been released from
pledge at the time the dividend is paid), less payments made in prior years. In
no event shall the Company have any right to any assets of the Borrower other
than (a) contributions that are made to the Borrower to meet its obligations
hereunder, (b) earnings attributable to the investment of such contributions,
(c) any cash dividends on the Shares and (d) the Shares remaining subject to
pledge under Article 5, but only to the extent permitted under Section 5.3.
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<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
The Plan Administrator (as defined in the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan (the "Plan")), on behalf of the Borrower, as of
the date thereof, represents and warrants as follows:
3.1 AUTHORIZATIONS. The Borrower is an employee stock ownership plan
established by the Charles Schwab & Co., which, through the trustee of the
Borrower (the "Trustee"), as directed by the Plan Administrator, has all
requisite power and authority to execute, deliver and perform its obligations
under this Agreement. This Agreement has been duly authorized by all necessary
action on the part of the Plan Administrator and the Trustee; this Agreement
has been duly executed and delivered by the Borrower and constitutes, a legal,
valid and binding obligation of the Borrower, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other similar laws
affecting creditors' rights generally and subject, as to enforceability, to
general equitable principles (regardless of whether enforcement is sought in
proceeding in equity or at law).
3.2 COMPLIANCE WITH OBLIGATIONS AND LAWS. Neither the execution and
delivery by the Trustee of this Agreement, nor the consummation of the
transactions contemplated hereby, nor
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<PAGE>
compliance by the Borrower with its obligations hereunder, will conflict with,
or result in a breach or violation of, or constitute a default under, any
provision of the Borrower or any law, rule, regulation, order, injunction or
decree of any court, administrative authority or arbitrator applicable to the
Borrower.
3.3 RESTRICTIONS ON TRANSFER. If Borrower purchases Shares directly from
the Company, and not through open market purchases, Borrower understands that
such Shares will not have been registered under the Securities Act of 1933, as
amended ("Securities Act"), and that such Shares are not freely tradeable and
must be held indefinitely unless registered under the Securities Act or an
exemption from registration is available. Borrower further understands that
although an exemption from registration may be available pursuant to Rule 144
promulgated under the Securities Act, satisfaction of a number of conditions is
required to make a sale under that exemption, and that, even if Rule 144 is
applicable in whole or in part, in no event may Borrower sell the Shares to the
public under such rule prior to the expiration of a two year period after
purchase, that any such sales must be limited in amount and that sales can only
be made in full compliance with the provisions of the Rule. Borrower represents
that it is acquiring the Shares for its own account and not with the view to
distribution within the meaning of the Securities Act, other than as may be
effected in compliance with the Securities Act and rules and
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<PAGE>
regulations promulgated thereunder. The Company may affix to the certificates
representing the Shares a legend substantially as follows and such additional
legends as the Company reasonably may determine:
These securities have not been registered under the Securities
Act of 1933, as amended, and have been taken by the issuer for
its own account and not with a view to their distribution. Said
securities may not be sold or transferred unless (a) they have
been registered under said Act or (b) the transfer agent (or the
Company, if it is then acting as its own transfer agent) is
presented with either a written opinion of counsel satisfactory
to the Company or a "no-action" letter of the Securities and
Exchange Commission to the effect that such registration is not
required under the circumstances of such sale or transfer.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company, as of the date hereof, represents and warrants as follows:
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<PAGE>
4.1 DUE INCORPORATION. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
4.2 CORPORATE AUTHORITY. The Company has all requisite power and
authority to execute, deliver and perform its obligations under this Agreement.
The Company has taken all corporate action to establish the Borrower and to
authorize this Agreement. This Agreement has been duly executed and delivered
by the Company and is a legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
reorganization and other similar laws affecting creditors' rights generally and
subject, as to enforceability, to general equitable principles (regardless of
whether enforcement is sought in a proceeding in equity or at law).
4.3 COMPLIANCE WITH LAWS AND OBLIGATIONS. Neither the execution of this
Agreement nor the fulfillment of any of the Company's obligations under this
Agreement will conflict with, or result in a breach or violation of, or
constitute a default under any law, rule, regulation, order, injunction, or any
other obligation, loan, contract or agreement of the Company.
4.4 COMPANY SALES. To the extent that any of the Shares are purchased by
the Borrower from the Company, such Shares shall, as of
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<PAGE>
the date of such purchase, be duly authorized and validly issued by the Company.
4.5 EXEMPT LOANS. The ESOP Loan is an exempt loan within the meaning of
Treas. Reg. Section 54.4975-7(b).
ARTICLE 5
PLEDGE OF SHARES
5.1 PLEDGE. Upon the terms and conditions contained herein, the Borrower
does hereby agree to pledge the Shares upon their receipt thereof to the Company
as security for the payment of the ESOP Loan. Such Shares shall nonetheless be
retained by the Trustee and held in a suspense account pursuant to the Plan. As
long as there is no failure to make payments of principal or interest due under
the ESOP Loan, the Borrower shall receive and retain all cash dividends paid
with respect to the Shares and exercise all voting rights with respect to the
Shares.
5.2 RELEASE OF SHARES FROM PLEDGE. Within ten days after each payment of
principal and/or interest under the ESOP Loan, a number of the Shares shall be
released from pledge hereunder. The number of Shares to be so released shall be
calculated by multiplying the number of Shares held by the Company under the
pledge (immediately before the release) by a fraction. The numerator of the
fraction shall be the amount of principal and interest represented by such
payment on the
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<PAGE>
ESOP Loan. The denominator of the fraction shall be the sum of the numerator
and the remaining unpaid principal and interest of the ESOP Loan.
5.3 DEFAULT. In the event of a failure to make payments of principal or
interest due under the ESOP Loan, which failure is not cured within 30 days, the
Company shall have the right , at any time thereafter, to repurchase, sell or
otherwise convert to cash all or any portion of the Shares remaining subject to
pledge; provided, however, that such Shares may be so applied by the Company
only upon and to the extent of the Borrower's failure to meet the payment
schedule of the Promissory Note (without regard to any acceleration of such
payment schedule as a result of the failure to pay), and that the Company shall
give the Borrower 15 days' written notice of its intent to repurchase or sell
such Shares pursuant to this Section 5.3. The Company shall apply the proceeds
thereby obtained first to the payment of its reasonable expenses incurred in
effecting such sale or other disposition, including but not limited to
attorneys' and brokers' fees, and thereafter to the payment of the liabilities
of the Borrower to the Company under the ESOP Loan. Any surplus remaining in
the hands of the Company after the payment of such expenses and such liabilities
shall be returned by the Company to the Borrower. A repurchase of Shares by the
Company shall be based upon the then
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<PAGE>
prevailing market price of Company Stock on the New York Stock Exchange.
5.4 MISCELLANEOUS. No delay or failure of the Company in exercising any
right, power or privilege hereunder shall affect such right, power or privilege;
nor shall any single or partial exercise thereof nor any abandonment or
discontinuance of steps to enforce such a right, power or privilege preclude any
further exercise thereof or any other right, power or privilege of the Company.
The rights and remedies of the Company hereunder are cumulative and not
exclusive. Any waiver, permit, consent or approval of any kind by the Company
of any breach or default hereunder, or any such waiver of any provisions or
conditions hereof, must be in writing and shall be effective only to the extent
set forth in such writing.
ARTICLE 6
MISCELLANEOUS
6.1 AMENDMENTS, CONSENTS, WAIVERS AND MODIFICATIONS. No amendment or
waiver of any provision of this Agreement shall be effective unless set forth in
an instrument in writing signed by both parties to this Agreement.
6.2 NO WAIVER. No course of dealing between the Company and the Borrower
in exercising any rights or obligations hereunder shall be construed as a waiver
of any rights of the Company or of the Borrower.
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<PAGE>
6.3 SURVIVAL OF COVENANTS, ETC., SUCCESSORS AND ASSIGNS. So long as any
portion of the Principal Amount shall be outstanding, all covenants, agreements,
representations and warranties made by the Company and the Borrower in this
Agreement and in any certificate or other document delivered pursuant hereto
shall inure to the benefit of the Company or the Borrower, as the case may be,
and shall be binding upon any successors and assigns of the Borrower or the
Company, as the case may be.
6.4 COMMUNICATIONS. All notices and other communications which are
required or may be given hereunder shall be in writing, shall be effective upon
receipt, and shall be deemed to have been duly given if delivered personally or
sent by cable, telegram, telex or facsimile or by registered or certified mail,
postage prepaid, sent to the following addresses:
If to the Company: The Charles Schwab Corporation
101 Montgomery Street
San Francisco, California 94104
If to the Borrower: Plan Administrator of the Charles Schwab Profit Sharing
and Employee Stock Ownership Plan
101 Montgomery Street
San Francisco, California 94104
with a copy to: The Charles Schwab Trust Company
Trustee of the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan
P.O. Box 193931
San Francisco, California 94119
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<PAGE>
Such address may be changed from time to time by notice to the Borrower and the
Trustee, in the case of the Company, by notice to the Company and the Trustee,
in the case of the Borrower and by notice to the Company and the Borrower, in
the case of the Trustee.
6.5 ENTIRE AGREEMENT. This Agreement, including attachments thereto,
constitutes the entire agreement between the parties hereto with respect to the
ESOP Loan.
6.6 GOVERNING LAW. This Agreement shall be governed by, and interpreted
in accordance with, the substantive laws of the State of California, except as
preempted by ERISA.
6.7 HEADINGS. The table of contents and headings of the sections and
subsections of this Agreement are inserted for convenience only and shall not be
deemed to constitute a part hereof.
6.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which will be deemed to constitute an original and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party.
6.9 SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability or any other
provision hereunder.
6.10 CAPACITY OF TRUSTEE. The Charles Schwab Trust Company is executing
this Agreement only in its capacity as Trustee for the Borrower and not in its
individual capacity.
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<PAGE>
IN WITNESS WHEREOF, the Company and the Trustee, on behalf of the Borrower,
have executed this ESOP Loan Agreement as of this 19th day of January, 1993.
THE CHARLES SCHWAB THE CHARLES SCHWAB TRUST
CORPORATION COMPANY, AS TRUSTEE OF THE
CHARLES SCHWAB PROFIT
SHARING AND EMPLOYEE
STOCK OWNERSHIP PLAN AND
TRUST
By /s/ Charles R. Schwab By /s/ Chris V. Dodds
ADMINISTRATIVE COMMITTEE AS PLAN ADMINSISTRATOR OF THE CHARLES SCHWAB PROFIT
SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
By /s/ A. John Gambs
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<PAGE>
EXHIBIT 10.186
THE CHARLES SCHWAB CORPORATION
1987 STOCK OPTION PLAN
(RESTATED TO INCLUDE AMENDMENTS THROUGH OCTOBER 22, 1997)
ARTICLE 1. INTRODUCTION.
The purpose of the 1987 Stock Option Plan, as Amended and Restated (the
"Plan") is to enable The Charles Schwab Corporation and its subsidiaries to
attract and retain directors, officers, and other key employees and to provide
such persons with additional incentive to advance the interests of the Company.
The Plan was initially adopted on March 24, 1987, and was amended on
July 29, 1987, April 17, 1989, September 17, 1996 and October 22, 1997. The
Plan is hereby restated and amended as of October 22, 1997, and the terms of
this Restatement shall apply to all awards granted under the Plan on or after
such date. The Plan shall terminate not more than ten (10) years from the date
the Plan initially was adopted. The Plan will provide for Awards in the form of
Restricted Shares, Performance Share Awards or Options, which may constitute
incentive stock options or nonstatutory stock options. The Plan shall be
governed by, and construed in accordance with, the laws of the State of
Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 THE COMMITTEE. The Plan shall be administered by the Committee.
The Committee shall consist of two or more Non-Employee Directors, who shall be
appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
ARTICLE 3. LIMITATION ON AWARDS.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 1,616,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares being
issued, or if any Options terminate for any other reason before being exercised,
then such Restricted Shares, Performance Share Awards or Options shall again
become available for Awards under the Plan. The limitation of this Article 3
shall be subject to adjustment pursuant to Article 10. Any Common Shares issued
pursuant to the Plan may be authorized but unissued shares or treasury shares.
<PAGE>
ARTICLE 4. ELIGIBILITY.
4.1 GENERAL RULE. Key Employees shall be eligible for designation as
Participants by the Committee.
4.2 TEN-PERCENT STOCKHOLDERS. A Key Employee who owns more than
10 percent of the total combined voting power of all classes of outstanding
stock of the Company or any of its Subsidiaries shall not be eligible for the
grant of an ISO unless (a) the Exercise price under such ISO is at least 110
percent of the Fair Market Value of a Common Share on the date of grant and (b)
such ISO by its terms is not exercisable after the expiration of five years from
the date of grant.
4.3 ATTRIBUTION RULES. For purposes of Section 4.2, in determining
stock ownership, a Key Employee shall be deemed to own the stock owned, directly
or indirectly, by or for his or her brothers, sisters, spouse, ancestors or
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which the Key Employee holds an option shall not be counted.
4.4 OUTSTANDING STOCK. For purposes of Section 4.2, "outstanding stock"
shall include all stock actually issued and outstanding immediately after the
grant of the ISO to the Key Employee. "Outstanding stock" shall not include
treasury shares or shares authorized for issuance under outstanding options held
by the Key Employee or by any other person.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO. The Committee
may designate all or any part of an Option as an ISO (or, in the case of a Key
Employee who is subject to the tax laws of a foreign jurisdiction, as an option
qualifying for favorable tax treatment under the laws of such foreign
jurisdiction).
5.2 OPTIONS NONTRANSFERABILITY. No Option granted under the Plan shall
be transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
2
<PAGE>
5.3 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.2. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option. The term
of an ISO shall in no event exceed 10 years from the date of grant, and Section
4.2 may require a shorter term. Subject to the preceding sentence, the
Committee shall determine when all or any part of an Option is to become
exercisable and when such Option is to expire; provided that, in appropriate
cases, the Company shall have the discretion to extend the term of an Option or
the time within which, following termination of employment, an Option may be
exercised, or to accelerate the exercisability of an Option. A Stock Option
Agreement may provide for expiration prior to the end of its term in the event
of the termination of the Optionee's employment and shall provide for the
suspension of vesting when an employee is on a leave of absence for a period in
excess of six months in appropriate cases, as determined by the Company;
provided that the exercisability of Options shall be accelerated in the event of
the Participant's death or Disability and, in the case of Retirement, the
exercisability of all outstanding Options shall be accelerated, other than any
Options that had been granted within two years of the date of the Optionee's
Retirement. NSOs may also be awarded in combination with Restricted Shares, and
such an Award may provide that the NSOs will not be exercisable unless the
related Restricted Shares are forfeited. In addition, NSOs granted under this
Section 5 may be granted subject to forfeiture provisions which provide for
forfeiture of the Option upon the exercise of tandem awards, the terms of which
are established in other programs of the Company.
5.6 LIMITATION ON AMOUNT OF ISOS. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect to
which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 EFFECT OF CHANGE IN CONTROL. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
3
<PAGE>
5.8 RESTRICTIONS ON TRANSFER OF COMMON SHARES. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 AUTHORIZATION OF REPLACEMENT OPTIONS. Concurrently with the grant
of any Option to a Participant, the Committee may authorize the grant of
Replacement Options. If Replacement Options have been authorized by the
Committee with respect to a particular award of Options (the "Underlying
Options"), the Option Agreement with respect to the Underlying Options shall so
state, and the terms and conditions of the Replacement Options shall be provided
therein. The grant of any Replacement Options shall be effective only upon the
exercise of the Underlying Options through the use of Common Shares pursuant to
Section 6.2 or Section 6.3. The number of Replacement Options shall equal the
number of Common Shares used to exercise the Underlying Options, and, if the
Option Agreement so provides, the number of Common Shares used to satisfy any
tax withholding requirements incident to the exercise of the Underlying Options
in accordance with Section 12.2. Upon the exercise of the Underlying Options,
the Replacement Options shall be evidenced by an amendment to the Underlying
Option Agreement. Notwithstanding the fact that the Underlying Option may be an
ISO, a Replacement Option is not intended to qualify as an ISO. The Exercise
Price of a Replacement Option shall be no less than the Fair Market Value of a
Common Share on the date the grant of the Replacement Option becomes effective.
The term of each Replacement Option shall be equal to the remaining term of the
Underlying Option. No Replacement Options shall be granted to Optionees when
Underlying Options are exercised pursuant to the terms of the Plan and the
Underlying Option Agreement following termination of the Optionee's employment.
The Committee, in its sole discretion, may establish such other terms and
conditions for Replacement Options as it deems appropriate.
5.10 OPTIONS GRANTED TO NON-UNITED STATES KEY EMPLOYEES. In the case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be made
only pursuant to the express provisions of the applicable Stock Option
Agreement. However,
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<PAGE>
the Committee may specify in the Stock Option Agreement that payment may be
made pursuant to Section 6.2 or 6.3.
(b) In the case of an NSO, the Committee may at any time accept payment
pursuant to Section 6.2 or 6.3.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
6.3 EXERCISE/SALE. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS.
7.1 TIME, AMOUNT AND FORM OF AWARDS. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NSOs
are exercised.
7.2 PAYMENT FOR RESTRICTED SHARE AWARDS. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 VESTING OR ISSUANCE CONDITIONS. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be issued
pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other
5
<PAGE>
criteria as the Committee may adopt; provided that, in the case of an Award of
Restricted Shares where vesting is based entirely on the Participant's service,
(i) vesting shall be accelerated in the event of the Participant's death or
Disability; (ii) in the case of Retirement, vesting shall be accelerated for all
Restricted Shares that had been granted more than two years prior to the date of
the Participant's Retirement; and (iii) vesting shall be suspended when an
employee is on a leave of absence for a period in excess of six months in
appropriate cases, as determined by the Company. The Committee, in its sole
discretion, may determine, at the time of making an Award of Restricted Shares,
that such Award shall become fully vested in the event that a Change in Control
occurs with respect to the Company. The Committee, in its sole discretion, may
determine, at the time of making a Performance Share Award, that the issuance
conditions set forth in such Award shall be waived in the event that a Change in
Control occurs with respect to the Company.
7.4 FORM OF SETTLEMENT OF PERFORMANCE SHARE AWARDS. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 DEATH OF RECIPIENT. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries. Each
recipient of a Performance Share Award under the Plan shall designate one or
more beneficiaries for this purpose by filing the prescribed form with the
Company. A beneficiary designation may be changed by filing the prescribed form
with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need to hold a hearing) require an extension of time for processing the appeal,
in which case a written
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decision on review shall be delivered to the claimant as soon as possible but
not later than 120 days after the Committee's receipt of the appeal notice. The
claimant shall be notified in writing of any such extension of time. The written
decision on review shall include specific reasons for the decision, written in a
manner calculated to be understood by the claimant, and shall specifically refer
to the pertinent Plan provisions on which it is based. All determinations of the
Committee shall be final and binding on Participants and their beneficiaries.
ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
9.1 RESTRICTED SHARES.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as the
Company's other stockholders.
(b) During the period of restriction, Named Executive Officers holding
Restricted Shares granted hereunder shall be credited with all regular
cash dividends paid with respect to all Restricted Shares while they are
so held. If a dividend is paid in the form of cash, such cash dividend
shall be credited to Named Executive Officers subject to the same
restrictions on transferability and forfeitability as the Restricted
Shares with respect to which they were paid. If any dividends or
distributions are paid in shares of Common Stock, the shares of Common
Stock shall be subject to the same restrictions on transferability and
forfeitability as the Restricted Shares with respect to which they were
paid. Subject to the succeeding paragraph, and to the restrictions on
vesting and the forfeiture provisions, all dividends credited to a Named
Executive Officer shall be paid to the Named Executive Officer within
forty-five (45) days following the full vesting of the Restricted Shares
with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative security"
or an "equity security" pursuant to Rule 16(a) under the Exchange Act,
such dividend shall be subject to a vesting period equal to the longer of:
(i) the remaining vesting period of the Restricted Shares with respect to
which the dividend is paid; or (ii) six (6) months. The Committee shall
establish procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have the
same voting rights as the Company's other stockholders.
9.2 PERFORMANCE SHARE AWARDS. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 GENERAL. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a
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form other than Common Shares, a combination or consolidation of the outstanding
Common Shares (by reclassification or otherwise) into a lesser number of Common
Shares, a recapitalization, a spinoff or a similar occurrence, the Committee
shall make appropriate adjustments in one or more of (a) the number of Options,
Restricted Shares and Performance Share Awards available for future Awards under
Article 3, (b) the number of Performance Share Awards included in any prior
Award which has not yet been settled, (c) the number of Common Shares covered by
each outstanding Option or (d) the Exercise Price under each outstanding Option.
10.2 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent, for
their continuation by the Company (if the Company is a surviving corporation),
for accelerated vesting or for settlement in cash.
10.3 RESERVATION OF RIGHTS. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 EMPLOYMENT RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain employed by the
Company or any Subsidiary. The Company and its Subsidiaries reserve the right to
terminate the employment of any employee at any time, with or without cause,
subject only to a written employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 7, 9 and 10.
11.3 CREDITORS' RIGHTS. A holder of Performance Share Awards shall have
no rights other than those of a general creditor of the Company. Performance
Share Awards represent unfunded and unsecured obligations of the Company,
subject to the terms and conditions of the applicable Stock Award Agreement.
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11.4 GOVERNMENT REGULATIONS. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to the
issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of
1933, as amended, or any applicable state securities laws; and
(b) Satisfactory assurances have been received that such Common Shares,
when issued, will be duly listed on the New York Stock Exchange or any
other securities exchange on which Common Shares are then listed.
ARTICLE 12. WITHHOLDING TAXES.
12.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, the recipient of any payment or distribution under the Plan
shall make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
12.2 NONSTATUTORY OPTIONS, RESTRICTED SHARES OR PERFORMANCE SHARE AWARDS.
The Committee may permit an Optionee who exercises NSOs, or who receives Awards
of Restricted Shares, or who receives Common Shares pursuant to the terms of a
Performance Share Award, to satisfy all or part of his or her withholding tax
obligations by having the Company withhold a portion of the Common Shares that
otherwise would be issued to him or her under such Awards. Such Common Shares
shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash. The payment of withholding taxes by surrendering
Common Shares to the Company, if permitted by the Committee, shall be subject to
such restrictions as the Committee may impose, including any restrictions
required by rules of the Securities and Exchange Commission.
ARTICLE 13. ASSIGNMENT OR TRANSFER OF AWARD.
13.1 GENERAL RULE. Any Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or by
operation of law, except to the extent specifically permitted by Section 13.2.
13.2 EXCEPTIONS TO GENERAL RULE. Notwithstanding Section 13.1, this
Plan shall not preclude (i) a Participant from designating a beneficiary to
succeed, after the Participant's death, to those of the Participant's Awards
(including without limitation, the right to exercise any
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unexercised Options) as may be determined by the Company from time to time in
its sole discretion, (ii) a transfer of any Award hereunder by will or the laws
of descent or distribution, or (iii) a voluntary transfer of an Award (other
than an ISO) to a trust or partnership for the exclusive benefit of one or more
members of the Participant's family, but only if the Participant has sole
investment control over such trust or partnership.
ARTICLE 14. FUTURE OF PLANS.
14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on February 26, 1997. The Plan shall remain in effect until it is
terminated under Section 15.2, except that no Awards shall be made after March
24, 1997.
14.2 AMENDMENT OR TERMINATION. The Board may at any time terminate this
Plan, and the Board or the Committee make such modifications of the Plan as it
shall deem advisable; provided, however, that any amendment of the Plan shall be
subject to the approval of the Company's stockholders to the extent required by
applicable laws, regulations or rules.
14.3 EFFECT OF AMENDMENT OR TERMINATION. No Award shall be made under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
ARTICLE 15. DEFINITIONS.
15.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
15.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
15.3 "Board" means the Company's Board of Directors, as constituted from
time to time.
15.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which fewer
than two-thirds of the incumbent directors are directors who either (i)
had been directors of the Company 24 months prior to such change or (ii)
were elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the directors who had been directors of
the Company 24 months prior to such change and who were still in office at
the time of the election or nomination;
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(c) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and
apart from rights accruing under special circumstances) having the right
to vote at elections of directors (the "Base Capital Stock"); provided,
however, that any change in the relative beneficial ownership of
securities of any person resulting solely from a reduction in the
aggregate number of outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of securities, shall be
disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company.
15.5 "Code" means the Internal Revenue Code of 1986, as amended.
15.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
15.7 "Common Share" means one share of the common stock of the Company.
15.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
15.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
15.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
15.11 "Exercise Price" means the amount for which one Common Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
15.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for such
date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the
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mean between the last reported representative bid and asked prices quoted
by the NASDAQ system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
15.13 "ISO" means an incentive stock option described in section 422(b) of
the Code.
15.14 "Key Employee" means a key common-law employee of the Company or any
Subsidiary, as determined by the Committee.
15.15 "Named Executive Officer" means a Participant who, as of the date of
vesting of an Award is one of a group of "covered employees," as defined in the
Regulations promulgated under Code Section 162(m), or any successor statute.
15.16 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
15.17 "NSO" means an employee stock option not described in sections 422
through 424 of the Code.
15.18 "Option" means an ISO or NSO or, in the case of a Key Employee who
is subject to the tax laws of a foreign jurisdiction, an option qualifying for
favorable tax treatment under the laws of such jurisdiction, including a
Replacement Option, granted under the Plan and entitling the holder to purchase
one Common Share.
15.19 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
15.20 "Participant" means a Non-Employee Director or Key Employee who has
received an Award.
15.21 "Performance Share Award" means the conditional right to receive in
the future one Common Share, awarded to a Participant under the Plan.
15.22 "Plan" means this 1987 Stock Option Plan of The Charles Schwab
Corporation, as it may be amended from time to time.
15.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
15.24 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
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15.25 "Stock Award Agreement" means the agreement between the Company and
the recipient of a Restricted Share or Performance Share Award which contains
the terms, conditions and restrictions pertaining to such Restricted Share or
Performance Share Award.
15.26 "Stock Option Agreement" means the agreement between the Company and
an Optionee which contains the terms, conditions and restrictions pertaining to
his or her option.
15.27 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
15.28. "Retirement" shall mean any termination of employment of an Optionee
for any reason other than death at any time after the Optionee has attained
fifty (50), but only if, at the time of such termination, the Participant has
been credited with at least seven (7) Years of Service under the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan. The foregoing definition
shall apply to all Stock Option Agreements entered into pursuant to the Plan,
irrespective of any definition to the contrary contained in any such Stock
Option Agreement.
15.29 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall be
made by the Employee Benefits Administration Committee of the Company, the
findings of which shall be final, binding and conclusive.
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ADDENDUM A
The provisions of the Plan, as amended by the terms of this Addendum
A, shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions
shall apply in addition to those set out in section 16 of the Plan:
APPROVED OPTION Means a stock option designed to qualify
as an approved executive share option under the Taxes
Act;
INLAND REVENUE means the Board of the Inland Revenue in
the United Kingdom.
KEY U.K. EMPLOYEE means a designated employee of
Sharelink Investment Services plc or any subsidiary (as
that term is defined in the Companies Act 1985 of the
United Kingdom, as amended) of which Sharelink
Investment Services plc has control for the purposes of
section 840 of the Taxes Act;
TAXES ACT means the Income and Corporation Taxes Act
1988 of the United Kingdom.
2. An Approved Option may only be granted to a Key U.K. Employee
who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of paragraph 8 of
Schedule 9 to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time" shall
mean an employee who is required to work 20 hours per week, excluding meal
breaks.
3. No Approved Option may be granted to a Key U.K. Employee if it
would cause the aggregate of the exercise price of all subsisting Approved
Options granted to such employee under the Plan, or any other subsisting options
granted to such employee under any other share option scheme approved under
Schedule 9 of the Taxes Act and established by the Company or an associated
company, to exceed the higher of (a) one hundred thousand pounds sterling and
(b) four times such employee's relevant emoluments for the current or preceding
year of assessment (whichever is greater); but where there were no relevant
emoluments for the previous year of assessment, the limit shall be the higher of
one hundred thousand pounds sterling) or four times such employee's relevant
emoluments for the period of twelve months beginning with the first day during
the current year of assessment in respect of which there are relevant
emoluments. For the purpose of this section 3 of Addendum A, "associated
company" means an associated company within the meaning of section 416 of the
Taxes Act; "relevant
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emoluments" has the meaning given by paragraph 28(4) of Schedule 9 to the Taxes
Act and "year of assessment" means a year beginning on any April 6 and ending on
the following April 5.
4. Common Shares issued pursuant to the exercise of Approved
Options must satisfy the conditions specified in paragraphs 10 to 14 of Schedule
9 to the Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan, the
exercise price of an Approved Option shall not be less than 100 percent of the
closing price of a Common Share as reported in the New York Stock Exchange
Composite Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key U.K.
Employee when that Key U.K. Employee falls within the provisions of paragraph 8
of Schedule 9 to the Taxes Act. If at any time the shares under an Approved
Option cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9
to the Taxes Act, then all Approved Options then outstanding shall lapse and
cease to be exercisable from the date of the shares ceasing so to comply, and no
optionee shall have any cause of action against the Company, Sharelink
Investment Services plc or any subsidiary of the Company or any other person in
respect thereof.
7. An Approved Option may contain such other terms, provisions
and conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements for
approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the terms
of section 10.1 of the Plan, no adjustment shall be made pursuant to section
10.1 of the Plan to any outstanding Approved Options without the prior approval
of the Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee shall
make arrangements satisfactory to the Company for the satisfaction of any tax
withholding or deduction -- at -- source obligations that arise by reason of the
grant to him or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in addition to the
provisions set out in section 15.2 of the Plan, no amendment which affects any
of the provisions of the Plan relating to Approved Options shall be effective
until approved by the Inland Revenue, except for such amendment as are required
to obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to
the Taxes Act.
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NON-OUALIFIED STOCK OPTION AGREEMENT
(1987 Stock Option Plan, as first amended)
THIS AGREEMENT, made as of this _____ of _________, 19__, by and
between The Charles Schwab Corporation, a Delaware corporation ("Company"), and
_______________ ("Optionee").
WITNESSETH:
WHEREAS, there has been granted to Optionee, effective as of
_________ __, 19____, a non-qualified stock option under the 1987 Stock Option
Plan, as first amended, of the Company ("Option Plan");
NOW, THEREFORE, it is mutually agreed as follows:
1. The Optionee shall have a non-qualified stock option to
acquire _____ shares of common stock of the Company (the "Shares"), at a price
of $_______ per share.
2. Optionee acknowledges that paragraph 5(a) of the Option Plan
imposes significant restrictions on Optionee's ability to exercise this option.
3. This is a non-statutory stock option and the provisions of
paragraph 5(b) of the Option Plan are inapplicable to this Option. With that
exception and except as provided in paragraphs 4, 5 and 6 below, the other terms
of this option shall be the same as without limitation, vesting of Shares,
limitations on exercise and transfer, and other restrictions. The Option Plan
is attached hereto as Exhibit A and is incorporated herein by this reference.
Optionee has read the Option Plan and, other than for the provisions of
paragraph 5(b) of the Option Plan and as provided in paragraphs 4, 5 and 6
below, agrees to be bound by its terms. Without limitation, Optionee
specifically acknowledges the representations, warranties and agreements
contained in paragraph 6(e) of the Option Plan.
4. Notwithstanding paragraph 6(b) of the Option Plan, in the
event Optionee's employment, service as a director or provision of independent
contractor services with or for the Company and its subsidiaries terminates by
reason of Optionee's death or permanent disability, all shares then not deemed
to be Vested thereupon will be deemed immediately Vested. For this purpose,
"permanent disability" will mean the reasonable determination by a qualified
physician acceptable to the Company that the Optionee has an illness or
incapacity that has disabled, or will disable, the Optionee from rendering his
or her normal services to the company and its subsidiaries for a period of more
than six (6) consecutive months in any consecutive twelve (12) month period.
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5. If the Company fails to timely exercise its right to
repurchase Unvested Shares, those Shares will be treated as Vested Shares.
Options underlying Unvested Shares may not be exercised once vesting ceases.
6. Any notice to be given by the Optionee under the terms of the
Option Plan shall be deemed to have been duly given, and effective upon receipt,
if sent by Certified Mail, postage and certification prepaid, to The Charles
Schwab Corporation, 101 Montgomery Street, San Francisco, California 94104,
Attention: Corporate Secretary, except as superseded by a different address
noticed to Optionee.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year referred to above.
BY:
----------------------------------------
on Behalf of
The Charles Schwab Corporation
("Company")
----------------------------------------
Optionee
Attachments: (1) Spousal Consent
(2) Exhibit A: 1987 Stock Option Plan, as first amended.
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EXHIBIT 10.187
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
(RESTATED TO INCLUDE AMENDMENTS THROUGH OCTOBER 22, 1997)
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board of Directors on March 26, 1992. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of incremental stockholder value by (a) encouraging Non-Employee
Directors and Key Employees to focus on long-range objectives, (b) encouraging
the attraction and retention of Non-Employee Directors and Key Employees with
exceptional qualifications and (c) linking Non-Employee Directors and Key
Employees directly to stockholder interests. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Performance
Share Awards or Options, which may constitute incentive stock options or
nonstatutory stock options. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 THE COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall consist of two or more Non-Employee Directors, who shall be
appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
ARTICLE 3. LIMITATION ON AWARDS.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 29,150,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares being
issued, or if any Options terminate for any other reason before being exercised,
then such Restricted Shares, Performance Share Awards or Options shall again
become available for Awards under the Plan. The limitation of this Article 3
shall be subject to adjustment pursuant to Article 10. Any Common Shares issued
pursuant to the Plan may be authorized but unissued shares or treasury shares.
Subject to the overall limit on the aggregate shares set forth above, the
following limitations shall apply: (a) The maximum number of Common Shares which
may be granted
<PAGE>
subject to an Option to any one Participant in any one fiscal year shall be
500,000; and (b) The maximum number of Restricted Shares or Performance Share
Awards which may be granted to any one Participant in any one fiscal year
shall be 200,000.
ARTICLE 4. ELIGIBILITY.
4.1 GENERAL RULE. Key Employees and Non-Employee Directors shall be
eligible for designation as Participants by the Committee.
4.2 NON-EMPLOYEE DIRECTORS. In addition to any awards pursuant to Section
4.1, Non-Employee Directors shall be entitled to receive the automatic NSOs
described in this Section 4.2.
(a) Each Non-Employee Director shall receive a Non-Officer Stock Option
covering 2,500 Common Shares for each Award Year with respect to which he
or she serves as a Non-Employee Director on the grant date described in
subsection (b) below; provided that the Non-Officer Stock Option shall
cover 1,500 shares if the Exercise Price determined as of the grant date,
is $35 or more;
(b) The NSO for a particular Award Year shall be granted to each
Non-Employee Director as of May 15 of each Award Year, and if May 15 is not
a business day, then the grant shall be made on and as of the next
succeeding business day;
(c) Each NSO shall be exercisable in full at all times during its term;
(d) The term of each NSO shall be 10 years; provided, however, that any
unexercised NSO shall expire on the date that the Optionee ceases to be a
Non-Employee Director or a Key Employee for any reason other than death or
disability. If an Optionee ceases to be a Non-Employee Director or Key
Employee on account of death or disability, any unexercised NSO shall
expire on the earlier of the date 10 years after the date of grant or one
year after the date of death or disability of such Director; and
(e) The Exercise Price under each NSO shall be equal to the Fair Market
Value on the date of grant and shall be payable in any of the forms
described in Article 6.
4.3 TEN-PERCENT STOCKHOLDERS. A Key Employee who owns more than
10 percent of the total combined voting power of all classes of outstanding
stock of the Company or any of its Subsidiaries shall not be eligible for the
grant of an ISO unless (a) the Exercise price under such ISO is at least 110
percent of the Fair Market Value of a Common Share on the date of grant and (b)
such ISO by its terms is not exercisable after the expiration of five years from
the date of grant.
4.4 ATTRIBUTION RULES. For purposes of Section 4.3, in determining stock
ownership, a Key Employee shall be deemed to own the stock owned, directly or
indirectly, by or for his or her brothers, sisters, spouse, ancestors or lineal
descendants. Stock owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be deemed to be owned proportionately
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by or for its stockholders, partners or beneficiaries. Stock with respect to
which the Key Employee holds an option shall not be counted.
4.5 OUTSTANDING STOCK. For purposes of Section 4.3, "outstanding stock"
shall include all stock actually issued and outstanding immediately after the
grant of the ISO to the Key Employee. "Outstanding stock" shall not include
treasury shares or shares authorized for issuance under outstanding options held
by the Key Employee or by any other person.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan,
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical. The Committee may designate all or
any part of an Option as an ISO, except for Options granted to Non-Employee
Directors under Section 4.2. The Committee may designate all or any part of an
Option as an ISO (or, in the case of a Key Employee who is subject to the tax
laws of a foreign jurisdiction, as an option qualifying for favorable tax
treatment under the laws of such foreign jurisdiction), except for Options
granted to Non-Employee Directors under section 4.2.
5.2 OPTIONS NONTRANSFERABILITY. No Option granted under the Plan shall be
transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
5.3 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.3. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option. The term
of an ISO shall in no event exceed 10 years from the date of grant, and Section
4.3 may require a shorter term. Subject to the preceding sentence, the
Committee shall determine when all or any part of an Option is to
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become exercisable and when such Option is to expire; provided that, in
appropriate cases, the Company shall have the discretion to extend the term
of an Option or the time within which, following termination of employment,
an Option may be exercised, or to accelerate the exercisability of an Option.
A Stock Option Agreement may provide for expiration prior to the end of its
term in the event of the termination of the Optionee's employment and shall
provide for the suspension of vesting when an employee is on a leave of
absence for a period in excess of six months in appropriate cases, as
determined by the Company; provided that the exercisability of Options shall
be accelerated in the event of the Participant's death or Disability and, in
the case of Retirement, the exercisability of all outstanding Options shall
be accelerated, other than any Options that had been granted within two years
of the date of the Optionee's Retirement. Except as provided in Section 4.2,
NSOs may also be awarded in combination with Restricted Shares, and such an
Award may provide that the NSOs will not be exercisable unless the related
Restricted Shares are forfeited. In addition, NSOs granted under this
Section 5 may be granted subject to forfeiture provisions which provide for
forfeiture of the Option upon the exercise of tandem awards, the terms of
which are established in other programs of the Company.
5.6 LIMITATION ON AMOUNT OF ISOS. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect to
which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 EFFECT OF CHANGE IN CONTROL. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
5.8 RESTRICTIONS ON TRANSFER OF COMMON SHARES. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 AUTHORIZATION OF REPLACEMENT OPTIONS. Concurrently with the grant of
any Option to a Participant (other than NSOs granted pursuant to Section 4.2),
the Committee may authorize the grant of Replacement Options. If Replacement
Options have been authorized by the Committee with respect to a particular award
of Options (the "Underlying Options"), the Option Agreement with respect to the
Underlying Options shall so state, and the terms and conditions of the
Replacement Options shall be provided therein. The grant of any Replacement
Options shall be effective only upon the exercise of the Underlying Options
through the use of Common Shares pursuant to Section 6.2 or Section 6.3. The
number of Replacement Options shall equal the number of Common Shares used to
exercise the Underlying Options, and, if the Option Agreement so provides, the
number of Common Shares used to satisfy any tax withholding requirements
incident to the exercise of the Underlying Options in accordance with Section
13.2.
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Upon the exercise of the Underlying Options, the Replacement Options shall
be evidenced by an amendment to the Underlying Option Agreement. Notwithstanding
the fact that the Underlying Option may be an ISO, a Replacement Option is not
intended to qualify as an ISO. The Exercise Price of a Replacement Option shall
be no less than the Fair Market Value of a Common Share on the date the grant of
the Replacement Option becomes effective. The term of each Replacement Option
shall be equal to the remaining term of the Underlying Option. No Replacement
Options shall be granted to Optionees when Underlying Options are exercised
pursuant to the terms of the Plan and the Underlying Option Agreement following
termination of the Optionee's employment. The Committee, in its sole discretion,
may establish such other terms and conditions for Replacement Options as it
deems appropriate.
5.10 OPTIONS GRANTED TO NON-UNITED STATES KEY EMPLOYEES. In the case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash at the time when such Common Shares
are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be made
only pursuant to the express provisions of the applicable Stock Option
Agreement. However, the Committee may specify in the Stock Option Agreement
that payment may be made pursuant to Section 6.2 or 6.3.
(b) In the case of an NSO, the Committee may at any time accept payment
pursuant to Section 6.2 or 6.3.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
6.3 EXERCISE/SALE. To the extent this Section 6.3 is applicable, payment
may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon
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exercise of the Options) and to deliver all or part of the sales proceeds to
the Company in payment of all or part of the Exercise Price and any
withholding taxes.
ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS.
7.1 TIME, AMOUNT AND FORM OF AWARDS. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NSOs
are exercised.
7.2 PAYMENT FOR RESTRICTED SHARE AWARDS. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 VESTING OR ISSUANCE CONDITIONS. Each Award of Restricted Shares shall
become vested, in full or in installments, upon satisfaction of the conditions
specified in the Stock Award Agreement. Common Shares shall be issued pursuant
to Performance Share Awards in full or in installments upon satisfaction of the
issuance conditions specified in the Stock Award Agreement. The Committee shall
select the vesting conditions in the case of Restricted Shares, or issuance
conditions in the case of Performance Share Awards, which may be based upon the
Participant's service, the Participant's performance, the Company's performance
or such other criteria as the Committee may adopt; provided that, in the case of
an Award of Restricted Shares where vesting is based entirely on the
Participant's service, (i) vesting shall be accelerated in the event of the
Participant's death or Disability; (ii) in the case of Retirement, vesting shall
be accelerated for all Restricted Shares that had been granted more than two
years prior to the date of the Participant's Retirement; and (iii) vesting shall
be suspended when an employee is on a leave of absence for a period in excess of
six months in appropriate cases, as determined by the Company. The Committee,
in its sole discretion, may determine, at the time of making an Award of
Restricted Shares, that such Award shall become fully vested in the event that a
Change in Control occurs with respect to the Company. The Committee, in its sole
discretion, may determine, at the time of making a Performance Share Award, that
the issuance conditions set forth in such Award shall be waived in the event
that a Change in Control occurs with respect to the Company.
7.4 FORM OF SETTLEMENT OF PERFORMANCE SHARE AWARDS. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share
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Award is settled, the number of Performance Share Awards shall be subject to
adjustment pursuant to Article 10.
7.5 DEATH OF RECIPIENT. Any Common Shares that are to be issued pursuant
to a Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's beneficiary or beneficiaries. Each recipient of a
Performance Share Award under the Plan shall designate one or more beneficiaries
for this purpose by filing the prescribed form with the Company. A beneficiary
designation may be changed by filing the prescribed form with the Company at any
time before the Award recipient's death. If no beneficiary was designated or if
no designated beneficiary survives the Award recipient, then any Common Shares
that are to be issued pursuant to a Performance Share Award after the
recipient's death shall be delivered or distributed to the recipient's estate.
The Committee, in its sole discretion, shall determine the form and time of any
distribution(s) to a recipient's beneficiary or estate.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need to hold a hearing) require an extension of time for processing the appeal,
in which case a written decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
9.1 RESTRICTED SHARES.
(a) All holders of Restricted Shares who are not Named Executive Officers
shall have the same voting, dividend, and other rights as the Company's
other stockholders.
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(b) During the period of restriction, Named Executive Officers holding
Restricted Shares granted hereunder shall be credited with all regular cash
dividends paid with respect to all Restricted Shares while they are so
held. If a dividend is paid in the form of cash, such cash dividend shall
be credited to Named Executive Officers subject to the same restrictions on
transferability and forfeitability as the Restricted Shares with respect to
which they were paid. If any dividends or distributions are paid in shares
of Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted Shares
with respect to which they were paid. Subject to the succeeding paragraph,
and to the restrictions on vesting and the forfeiture provisions, all
dividends credited to a Named Executive Officer shall be paid to the Named
Executive Officer within forty-five (45) days following the full vesting of
the Restricted Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative security" or
an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the longer of: (i)
the remaining vesting period of the Restricted Shares with respect to which
the dividend is paid; or (ii) six (6) months. The Committee shall establish
procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have the same
voting rights as the Company's other stockholders.
9.2 PERFORMANCE SHARE AWARDS. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 GENERAL. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the number of
Performance Share Awards included in any prior Award which has not yet been
settled, (c) the number of Common Shares covered by each outstanding Option or
(d) the Exercise Price under each outstanding Option.
10.2 REORGANIZATIONS. In the event that the Company is a party to a merger
or other reorganization, outstanding Options, Restricted Shares and Performance
Share Awards shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent,
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for their continuation by the Company (if the Company is a surviving
corporation), for accelerated vesting or for settlement in cash.
10.3 RESERVATION OF RIGHTS. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 EMPLOYMENT RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain employed by the
Company or any Subsidiary. The Company and its Subsidiaries reserve the right to
terminate the employment of any employee at any time, with or without cause,
subject only to a written employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of such Common Shares, whether
by issuance of a certificate, book entry or other procedure. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date when such certificate is issued, except as expressly provided
in Articles 7, 9 and 10.
11.3 CREDITORS' RIGHTS. A holder of Performance Share Awards shall have no
rights other than those of a general creditor of the Company. Performance Share
Awards represent unfunded and unsecured obligations of the Company, subject to
the terms and conditions of the applicable Stock Award Agreement.
11.4 GOVERNMENT REGULATIONS. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to the
issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of
1933, as amended, or any applicable state securities laws; and
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(b) Satisfactory assurances have been received that such Common Shares,
when issued, will be duly listed on the New York Stock Exchange or any
other securities exchange on which Common Shares are then listed.
ARTICLE 12. LIMITATION OF PAYMENTS.
12.1 BASIC RULE. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer in
the nature of compensation to or for the benefit of a Participant, whether paid
or payable (or transferred or transferable) pursuant to the terms of this Plan
or otherwise (a "Payment"), would be nondeductible for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
section 280G of the Code, then the aggregate present value of all Payments shall
be reduced (but not below zero) to the Reduced Amount; provided, however, that
the Committee, at the time of making an Award under this Plan or at any time
thereafter, may specify in writing that such Award shall not be so reduced and
shall not be subject to this Article 12. For purposes of this Article 12, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the Code.
12.2 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible because of section 280G of the Code, then the Company
shall promptly give the Participant notice to that effect and a copy of the
detailed calculation thereof and of the Reduced Amount, and the Participant may
then elect, in his or her sole discretion, which and how much of the Payments
shall be eliminated or reduced (as long as after such election, the aggregate
present value of the Payments equals the Reduced Amount) and shall advise the
Company in writing of his or her election within 10 days of receipt of notice.
If no such election is made by the Participant within such 10-day period, then
the Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Payments equals the Reduced Amount) and shall notify the Participant promptly of
such election. For purposes of this Article 12, present value shall be
determined in accordance with section 280G(d)(4) of the Code. All determinations
made by the Auditors under this Article 12 shall be binding upon the Company and
the Participant and shall be made within 60 days of the date when a Payment
becomes payable or transferable. As promptly as practicable following such
determination and the elections hereunder, the Company shall pay or transfer to
or for the benefit of the Participant such amounts as are then due to him or her
under the Plan, and shall promptly pay or transfer to or for the benefit of the
Participant in the future such amounts as become due to him or her under the
Plan.
12.3 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a
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deficiency by the Internal Revenue Service against the Company or the
Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be
treated for all purposes as a loan to the Participant which he or she shall
repay to the Company on demand, together with interest at the applicable
federal rate provided in section 7872(f)(2) of the Code; provided, however,
that no amount shall be payable by the Participant to the Company if and to
the extent that such payment would not reduce the amount which is subject to
taxation under section 4999 of the Code. In the event that the Auditors
determine that an Underpayment has occurred, such Underpayment shall promptly
be paid or transferred by the Company to or for the benefit of the
Participant, together with interest at the applicable federal rate provided
in section 7872(f)(2) of the Code.
12.4 RELATED CORPORATIONS. For purposes of this Article 12, the term
"Company" shall include affiliated corporations to the extent determined by
the Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 13. WITHHOLDING TAXES.
13.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, the recipient of any payment or distribution under the Plan
shall make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 NONSTATUTORY OPTIONS, RESTRICTED SHARES OR PERFORMANCE SHARE AWARDS.
The Committee may permit an Optionee who exercises NSOs, or who receives Awards
of Restricted Shares, or who receives Common Shares pursuant to the terms of a
Performance Share Award, to satisfy all or part of his or her withholding tax
obligations by having the Company withhold a portion of the Common Shares that
otherwise would be issued to him or her under such Awards. Such Common Shares
shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash. The payment of withholding taxes by surrendering
Common Shares to the Company, if permitted by the Committee, shall be subject to
such restrictions as the Committee may impose, including any restrictions
required by rules of the Securities and Exchange Commission.
ARTICLE 14. ASSIGNMENT OR TRANSFER OF AWARD.
14.1 GENERAL RULE. Any Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or by
operation of law, except to the extent specifically permitted by Section 14.2.
14.2 EXCEPTIONS TO GENERAL RULE. Notwithstanding Section 14.1, this Plan
shall not preclude (i) a Participant from designating a beneficiary to succeed,
after the Participant's death, to those of the Participant's Awards (including
without limitation, the right to exercise any unexercised Options) as may be
determined by the Company from time to time in its sole
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discretion, (ii) a transfer of any Award hereunder by will or the laws of
descent or distribution, or (iii) a voluntary transfer of an Award (other
than an ISO) to a trust or partnership for the exclusive benefit of one or
more members of the Participant's family, but only if the Participant has
sole investment control over such trust or partnership.
ARTICLE 15. FUTURE OF PLANS.
15.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on May 8, 1992. The Plan shall remain in effect until it is terminated
under Section 15.2, except that no ISOs shall be granted after May 7, 2002.
15.2 AMENDMENT OR TERMINATION. The Committee may, at any time and for any
reason, amend or terminate the Plan; provided, however, that any amendment of
the Plan shall be subject to the approval of the Company's stockholders to the
extent required by applicable laws, regulations or rules.
15.3 EFFECT OF AMENDMENT OR TERMINATION. No Award shall be made under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
ARTICLE 16. DEFINITIONS.
16.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
16.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
16.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
16.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which fewer
than two-thirds of the incumbent directors are directors who either (i) had
been directors of the Company 24 months prior to such change or (ii) were
elected, or nominated for election, to the Board with the affirmative votes
of at least a majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in office at the
time of the election or nomination;
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(c) Any "person" (as such term is used in sections 13(d) and 14(d) of the
Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and
apart from rights accruing under special circumstances) having the right to
vote at elections of directors (the "Base Capital Stock"); provided,
however, that any change in the relative beneficial ownership of securities
of any person resulting solely from a reduction in the aggregate number of
outstanding shares of Base Capital Stock, and any decrease thereafter in
such person's ownership of securities, shall be disregarded until such
person increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
16.5 "Code" means the Internal Revenue Code of 1986, as amended.
16.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
16.7 "Common Share" means one share of the common stock of the
Company.
16.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
16.9 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
16.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
16.11 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
16.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for
such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the
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mean between the last reported representative bid and asked prices quoted
by the NASDAQ system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
16.13 "ISO" means an incentive stock option described in section 422(b)
of the Code.
16.14 "Key Employee" means a key common-law employee of the Company or
any Subsidiary, as determined by the Committee.
16.15 "Named Executive Officer" means a Participant who, as of the date
of vesting of an Award is one of a group of "covered employees," as defined in
the Regulations promulgated under Code Section 162(m), or any successor statute.
16.16 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
16.17 "NSO" means an employee stock option not described in sections
422 through 424 of the Code.
16.18 "Option" means an ISO or NSO or, in the case of a Key Employee
who is subject to the tax laws of a foreign jurisdiction, an option qualifying
for favorable tax treatment under the laws of such jurisdiction, including a
Replacement Option, granted under the Plan and entitling the holder to purchase
one Common Share.
16.19 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
16.20 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
16.21 "Performance Share Award" means the conditional right to receive
in the future one Common Share, awarded to a Participant under the Plan.
16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab
Corporation, as it may be amended from time to time.
16.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
16.24 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
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16.25 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
16.26 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
16.27 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
16.28. "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under the
Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing
definition shall apply to all Stock Option Agreements entered into pursuant to
the Plan, irrespective of any definition to the contrary contained in any such
Stock Option Agreement.
16.29 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall be
made by the Employee Benefits Administration Committee of the Company, the
findings of which shall be final, binding and conclusive.
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ADDENDUM A
The provisions of the Plan, as amended by the terms of this Addendum
A, shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions shall
apply in addition to those set out in section 16 of the Plan:
APPROVED OPTION Means a stock option designed to qualify as
an approved executive share option under the Taxes Act;
INLAND REVENUE means the Board of the Inland Revenue in the
United Kingdom.
KEY U.K. EMPLOYEE means a designated employee of Sharelink
Investment Services plc or any subsidiary (as that term is
defined in the Companies Act 1985 of the United Kingdom, as
amended) of which Sharelink Investment Services plc has
control for the purposes of section 840 of the Taxes Act;
TAXES ACT means the Income and Corporation Taxes Act 1988 of
the United Kingdom.
2. An Approved Option may only be granted to a Key U.K. Employee
who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of paragraph 8 of
Schedule 9 to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time" shall
mean an employee who is required to work 20 hours per week, excluding meal
breaks.
3. No Approved Option may be granted to a Key U.K. Employee if it
would cause the aggregate of the exercise price of all subsisting Approved
Options granted to such employee under the Plan, or any other subsisting options
granted to such employee under any other share option scheme approved under
Schedule 9 of the Taxes Act and established by the Company or an associated
company, to exceed the higher of (a) one hundred thousand pounds sterling and
(b) four times such employee's relevant emoluments for the current or preceding
year of assessment (whichever is greater); but where there were no relevant
emoluments for the previous year of assessment, the limit shall be the higher of
one hundred thousand pounds sterling or four times such employee's relevant
emoluments for the period of twelve months beginning with the first day during
the current year of assessment in respect of which there are relevant
emoluments. For the purpose of this section 3 of Addendum A, "associated
company" means an associated company within the meaning of section 416 of the
Taxes Act; "relevant
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emoluments" has the meaning given by paragraph 28(4) of Schedule 9 to the
Taxes Act and "year of assessment" means a year beginning on any April 6 and
ending on the following April 5.
4. Common Shares issued pursuant to the exercise of Approved Options
must satisfy the conditions specified in paragraphs 10 to 14 of Schedule 9 to
the Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan, the
exercise price of an Approved Option shall not be less than 100 percent of the
closing price of a Common Share as reported in the New York Stock Exchange
Composite Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key U.K.
Employee when that Key U.K. Employee falls within the provisions of paragraph 8
of Schedule 9 to the Taxes Act. If at any time the shares under an Approved
Option cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9
to the Taxes Act, then all Approved Options then outstanding shall lapse and
cease to be exercisable from the date of the shares ceasing so to comply, and no
optionee shall have any cause of action against the Company, Sharelink
Investment Services plc or any subsidiary of the Company or any other person in
respect thereof.
7. An Approved Option may contain such other terms, provisions and
conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements for
approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the terms of
section 10.1 of the Plan, no adjustment shall be made pursuant to section 10.1
of the Plan to any outstanding Approved Options without the prior approval of
the Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee shall
make arrangements satisfactory to the Company for the satisfaction of any tax
withholding or deduction -- at -- source obligations that arise by reason of the
grant to him or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in addition to the provisions
set out in section 15.2 of the Plan, no amendment which affects any of the
provisions of the Plan relating to Approved Options shall be effective until
approved by the Inland Revenue, except for such amendment as are required to
obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to the
Taxes Act.
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EXHIBIT 10.188
THE CHARLES SCHWAB CORPORATION
1987 EXECUTIVE OFFICER STOCK OPTION PLAN
(RESTATED TO INCLUDE AMENDMENTS THROUGH OCTOBER 22, 1997)
ARTICLE 1. INTRODUCTION.
The purpose of the 1987 Executive Stock Option Plan, as Amended and
Restated (the "Plan") is to enable The Charles Schwab Corporation and its
subsidiaries to attract and retain directors, officers, and other key employees
and to provide such persons with additional incentive to advance the interests
of the Company. The Plan was initially adopted on March 24, 1987, and was
amended on September 17, 1996 and October 22, 1997. The Plan is hereby restated
and amended as of October 22, 1997, and the terms of this Restatement shall
apply to all awards granted under the Plan on or after such date. The Plan
shall terminate not more than ten (10) years from the date the Plan initially
was adopted. The Plan will provide Awards in the form of Restricted Shares,
Performance Share Awards or Options. The Plan shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 THE COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall consist of two or more Non-Employee Directors, who shall be
appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
ARTICLE 3. LIMITATION ON AWARDS.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 1,284,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares being
issued, or if any Options terminate for any other reason before being exercised,
then such Restricted Shares, Performance Share Awards or Options shall again
become available for Awards under the Plan. The limitation of this Article 3
shall be subject to adjustment pursuant to Article 10. Any Common Shares issued
pursuant to the Plan may be authorized but unissued shares or treasury shares.
<PAGE>
ARTICLE 4. ELIGIBILITY.
4.1 GENERAL RULE. Key Employees shall be eligible for designation as
Participants by the Committee.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan,
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.
5.2 OPTIONS NONTRANSFERABILITY. No Option granted under the Plan shall be
transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
5.3 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10.
5.4 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant.
Subject to the preceding sentence, the Exercise Price under any Option shall be
determined by the Committee. The Exercise Price shall be payable in accordance
with Article 6.
5.5 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option. Subject
to the preceding sentence, the Committee shall determine when all or any part of
an Option is to become exercisable and when such Option is to expire; provided
that, in appropriate cases, the Company shall have the discretion to extend the
term of an Option or the time within which, following termination of employment,
an Option may be exercised, or to accelerate the exercisability of an Option. A
Stock Option Agreement may provide for expiration prior to the end of its term
in the event of the termination of the Optionee's employment and shall provide
for the suspension of vesting when an employee is on a leave of absence for a
period in excess of six months in appropriate cases, as determined by the
Company; provided that the exercisability of Options shall be accelerated in the
event of the Participant's death or Disability and, in the case of Retirement,
the exercisability of all outstanding Options shall be accelerated, other than
any Options that had been granted within two years of the date of the Optionee's
Retirement. Options may also be
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awarded in combination with Restricted Shares, and such an Award may provide
that the Options will not be exercisable unless the related Restricted Shares
are forfeited. In addition, Options granted under this Section 5 may be
granted subject to forfeiture provisions which provide for forfeiture of the
Option upon the exercise of tandem awards, the terms of which are established
in other programs of the Company.
5.6 EFFECT OF CHANGE IN CONTROL. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
5.7 RESTRICTIONS ON TRANSFER OF COMMON SHARES. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.8 AUTHORIZATION OF REPLACEMENT OPTIONS. Concurrently with the grant of
any Option to a Participant, the Committee may authorize the grant of
Replacement Options. If Replacement Options have been authorized by the
Committee with respect to a particular award of Options (the "Underlying
Options"), the Option Agreement with respect to the Underlying Options shall so
state, and the terms and conditions of the Replacement Options shall be provided
therein. The grant of any Replacement Options shall be effective only upon the
exercise of the Underlying Options through the use of Common Shares pursuant to
Section 6.2 or Section 6.3. The number of Replacement Options shall equal the
number of Common Shares used to exercise the Underlying Options, and, if the
Option Agreement so provides, the number of Common Shares used to satisfy any
tax withholding requirements incident to the exercise of the Underlying Options
in accordance with Section 12.2. Upon the exercise of the Underlying Options,
the Replacement Options shall be evidenced by an amendment to the Underlying
Option Agreement. The Exercise Price of a Replacement Option shall be no less
than the Fair Market Value of a Common Share on the date the grant of the
Replacement Option becomes effective. The term of each Replacement Option shall
be equal to the remaining term of the Underlying Option. No Replacement Options
shall be granted to Optionees when Underlying Options are exercised pursuant to
the terms of the Plan and the Underlying Option Agreement following termination
of the Optionee's employment. The Committee, in its sole discretion, may
establish such other terms and conditions for Replacement Options as it deems
appropriate.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash at the time when such Common Shares
are purchased, except that the Committee may at any time accept payment pursuant
to Section 6.2 or 6.3.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to
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the Company. Such Common Shares shall be valued at their Fair Market Value
on the date when the new Common Shares are purchased under the Plan. In the
event that the Common Shares being surrendered are Restricted Shares that
have not yet become vested, the same restrictions shall be imposed upon the
new Common Shares being purchased.
6.3 EXERCISE/SALE. To the extent this Section 6.3 is applicable, payment
may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS.
7.1 TIME, AMOUNT AND FORM OF AWARDS. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with Options, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related Options
are exercised.
7.2 PAYMENT FOR RESTRICTED SHARE AWARDS. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 VESTING OR ISSUANCE CONDITIONS. Each Award of Restricted Shares shall
become vested, in full or in installments, upon satisfaction of the conditions
specified in the Stock Award Agreement. Common Shares shall be issued pursuant
to Performance Share Awards in full or in installments upon satisfaction of the
issuance conditions specified in the Stock Award Agreement. The Committee shall
select the vesting conditions in the case of Restricted Shares, or issuance
conditions in the case of Performance Share Awards, which may be based upon the
Participant's service, the Participant's performance, the Company's performance
or such other criteria as the Committee may adopt; provided that, in the case of
an Award of Restricted Shares where vesting is based entirely on the
Participant's service, (i) vesting shall be accelerated in the event of the
Participant's death or Disability; (ii) in the case of Retirement, vesting shall
be accelerated for all Restricted Shares that had been granted more than two
years prior to the date of the Participant's Retirement; and (iii) vesting shall
be suspended when an employee is on a leave of absence for a period in excess of
six months in appropriate cases, as determined by the Company. The Committee,
in its sole discretion,
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may determine, at the time of making an Award of Restricted Shares, that such
Award shall become fully vested in the event that a Change in Control occurs
with respect to the Company. The Committee, in its sole discretion, may
determine, at the time of making a Performance Share Award, that the issuance
conditions set forth in such Award shall be waived in the event that a Change
in Control occurs with respect to the Company.
7.4 FORM OF SETTLEMENT OF PERFORMANCE SHARE AWARDS. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 DEATH OF RECIPIENT. Any Common Shares that are to be issued pursuant
to a Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's beneficiary or beneficiaries. Each recipient of a
Performance Share Award under the Plan shall designate one or more beneficiaries
for this purpose by filing the prescribed form with the Company. A beneficiary
designation may be changed by filing the prescribed form with the Company at any
time before the Award recipient's death. If no beneficiary was designated or if
no designated beneficiary survives the Award recipient, then any Common Shares
that are to be issued pursuant to a Performance Share Award after the
recipient's death shall be delivered or distributed to the recipient's estate.
The Committee, in its sole discretion, shall determine the form and time of any
distribution(s) to a recipient's beneficiary or estate.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need to hold a hearing) require an extension of time for processing the appeal,
in which case a written decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
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ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
9.1 RESTRICTED SHARES.
(a) All holders of Restricted Shares who are not Named Executive Officers
shall have the same voting, dividend, and other rights as the Company's
other stockholders.
(b) During the period of restriction, Named Executive Officers holding
Restricted Shares granted hereunder shall be credited with all regular cash
dividends paid with respect to all Restricted Shares while they are so
held. If a dividend is paid in the form of cash, such cash dividend shall
be credited to Named Executive Officers subject to the same restrictions on
transferability and forfeitability as the Restricted Shares with respect to
which they were paid. If any dividends or distributions are paid in shares
of Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted Shares
with respect to which they were paid. Subject to the succeeding paragraph,
and to the restrictions on vesting and the forfeiture provisions, all
dividends credited to a Named Executive Officer shall be paid to the Named
Executive Officer within forty-five (45) days following the full vesting of
the Restricted Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative security" or
an "equity security" pursuant to Rule 16(a) under the Exchange Act, such
dividend shall be subject to a vesting period equal to the longer of: (i)
the remaining vesting period of the Restricted Shares with respect to which
the dividend is paid; or (ii) six (6) months. The Committee shall establish
procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have the same
voting rights as the Company's other stockholders.
9.2 PERFORMANCE SHARE AWARDS. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 GENERAL. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the number of
Performance Share Awards included in any prior Award which has not yet been
settled, (c) the number of Common
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Shares covered by each outstanding Option or (d) the Exercise Price under
each outstanding Option.
10.2 REORGANIZATIONS. In the event that the Company is a party to a merger
or other reorganization, outstanding Options, Restricted Shares and Performance
Share Awards shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent, for their continuation by the
Company (if the Company is a surviving corporation), for accelerated vesting or
for settlement in cash.
10.3 RESERVATION OF RIGHTS. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 EMPLOYMENT RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain employed by the
Company or any Subsidiary. The Company and its Subsidiaries reserve the right to
terminate the employment of any employee at any time, with or without cause,
subject only to a written employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 7, 9 and 10.
11.3 CREDITORS' RIGHTS. A holder of Performance Share Awards shall have no
rights other than those of a general creditor of the Company. Performance Share
Awards represent unfunded and unsecured obligations of the Company, subject to
the terms and conditions of the applicable Stock Award Agreement.
11.4 GOVERNMENT REGULATIONS. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
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(a) Any legal requirements or regulations have been met relating to the
issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of
1933, as amended, or any applicable state securities laws; and
(b) Satisfactory assurances have been received that such Common Shares,
when issued, will be duly listed on the New York Stock Exchange or any
other securities exchange on which Common Shares are then listed.
ARTICLE 12. WITHHOLDING TAXES.
12.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, the recipient of any payment or distribution under the Plan
shall make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
12.2 NONSTATUTORY OPTIONS, RESTRICTED SHARES OR PERFORMANCE SHARE AWARDS.
The Committee may permit an Optionee who exercises Options, or who receives
Awards of Restricted Shares, or who receives Common Shares pursuant to the terms
of a Performance Share Award, to satisfy all or part of his or her withholding
tax obligations by having the Company withhold a portion of the Common Shares
that otherwise would be issued to him or her under such Awards. Such Common
Shares shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall
be subject to such restrictions as the Committee may impose, including any
restrictions required by rules of the Securities and Exchange Commission.
ARTICLE 13. ASSIGNMENT OR TRANSFER OF AWARD.
13.1 GENERAL RULE. Any Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or by
operation of law, except to the extent specifically permitted by Section 13.2.
13.2 EXCEPTIONS TO GENERAL RULE. Notwithstanding Section 13.1, this Plan
shall not preclude (i) a Participant from designating a beneficiary to succeed,
after the Participant's death, to those of the Participant's Awards (including
without limitation, the right to exercise any unexercised Options) as may be
determined by the Company from time to time in its sole discretion, (ii) a
transfer of any Award hereunder by will or the laws of descent or distribution,
or (iii) a voluntary transfer of an Award to a trust or partnership for the
exclusive benefit of one or more members of the Participant's family, but only
if the Participant has sole investment control over such trust or partnership.
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ARTICLE 14. FUTURE OF PLANS.
14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on February 26, 1997. The Plan shall remain in effect until it is
terminated under Section 14.2, except that no Awards shall be granted after
March 24, 1997.
14.2 AMENDMENT OR TERMINATION. The Board may at any time terminate this
Plan, and the Board or the Committee make such modifications of the Plan as it
shall deem advisable; provided, however, that any amendment of the Plan shall be
subject to the approval of the Company's stockholders to the extent required by
applicable laws, regulations or rules.
14.3 EFFECT OF AMENDMENT OR TERMINATION. No Award shall be made under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
ARTICLE 15. DEFINITIONS.
15.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
15.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
15.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
15.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 14.1:
(a) A change in control required to be reported pursuant to Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which fewer
than two-thirds of the incumbent directors are directors who either (i) had
been directors of the Company 24 months prior to such change or (ii) were
elected, or nominated for election, to the Board with the affirmative votes
of at least a majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in office at the
time of the election or nomination;
(c) Any "person" (as such term is used in sections 13(d) and 14(d) of the
Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and
apart from rights accruing under special circumstances) having the right to
vote at elections of directors (the "Base Capital
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Stock"); provided, however, that any change in the relative beneficial
ownership of securities of any person resulting solely from a reduction
in the aggregate number of outstanding shares of Base Capital Stock, and
any decrease thereafter in such person's ownership of securities, shall
be disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company.
15.5 "Code" means the Internal Revenue Code of 1986, as amended.
15.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
15.7 "Common Share" means one share of the common stock of the Company.
15.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
15.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
15.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
15.11 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
15.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the NASDAQ system for such
date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
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15.13 "Key Employee" means a key common-law employee of the Company or
any Subsidiary, as determined by the Committee.
15.14 "Named Executive Officer" means a Participant who, as of the
date of vesting of an Award is one of a group of "covered employees," as
defined in the Regulations promulgated under Code Section 162(m), or any
successor statute.
15.15 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
15.16 "Option" means an employee stock option not described in sections
422 through 424 of the Code, including a Replacement Option, granted under the
Plan and entitling the holder to purchase one Common Share.
15.17 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
15.18 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
15.19 "Performance Share Award" means the conditional right to receive
in the future one Common Share, awarded to a Participant under the Plan.
15.20 "Plan" means this 1987 Executive Stock Option Plan of The Charles
Schwab Corporation, as it may be amended from time to time.
15.21 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
15.22 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
15.23 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
15.24 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
15.25 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
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15.26. "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under the
Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing
definition shall apply to all Stock Option Agreements entered into pursuant to
the Plan, irrespective of any definition to the contrary contained in any such
Stock Option Agreement.
15.27 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall be
made by the Employee Benefits Administration Committee of the Company, the
findings of which shall be final, binding and conclusive.
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NON-QUALIFIED STOCK OPTION AGREEMENT
(Executive Officer Stock Option Plan (1987))
THIS AGREEMENT made as of this ____ day of _________, 19____, by and
between The Charles Schwab Corporation, a Delaware corporation ("Company") and
______________________________ ("Optionee").
WITNESSETH:
WHEREAS, there has been granted to Optionee, effective as of __________,
19___, a non-qualified stock option under the Executive Officer Stock Option
Plan (1987) of the Company ("Option Plan");
NOW THEREFORE, it is mutually agreed as follows:
1. The Optionee shall have a non-qualified stock option to acquire
________ shares of common stock of the company (the "Shares"), at a price of
$_______ per share.
2. Except as provided in paragraphs 3 and 4 below, the other terms of
this option shall be the same as all of those provided for in the Option
Plan, which include, without limitation, vesting of Shares, limitations on
exercise and transfer, and other restrictions. The Option Plan is attached
hereto as Exhibit A and is incorporated herein by this reference. Optionee
has read the Option Plan and, other than as provided in paragraphs 3 and 4
below, agrees to be bound by its terms. Without limitation, Optionee
specifically acknowledges the representations, warranties and agreements
contained in paragraph 6(e) of the Option Plan.
3. Notwithstanding paragraph 6(b) of the Option Plan, in the event
Optionee's employment or service as a director with or for the Company and
its subsidiaries terminates by reason of Optionee's death or permanent
disability, all Shares then not deemed to be Vested thereupon will be deemed
immediately Vested. For this purpose, "permanent disability" will mean the
reasonable determination by a qualified physician acceptable to the company
that the Optionee has an illness or incapacity that has disabled, or will
disable, the Optionee from rendering his or her normal services to the
Company and its subsidiaries for a period of more than six (6) consecutive
months in any consecutive twelve (12) month period.
4. Upon exercise of this Option, the Company will extend to the
Optionee rights under that certain Registration Rights and Stock Restriction
Agreement dated as of March 31, 1987, as amended, subject to the Optionee's
agreement to be bound by the terms thereof.
5. Any notice to be given by the Optionee under the terms of the Option
Plan shall be deemed to have been duly given, and effective upon the receipt,
if sent by Certified Mail, postage and certification prepaid, to The Charles
Schwab Corporation, 101 Montgomery, San Francisco, California 94104,
Attention: Corporate Secretary, except as superseded by a different address
noticed to Optionee.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year referred to above.
THE CHARLES SCHWAB CORPORATION ("Company")
By:
-------------------------------------------
-----------------------------------------------
"Optionee"
Attachment (1) Spousal Consent
(2) Exhibit A: 1987 Stock Option Plan
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EXHIBIT 10.189
ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
RESTATED AND AMENDED AS OF JANUARY 1, 1998
The Annual Executive Individual Performance Plan (the "Plan") provides
for the payment of annual bonuses to Participants consisting of executive
officers of The Charles Schwab Corporation (the "Company"), other than the
Chairman, Vice Chairman and President.
The Compensation Committee of the Board of Directors (the "Committee")
shall select the executive officers who will participate in the Plan. The
amount available for payments under the Plan will consist of the sum of two
components. The first component is an amount equal to the sum of the bonuses
payable to each Participant for the year pursuant to the Corporate Executive
Bonus Plan (the "Formula Plan Bonus Total"). The second component is
calculated by multiplying the sum of (i) the first component, plus (ii) the
Formula Bonus Plan Total, by 60%. For purposes of calculating both
Components, the Formula Plan Bonus Total shall be increased by any reductions
in distributions determined by the Committee pursuant to Article III, Section
5 of the Corporate Executive Bonus Plan, and, at the discretion of the
Committee, the Formula Plan Bonus Total may be recomputed by excluding from
the calculation of the Company's net revenue growth or consolidated pre-tax
profit margin the amount of any items of income and expense that the
Committee determines to be extraordinary (such as the impact of mergers and
acquisitions during the year and other one-time nonoperating items).
The Committee shall determine the amounts to be paid to the Participants
hereunder. Such determination shall be based on the Committee's evaluation,
in its sole discretion and upon the recommendation of the Chairman and
President, of the Participant's individual contribution to the attainment of
the Company's performance objectives. The Committee has the discretion to
pay out less than the total amount available for payment hereunder.
All amounts payable pursuant to the Plan shall be paid within the first
ninety (90) days of the year following the year in which they are earned;
however, a recipient who is eligible to participate in The Charles Schwab
Corporation Deferred Compensation Plan may elect to defer payments pursuant
to the terms of that plan.
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The Plan is administered by the Committee. All decisions regarding the
operation of the Plan and payments thereunder shall be made by the Committee,
in its sole and absolute discretion, which decisions shall be final,
conclusive and binding. The Committee may amend or terminate the Plan at any
time and for any reason, without stockholder approval. Nothing contained
herein shall be construed as a guarantee of continued employment of any
participant hereunder. The Plan shall be construed and governed in accordance
with the laws of the State of California.
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EXHIBIT 10.190
THE CHARLES SCHWAB CORPORATION
EMPLOYEE STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board of Directors on October 22, 1997. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of incremental stockholder value by (a) encouraging Employees to focus
on long-range objectives, (b) encouraging the attraction and retention of
Employees with exceptional qualifications and (c) linking Employees directly to
stockholder interests. The Plan seeks to achieve this purpose by providing for
Awards in the form of Restricted Shares or Options. The Plan shall be governed
by, and construed in accordance with, the laws of the State of Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 THE COMMITTEE. The Plan shall be administered by the Committee. The
Committee shall consist of two or more non-employee Directors, who shall be
appointed by the Board.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall select the Employees
who are to receive Awards under the Plan, determine the amount, vesting
requirements and other conditions of such Awards, may interpret the Plan, and
make all other decisions relating to the operation of the Plan. The Committee
may adopt such rules or guidelines as it deems appropriate to implement the
Plan, and may, in its discretion, delegate any of its responsibilities to such
parties as it deems proper. The Committee's determinations under the Plan shall
be final and binding on all persons.
ARTICLE 3. LIMITATION ON AWARDS.
The aggregate number of Restricted Shares and Options awarded under the
Plan shall be determined by the Board from time to time. If any Restricted
Shares or Options are forfeited, or if any Options terminate for any other
reason before being exercised, then such Restricted Shares or Options shall
again become available for Awards under the Plan. The limitation of this
Article 3 shall be subject to adjustment pursuant to Article 10. Any Common
Shares issued pursuant to the Plan may be authorized but unissued shares or
treasury shares.
ARTICLE 4. ELIGIBILITY.
GENERAL RULE. The Committee shall make all determinations concerning the
Employees who shall be eligible to participate in the Plan, and the awards to
each Participant.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan,
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for
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inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. In the
case of an Employee who is subject to the tax laws of a foreign jurisdiction,
the Committee may designate all or any part of an Option as an option
qualifying for favorable tax treatment under the laws of such foreign
jurisdiction.
5.2 OPTIONS NONTRANSFERABILITY. No Option granted under the Plan shall
be transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
5.3 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10.
5.4 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant.
Subject to the preceding sentence, the Exercise Price under any Option shall be
determined by the Committee. The Exercise Price shall be payable in accordance
with Article 6.
5.5 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option. Subject
to the preceding sentence, the Committee shall determine when all or any part of
an Option is to become exercisable and when such Option is to expire; provided
that, in appropriate cases, the Company shall have the discretion to extend the
term of an Option or the time within which, following termination of employment,
an Option may be exercised, or to accelerate the exercisability of an Option.
A Stock Option Agreement may provide for expiration prior to the end of its term
in the event of the termination of the Optionee's employment and may provide for
the suspension of vesting when an employee is on a leave of absence for a period
in excess of six months in appropriate cases; provided that the exercisability
of Options shall be accelerated in the event of the Participant's death or
Disability and, in the case of Retirement, the exercisability of all outstanding
Options shall be accelerated, other than any Options that had been granted
within two years of the date of the Optionee's Retirement. Options may also be
awarded in combination with Restricted Shares, and such an Award may provide
that the Options will not be exercisable unless the related Restricted Shares
are forfeited. In addition, Options granted under this Section 5 may be
granted subject to forfeiture provisions which provide for forfeiture of the
Option upon the exercise of tandem awards, the terms of which are established in
other programs of the Company.
5.6 EFFECT OF CHANGE IN CONTROL. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
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5.7 RESTRICTIONS ON TRANSFER OF COMMON SHARES. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.8 AUTHORIZATION OF REPLACEMENT OPTIONS. Concurrently with the grant of
any Option to a Participant, the Committee may authorize the grant of
Replacement Options. If Replacement Options have been authorized by the
Committee with respect to a particular award of Options (the "Underlying
Options"), the Option Agreement with respect to the Underlying Options shall so
state, and the terms and conditions of the Replacement Options shall be provided
therein. The grant of any Replacement Options shall be effective only upon the
exercise of the Underlying Options through the use of Common Shares pursuant to
Section 6.2 or Section 6.3. The number of Replacement Options shall equal the
number of Common Shares used to exercise the Underlying Options, and, if the
Option Agreement so provides, the number of Common Shares used to satisfy any
tax withholding requirements incident to the exercise of the Underlying Options
in accordance with Section 13.2. Upon the exercise of the Underlying Options,
the Replacement Options shall be evidenced by an amendment to the Underlying
Option Agreement. The Exercise Price of a Replacement Option shall be no less
than the Fair Market Value of a Common Share on the date the grant of the
Replacement Option becomes effective. The term of each Replacement Option shall
be equal to the remaining term of the Underlying Option. No Replacement Options
shall be granted to Optionees when Underlying Options are exercised pursuant to
the terms of the Plan and the Underlying Option Agreement following termination
of the Optionee's employment. The Committee, in its sole discretion, may
establish such other terms and conditions for Replacement Options as it deems
appropriate.
5.9 OPTIONS GRANTED TO NON-UNITED STATES EMPLOYEES. In the case of
Employees who are subject to the tax laws of a foreign jurisdiction, the Company
may issue Options to such Employees that contain terms required to conform with
any requirements for favorable tax treatment imposed by the laws of such foreign
jurisdiction, or as otherwise may be required by the laws of such foreign
jurisdiction. The terms of any such Options shall be governed by the Plan,
subject to the terms of any Addendum to the Plan specifically applicable to such
Options.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash at the time when such Common Shares
are purchased, except that the Committee may at any time accept payment pursuant
to Section 6.2 or 6.3.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall
be valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
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6.3 EXERCISE/SALE. To the extent this Section 6.3 is applicable, payment
may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
ARTICLE 7. RESTRICTED SHARES.
7.1 TIME, AMOUNT AND FORM OF AWARDS. The Committee may grant Restricted
Shares with respect to an Award Year during such Award Year or at any time
thereafter. Each such Award shall be evidenced by a Stock Award Agreement
between the Award recipient and the Company. The amount of each Award of
Restricted Shares shall be determined by the Committee. Restricted Shares may
also be awarded in combination with Options, and such an Award may provide that
the Restricted Shares will be forfeited in the event that the related Options
are exercised.
7.2 PAYMENT FOR RESTRICTED SHARE AWARDS. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 VESTING OR ISSUANCE CONDITIONS. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. The Committee shall select
the vesting conditions in the case of Restricted Shares which may be based upon
the Participant's service, the Participant's performance, the Company's
performance or such other criteria as the Committee may adopt; provided that, in
the case of an Award of Restricted Shares where vesting is based entirely on the
Participant's service, (i) vesting shall be accelerated in the event of the
Participant's death or Disability; (ii) in the case of Retirement, vesting shall
be accelerated for all Restricted Shares that had been granted more than two
years prior to the date of the Participant's Retirement; and (iii) vesting shall
be suspended when an employee is on a leave of absence for a period in excess of
six months in appropriate cases, as determined by the Company. The Committee,
in its sole discretion, may determine, at the time of making an Award of
Restricted Shares, that such Award shall become fully vested in the event that a
Change in Control occurs with respect to the Company.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim,
the claimant may appeal a denied claim to the Committee (or to a person
designated by the Committee) for further review. Such appeal shall be filed in
writing with the Committee on a form supplied by the Committee, together with a
written statement of the claimant's position, no later than 90 days following
receipt by the claimant of written notice of the denial of his or her claim. If
the claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and
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shall be delivered in writing to the claimant no later than 60 days after the
Committee's receipt of the notice of appeal, unless special circumstances
(including the need to hold a hearing) require an extension of time for
processing the appeal, in which case a written decision on review shall be
delivered to the claimant as soon as possible but not later than 120 days
after the Committee's receipt of the appeal notice. The claimant shall be
notified in writing of any such extension of time. The written decision on
review shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, and shall specifically refer to
the pertinent Plan provisions on which it is based. All determinations of
the Committee shall be final and binding on Participants and their
beneficiaries.
ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
All holders of Restricted Shares shall have the same voting, dividend, and
other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 GENERAL. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options and Restricted Shares available for future
Awards under Article 3, (b) the number of Common Shares covered by each
outstanding Option or (c) the Exercise Price under each outstanding Option.
10.2 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options and Restricted Shares shall
be subject to the agreement of merger or reorganization. Such agreement may
provide, without limitation, for the assumption of outstanding Awards by the
surviving corporation or its parent, for their continuation by the Company (if
the Company is a surviving corporation), for accelerated vesting or for
settlement in cash.
10.3 RESERVATION OF RIGHTS. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 EMPLOYMENT RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain employed by the
Company or any Subsidiary.
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The Company and its Subsidiaries reserve the right to terminate the
employment of any employee at any time, with or without cause, subject only
to a written employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of such Common Shares, whether
by issuance of a certificate, book entry or other procedure. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date when such certificate is issued, except as expressly provided
in Articles 7, 9 and 10.
11.3 GOVERNMENT REGULATIONS. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to the
issuance of such Common Shares or to their registration, qualification or
exemption from registration or qualification under the Securities Act of 1933,
as amended, or any applicable state securities laws; and
(b) Satisfactory assurances have been received that such Common Shares,
when issued, will be duly listed on the New York Stock Exchange or any other
securities exchange on which Common Shares are then listed.
ARTICLE 12. WITHHOLDING TAXES.
12.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, the recipient of any payment or distribution under the Plan
shall make arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
12.2 WITHHOLDING ON OPTIONS OR RESTRICTED SHARES. The Committee may
permit an Optionee who exercises Options, or who receives Awards of Restricted
Shares, to satisfy all or part of his or her withholding tax obligations by
having the Company withhold a portion of the Common Shares that otherwise would
be issued to him or her under such Awards. Such Common Shares shall be valued
at their Fair Market Value on the date when taxes otherwise would be withheld in
cash. The payment of withholding taxes by surrendering Common Shares to the
Company, if permitted by the Committee, shall be subject to such restrictions as
the Committee may impose, including any restrictions required by rules of the
Securities and Exchange Commission.
ARTICLE 13. ASSIGNMENT OR TRANSFER OF AWARD.
Any Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor's
process, whether voluntarily, involuntarily or by operation of law. However,
this Article 13 shall not preclude (i) a Participant from designating a
6
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beneficiary to succeed, after the Participant's death, to those of the
Participant's Awards (including without limitation, the right to exercise any
unexercised Options) as may be determined by the Company from time to time in
its sole discretion, or (ii) a transfer of any Award hereunder by will or the
laws of descent or distribution.
ARTICLE 14. FUTURE OF PLANS.
14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on October 22, 1997. The Plan shall remain in effect until it is
terminated under Section 14.2.
14.2 AMENDMENT OR TERMINATION. The Committee may, at any time and for any
reason, amend or terminate the Plan.
14.3 EFFECT OF AMENDMENT OR TERMINATION. No Award shall be made under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not adversely affect the rights of any holder of any
Option or Restricted Shares previously granted under the Plan.
ARTICLE 15. DEFINITIONS.
15.1 "Award" means any award of an Option or a Restricted Share under
the Plan.
15.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
15.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
15.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 14.1:
(a) A change in control required to be reported pursuant to Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which fewer
than two-thirds of the incumbent directors are directors who either (i) had been
directors of the Company 24 months prior to such change or (ii) were elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the directors who had been directors of the Company 24 months prior
to such change and who were still in office at the time of the election or
nomination;
(c) Any "person" (as such term is used in sections 12(d) and 13(d) of the
Exchange Act) becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 20 percent or more of the combined voting
power of the Company's then outstanding securities ordinarily (and apart from
rights accruing under special circumstances) having the right to vote at
elections of directors (the "Base Capital Stock"); provided, however, that any
change in the relative beneficial ownership of securities of any person
resulting solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's
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ownership of securities, shall be disregarded until such person increases in
any manner, directly or indirectly, such person's beneficial ownership of any
securities of the Company.
15.5 "Code" means the Internal Revenue Code of 1986, as amended.
15.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
15.7 "Common Share" means one share of the common stock of the
Company.
15.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
15.9 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental
impairment that has continued without interruption for a period of at least
six months and that can be expected to be of long, continued and indefinite
duration. All determinations as to whether a Participant has incurred a
Disability shall be made by the Committee, the findings of which shall be
final, binding and conclusive.
15.10 "Employee" means a common-law employee, other than an officer of
the Company or any Subsidiary, as determined by the Committee.
15.11 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
15.12 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
15.13 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
15.14 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair Market
Value shall be equal to the last transaction price quoted by the NASDAQ system
for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair Market
Value shall be equal to the mean between the last reported representative bid
and asked prices quoted by the NASDAQ system for such date; and
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(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such basis as
it deems appropriate.
15.15 "Option" means an employee stock option, other than an option
described in sections 422 through 424 of the Code, including a Replacement
Option, granted under the Plan and entitling the holder to purchase one Common
Share.
15.16 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
15.17 "Participant" means an Employee who has received an Award.
15.18 "Plan" means this Charles Schwab Employee Stock Incentive Plan,
as it may be amended from time to time.
15.19 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
15.20 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
15.21. "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under the
Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing
definition shall apply to all Stock Option Agreements entered into pursuant to
the Plan, irrespective of any definition to the contrary contained in any such
Stock Option Agreement.
15.22 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share which contains the terms, conditions and
restrictions pertaining to such Restricted Share.
15.23 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
15.24 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
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EXHIBIT 10.191
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
RESTRICTED SHARES AWARD AGREEMENT
THIS AGREEMENT is entered into between The Charles Schwab Corporation, a
Delaware corporation (the "Company") and __________ (the "Employee").
WITNESSETH:
WHEREAS, the Company has adopted The Charles Schwab Corporation 1992 Stock
Incentive Plan (the "Plan"), which provides for the granting of restricted
shares of Common Stock of the Company ("Restricted Shares") to key employees of
the Company and its Subsidiaries; and
WHEREAS, the Compensation Committee of the Board of Directors of the
Company (the "Committee"), which is responsible for the administration of the
Plan, has authorized the granting of an award of Restricted Shares to the
Employee, effective as of _____________________; and
WHEREAS, this Agreement is prepared in conjunction with and pursuant to the
terms of the Plan and, although all of the terms of the Plan and the definitions
used in this Plan have not been set forth herein, such terms and definitions are
incorporated herein and made a part hereof by reference, and, except as
otherwise expressly stated herein, the provisions of the Plan shall govern any
interpretation of this Agreement; and
WHEREAS, the Employee has accepted the grant of Restricted Shares and
agreed to the terms and conditions hereinafter stated;
NOW, THEREFORE, the Employee and the Company agree to the provisions set
forth in the Agreement. The Employee signifies agreement with all of the terms
and conditions of this Agreement by failing to provide written objection to the
Company to any of the terms hereunder within 30 days of receipt of this
Agreement, and in any event by accepting any dividends paid with respect to the
Restricted Shares granted hereunder.
1. GRANT OF RESTRICTED SHARES. The Company hereby grants to the
Employee, as a separate incentive in connection with his or her employment and
not in lieu of any salary or other cash
<PAGE>
compensation for his or her services, an award of __________ Restricted
Shares, effective _____________, subject to all the terms and conditions in
this Agreement and the Plan.
2. RESTRICTION ON TRANSFER. The Restricted Shares awarded pursuant to
this Agreement shall be issued in the name of The Employee and held by the
Secretary of the Company as escrow agent (the "Escrow Agent"), and, except to
the extent specifically provided herein, shall not be sold, transferred,
otherwise disposed of, pledged or otherwise hypothecated until the date such
Restricted Shares become vested pursuant to paragraph 3 hereof (the
"Restriction on Transfer"). The Company may instruct the transfer agent for
its Common Stock to place a legend on the certificates representing the
Restricted Shares or otherwise note its records as to the restrictions on
transfer set forth in this Agreement and the Plan. The certificate or
certificates representing such shares shall be delivered by the Escrow Agent
to The Employee only after the shares become vested on the date specified in
paragraph 3 and after all other terms and conditions in this Agreement have
been satisfied. Notwithstanding the foregoing, to the extent specifically
permitted by the Plan, the Restricted Shares may be transferred by gift,
subject to the Restriction on Transfer and the vesting conditions set forth
herein.
3. VESTING OF SHARES. The Restricted Shares awarded by this Agreement
shall become vested as follows: Effective as of the date hereof (the "Grant
Date"), the Restricted Shares shall be 0% vested. If the Employee is
employed for a continuous period beginning on the date hereof and ending on
the third anniversary of the Grant Date, 50% of the Restricted Shares shall
become vested. If the Employee shall continue to be employed for a continuous
period ending on the fourth anniversary of the Grant Date, an additional 50%
of the Restricted Shares shall become vested, so that at such time all of the
Restricted Shares subject to this Agreement shall be then vested.
Notwithstanding the foregoing, in the event of the Employee's death or
Disability, 100% of the Restricted Shares shall be then vested, and in the
event of the Employee's Retirement after the second anniversary of the Grant
Date, 100% of the Restricted Shares shall be then vested. For purposes of
this Agreement, Retirement shall mean a termination of employment of the
Employee at any time after the Employee (i) has attained fifty (50) years of
age, and (ii) has completed seven (7) years of service, as determined
pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan. Notwithstanding the
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foregoing, however, the accrual of vesting pursuant to this paragraph is
contingent upon the Employee's satisfactory job performance, and the Company
may, in its sole discretion, upon notice to the Employee, suspend or delay
the vesting of the Restricted Shares hereunder for any period of time in the
event that the Company determines, within its sole discretion, that the
Employee's performance is unsatisfactory. Moreover, the continued accrual of
vesting pursuant to this paragraph shall be suspended during the period of
time in which the Optionee is on a leave of absence of more than six months
for any reason other than (i) medical reasons, (ii) pregnancy disability,
(iii) a leave qualifying under the Family and Medical Leave Act, or (iv)
workers' compensation. Upon the vesting of Restricted Shares hereunder, the
certificate or certificates representing such Restricted Shares shall be
delivered to the Employee.
4. CHANGE IN CONTROL. Upon the determination of the Committee that a
Change in Control of the Company has occurred, or in the event of the
liquidation or dissolution of the Company, the Restricted Shares shall become
fully vested and the Restriction on Transfer shall be lifted, notwithstanding
any other provision of this Agreement, and the certificate or certificates
representing such Restricted Shares shall be delivered to the Employee.
5. DISCRETION OF COMMITTEE. The Committee may decide, in its absolute
discretion, to lift at any time the Restriction on Transfer or to accelerate the
vesting of the Restricted Shares, and the certificate or certificates
representing such Restricted Shares shall be delivered to the Employee.
6. DELIVERY OF SHARES TO ESTATE OF DECEASED EMPLOYEE. Any distribution
or delivery to be made to the Employee under this Agreement shall, if the
Employee is then deceased, be made to the Employee's estate in accordance with
the terms of Section 7.5 of the Plan.
7. CONDITIONS TO ISSUANCE OF SHARES. The Restricted Shares deliverable
to the Employee may be either previously authorized but unissued shares or
issued shares which have been reacquired by the Company. The Company shall not
be required to issue any certificate or certificates for Restricted Shares
hereunder prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
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(b) The completion of any registration or other qualification of such
shares under any State or federal law or under the rulings or regulations of the
Securities and Exchange Commission or any other governmental regulatory body,
which the Committee shall, in its absolute discretion, deem necessary or
advisable;
(c) The obtaining of any approval or other clearance from any State
or federal governmental agency, which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following the date of
the grant of the Restricted Shares as the Committee may establish from time to
time for reasons of administrative convenience.
Neither the Employee nor any person claiming under or through the Employee
shall be, or have any of the rights or privileges of, a stockholder of the
Company in respect of any Restricted Shares deliverable hereunder unless and
until certificates representing such shares shall have been issued, recorded on
the records of the Company or its transfer agents or registrars, and delivered
to the Employee or the Escrow Agent. Except as provided in paragraph 8, after
such issuance, recordation and delivery, the Employee shall have all rights of a
stockholder of the Company with respect to voting such Restricted Shares and
receipt of dividends and distributions on such Restricted Shares.
8. CERTAIN ADJUSTMENTS TO SHARES. In the event that as a result of a
stock dividend, stock split, reclassification, recapitalization, combination of
shares or the adjustment in capital stock of the Company or otherwise, or as a
result of a merger, consolidation, spin-off or other reorganization, the
Company's Common Stock shall be increased, reduced or otherwise changed, and by
virtue of any such change the Employee shall in his or her capacity as owner of
Restricted Shares which have been awarded to him or her (the "Prior Shares") be
entitled to new or additional or different shares or securities (other than
rights or warrants to purchase securities), such new or additional or different
shares or securities shall thereupon be considered to be Restricted Shares and
shall be subject to all of the conditions and restrictions which were applicable
to the Prior Shares pursuant to the Plan. If the Employee receives rights or
warrants with respect to any Prior Shares, such rights or warrants may be held
or exercised by the Employee, provided that until such exercise any such rights
or warrants and
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after such exercise any shares or other securities acquired by the exercise
of such rights or warrants shall be considered to be Restricted Shares and
shall be subject to all of the conditions and restrictions which were
applicable to the Prior Shares pursuant to the Plan. The Committee in its
absolute discretion at any time may lift the Restriction on Transfer of all
or any portion of such new or additional shares of stock or securities,
rights or warrants to purchase securities or shares or other securities
acquired by the exercise of such rights or warrants.
9. CONTRIBUTION OF PAR VALUE TO CAPITAL OF THE COMPANY. Notwithstanding
the provisions of Section 7.2 of the Plan, the Company will contribute to the
capital of the Company on behalf of the Employee, as an Award recipient, an
amount equal to the par value of the Restricted Shares issued to the Employee
hereunder.
10. TAX WITHHOLDING. To the extent required by applicable federal, state,
local or foreign law, the Employee shall make arrangements satisfactory to the
Company for the satisfaction of any withholding tax obligations that arise by
reason of the awarding or vesting of the Restricted Shares hereunder, or by
reason of any election made by the Employee pursuant to Section 83(b) of the
Internal Revenue Code, and no Share certificates shall be issued to the Employee
unless such obligation is satisfied.
11. PLAN SHALL CONTROL. This Agreement is subject to all the terms and
provisions of the Plan. In the event of a conflict between any provisions of
this Agreement and any provisions of the Plan, the provisions of the Plan shall
govern. Terms used in this Agreement that are not defined in this Agreement
shall have the meaning set forth in the Plan.
12. POWERS OF THE COMMITTEE. The Committee shall have the power to
interpret and construe the Plan and this Agreement and to adopt such rules for
the administration, interpretation and application of the Plan as are consistent
therewith and to interpret or revoke any such rules. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon the Employee, the Employee's estate, the Company and all
other interested persons. No member of the Committee shall be personally liable
for any action, determination or interpretation made in good faith with respect
to the Plan or this Agreement.
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13. NO EFFECT ON OTHER BENEFIT PLANS. Nothing herein contained shall
affect the Employee's right to participate in and receive benefits under and in
accordance with the then current provisions of any pension, insurance or other
Employee welfare plan or program of the Company or any Subsidiary.
14. NONASSIGNABILITY. So long as the Restriction on Transfer is in
effect, except to the extent specifically permitted by this Agreement, the
Restricted Shares herein granted and the rights and privileges conferred hereby
shall not be transferred, assigned, pledged or hypothecated in any way (whether
by operation or law or otherwise) and shall not be subject to sale under
execution, attachment or similar process. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of such award or any right or privilege
conferred hereby, contrary to the provisions hereof, or upon any attempted sale
under any execution, attachment or similar process upon the rights and
privileges conferred hereby, such award and the rights and privileges conferred
hereby shall immediately become null and void.
15. SUCCESSORS AND ASSIGNS. Subject to the limitation on the
transferability of the Restricted Shares contained herein, this Agreement shall
be binding upon and inure to the benefit of the heirs, legatees, legal
representatives, successor and assigns of the Employee and the Company.
16. NOTICES. Any notice to be given to the Company under the terms of
this Agreement shall be addressed to the Company, in care of its Secretary, at
101 Montgomery Street, San Francisco, California 94104, or at such other address
as the Company may hereafter designate in writing. Any notice to be given to
the Employee shall be addressed to the Employee at the address set forth beneath
the Employee's signature hereto, or at such other address as the Employee may
hereafter designate in writing. Any such notice shall be deemed to have been
duly given if and when enclosed in a properly sealed envelope, addressed as
aforesaid, registered or certified and deposited, postage and registry fee
prepaid, in a United States post office.
17. SEVERABILITY. In the event that any provision of this Agreement shall
be held invalid or unenforceable, such provision shall be severable from, and
such invalidity or unenforceability shall not be construed to have any effect
on, the remaining provisions of this Agreement.
18. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of California.
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EXHIBIT 10.192
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of ______________________ between
THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and
________________(the "Optionee").
W I T N E S S E T H:
WHEREAS, the Board has adopted and the stockholders of the Company
have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended (the "Plan") in order to provide selected Key Employees and Non-Employee
Directors with an opportunity to acquire Common Shares; and
WHEREAS, the Committee has determined that the Optionee is a Key
Employee and that it would be in the best interests of the Company and its
stockholders to grant the stock option described in this Agreement (the
"Option") to the Optionee as an inducement to enter into or remain in the
service of the Company or its subsidiaries and as an incentive for extraordinary
efforts during such service:
NOW, THEREFORE, the Optionee and the Company agree to the provisions
set forth in this Agreement. The Optionee signifies agreement with all of the
terms and conditions of this Agreement by failing to provide written objection
to the Company to any of the terms hereunder within 30 days of receipt of this
Agreement, and in any event by exercising an Option granted hereunder.
SECTION 1. GRANT OF OPTION.
(a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase _____ Common Shares for the
amount of $_____ per Common Share (the "Exercise Price"), which is agreed to be
100% of the Fair Market Value thereof on the Date of Grant. The number of
Common Shares subject to this Option and the Exercise Price shall be subject to
adjustment under certain limited circumstances as provided in Article 10 of the
Plan.
(b) 1992 STOCK INCENTIVE PLAN. This Option is granted pursuant to
the Plan, the provisions of which are incorporated into this Agreement by
reference, and a copy of which
<PAGE>
is available upon request at no charge to the Optionee from the Company. In
the event of any inconsistency between the provisions of the Plan and the
provisions of this Agreement, the provisions of the Plan shall prevail.
(c) TAX TREATMENT. This Option is not intended to qualify as an
incentive stock option described in Section 422(b) of the Code.
(d) EXPIRATION DATE. Notwithstanding any other provision contained
herein, this Option shall expire not later than the date immediately preceding
the tenth anniversary of the Date of Grant.
SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement or as permitted by the
Plan, this Option, and any interest therein, shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
SECTION 3. RIGHT TO EXERCISE OPTION.
(a) VESTING. This Option shall become exercisable by the Optionee
with respect to the total number of Common Shares subject to this Option as set
forth under Section 1(a) above (the "Total Award Common Shares"), subject to the
continued employment of the Optionee by the Company or its subsidiaries on each
date either set forth below, and subject to the provisions of Section 3(e)
hereof, in annual increments of the Total Award Common Shares beginning on the
first anniversary of the Date of Grant, such that (i) no portion of this Option
will be exercisable prior to such first anniversary of the Date of Grant;
(ii) upon and after such first anniversary of the Date of Grant, the Optionee
may purchase up to twenty-five percent (25%) of the Total Award Common Shares,
provided the optionee has been continually employed by the Company or its
subsidiaries since the date of grant; (iii) upon and after the second, third
and fourth anniversaries of the Date of Grant, respectively, the Optionee may
purchase an additional twenty-five percent (25%) of the Total Award Common
Shares, provided in each case that the Optionee has been continually employed by
the Company or its subsidiaries since the Date of Grant.
(b) MINIMUM NUMBER OF SHARES. This Option shall be exercisable for
at least 100 Common Shares (without regard to adjustments to the number of
Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if
less, (i) the number of shares with respect to which this Option has become
vested under Section 3(a) above, or (ii) all of the remaining Common Shares
subject to this Option.
(c) FULL VESTING ON CHANGE IN CONTROL. Notwithstanding subparagraph
(a) hereof, this Option shall become fully exercisable as to the Total Award
Common Shares
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immediately preceding any Change in Control with respect to the Company. In the
event that the Committee determines that a Change in Control is likely to occur,
the Company shall so advise the Optionee, and the provisions of this
subparagraph (c) shall take effect as of the date ten (10) days prior to the
anticipated date of such Change in Control.
(d) ACCELERATED VESTING IN CERTAIN CASES. Notwithstanding
subparagraph (a) hereof, if the Optionee terminates employment with the Company
and its subsidiaries on account of death or Disability, all options granted
hereunder shall become fully exerciseable, and if the Optionee terminates
employment with the Company and its subsidiaries on account of Retirement, all
options granted hereunder shall become fully exerciseable, but only if such
Retirement occurs at least two (2) years after the date of grant.
(e) VESTING CONTINGENT ON SATISFACTORY PERFORMANCE. Notwithstanding
subparagraph (a) hereof, the continued accrual of vesting pursuant to
subparagraph (a) is contingent upon the Optionee's satisfactory job performance,
and the Company may, in its sole discretion, upon notice to the Optionee suspend
or delay the vesting of Options hereunder for any period of time in the event
that the Company determines, within its sole discretion, that the Optionee's
performance is unsatisfactory.
(f) SUSPENSION OF VESTING DURING CERTAIN LEAVES OF ABSENCE.
Notwithstanding subparagraph (a) hereof, the continued accrual of vesting
pursuant to subparagraph (a) shall be suspended during the period of time in
which the Optionee is on a leave of absence of more than six months for any
reason other than (i) medical reasons, (ii) pregnancy disability, (iii) a leave
qualifying under the Family and Medical Leave Act, or (iv) workers'
compensation.
SECTION 4. EXERCISE OF OPTION.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's
representative may exercise this Option by giving written notice to the Company
(or its designee) pursuant to Section 9(d). The notice shall specify the
election to exercise this Option, the date of exercise, the number of Common
Shares for which it is being exercised and the form of payment. The notice
shall be signed by the person or persons exercising this Option. In the event
that this Option is being exercised by the representative of the Optionee, the
notice shall be accompanied by proof satisfactory to the Company of the
representative's right to exercise this Option. The Purchase Price for Common
Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the
Plan at the time such notice is given.
(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise,
the Company shall cause to be issued a certificate or certificates for the
Common Shares so purchased, registered in the name of the person exercising this
Option. The Company shall cause such certificate or certificates to be
delivered to or upon the order of the person exercising this Option.
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SECTION 5. TERM.
(a) BASIC TERM. This Option shall in any event expire on the date
specified in Section 1(d).
(b) TERMINATION OF EMPLOYMENT. Subject only to the provisions of
Section 3(d), upon the Optionee's termination of employment with the Company and
its subsidiaries for any reason, whether as a result of a voluntary or
involuntary event of termination of employment (including a termination of
employment as may be provided for or determined under an employment contract, if
any, entered into between the Company or its subsidiary and the Optionee) (each,
a "Termination Event"), no unvested portion of the Total Award Common Shares
thereafter shall vest or become exercisable. With respect to the vested or
exercisable portion of the Total Award Common Shares as of the date of such a
Termination Event, this Option shall expire on the earlier of (i) the expiration
date specified in Section 1(d) or (ii) whichever of the following is applicable:
(A) in the case of a Termination Event resulting from death or Disability, the
date one year following such Termination Event; (B) in the case of a Termination
Event resulting from Retirement, the date two years following such Termination
Event; or (C) in all other cases, the date three (3) months following such
Termination Event.
(c) DIVESTMENT OF OPTIONS. Notwithstanding anything to the contrary
contained herein, this Option shall immediately become forfeited and expire in
the event that the Company terminates the Optionee's employment on account of
conduct inimical to the best interests of the Company, including, without
limitation, conduct constituting a violation of law or Company policy, fraud,
theft, conflict of interest, dishonesty or harassment. The determination
whether the Optionee's employment has been terminated on account of conduct
inimical to the best interests of the Company shall be made by the Company in
its sole discretion.
SECTION 6. LEGALITY OF INITIAL ISSUANCE.
No Common Shares shall be issued upon the exercise of this Option
unless and until the Company has determined that:
(a) A registration statement for the Common Shares is effective under
the Securities Act or an exemption from the registration requirements
thereof has been perfected;
(b) Any applicable listing requirement of any stock exchange on which
Common Shares are listed has been satisfied; and
(c) Any other applicable provisions of state or federal law have been
satisfied.
SECTION 7. NO REGISTRATION RIGHTS.
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The Company may, but shall not be obligated to, register or qualify
the Common Shares for resale or other disposition by the Optionee under the
Securities Act or any other applicable law.
SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES.
(a) RESTRICTIONS. Regardless of whether the offering and sale of
Common Shares under the Plan have been registered under the Securities Act or
have been registered or qualified under the securities laws of any state, the
Company may impose restrictions upon the sale, pledge or other transfer of such
Common Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Company and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Securities Act, the securities laws of any state or any other
law.
(b) INVESTMENT INTENT AT EXERCISE. If the Common Shares under the
Plan are not registered under the Securities Act but an exemption is available
which requires an investment representation or other representation, the
Optionee shall represent and agree at the time of exercise that the Common
Shares being acquired upon exercising this Option are being acquired for
investment, and not with a view to the sale or distribution thereof, and shall
make such other representations as are deemed necessary or appropriate by the
Company and its counsel.
(c) ADMINISTRATION. Any determination by the Company and its counsel
in connection with any of the matters set forth in this Section 8 shall be
conclusive and binding on the Optionee and all other persons.
SECTION 9. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. To the extent required by applicable federal,
state, local or foreign law, the Optionee shall make arrangements satisfactory
to the Company for the satisfaction of any withholding tax obligations that
arise by reason of the exercise of an Option hereunder, and no Option may be
exercised unless such obligation is satisfied.
(b) RIGHTS AS A STOCKHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a stockholder with respect to any Common
Shares subject to this Option until certificates for such Common Shares have
been issued in the name of the Optionee or the Optionee's representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be
construed as giving the Optionee the right to be retained as an employee of the
Company or its subsidiaries.
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The Company reserves the right to terminate the Optionee's employment at any
time for any reason, subject only to the terms of any written employment
contract entered into between the Company and the Optionee.
(d) NOTICE. Any notice required by the terms of this Agreement shall
be given in writing and shall be deemed effective upon personal delivery or upon
deposit with the appropriate postal service, by registered or certified mail
with postage and fees prepaid and addressed to the party entitled to such notice
at the address shown below such party's signature on this Agreement, or at such
other address as such party may designate by ten (10) days advance written
notice to the other party to this Agreement. Notwithstanding the foregoing, no
notice of exercise, as required by Section 4(a), shall be effective until actual
receipt thereof by the Company or its designee.
(e) ENTIRE AGREEMENT. This Agreement and the Plan constitute the
entire agreement between the parties hereto with regard to the subject matter
hereof; provided, however, that in the event of any inconsistency or conflict
between any provision hereof and the terms of the Plan, the terms of the Plan
shall control.
(f) CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State.
SECTION 10. DEFINITIONS.
(a) Capitalized terms defined in the Plan shall have the same meaning
when used in this Agreement.
(b) "CHANGE IN CONTROL" shall mean the occurrence of any of the
following events after the effective date of the Plan as set out in Section 15.1
of the Plan:
(1) A change in control required to be reported pursuant to Item
6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act");
(2) A change in the composition of the Company's Board of
Directors (the "Board"), as a result of which fewer than two-thirds of the
incumbent directors are directors who either (i) had been directors of the
Company 24 months prior to such change or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of the
directors who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or nomination;
(3) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and apart
from rights accruing under special circumstances)
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having the right to vote at elections of directors (the "Base Capital Stock");
provided, however, that any change in the relative beneficial ownership of
securities of any person resulting solely from a reduction in the aggregate
number of outstanding shares of Base Capital Stock, and any decrease thereafter
in such person's ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's beneficial
ownership of any securities of the Company.
(c) "COMMON SHARE" shall mean one share of the common stock of the
Company.
(d) "DATE OF GRANT" shall mean the date of this Agreement, which is
the date first written above.
(e) "FAIR MARKET VALUE" shall mean the market price of a Common
Share, determined by the Committee as follows:
(1) If the Common Share was traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(2) If the Common Share was traded over-the-counter on the date
in question and was classified as a national market issue, then the Fair Market
Value shall be equal to the last transaction price quoted by the NASDAQ system
for such date;
(3) If the Common Share was traded over-the-counter on the date
in question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported representative
bid and asked prices quoted by the NASDAQ system for such date; and
(4) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
(f) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Common Shares with respect to which this Option is being exercised.
(g) "RETIREMENT" shall mean a termination of employment of the
Optionee occurring at any time after the Optionee (i) has attained fifty (50)
years of age, and (ii) completed seven (7) years of service, as determined
pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan.
(h) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
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EXHIBIT 10.193
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
NONSTATUTORY STOCK OPTION AND PERFORMANCE UNIT AGREEMENT
THIS AGREEMENT is entered into as of ______________________ between
THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and
_______________(the "Optionee").
W I T N E S S E T H:
WHEREAS, the Board has adopted and the stockholders of the Company
have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended (the "Plan") in order to provide selected Key Employees and Non-Employee
Directors with an opportunity to acquire Common Shares; and
WHEREAS, the Committee has determined that the Optionee is a Key
Employee and that it would be in the best interests of the Company and its
stockholders to grant the stock option described in this Agreement (the
"Option") and the Performance Units described in this Agreement (the
"Performance Units") to the Optionee as an inducement to enter into or remain in
the service of the Company or its subsidiaries and as an incentive for
extraordinary efforts during such service:
NOW, THEREFORE, the Optionee and the Company agree to the provisions
set forth in this Agreement. The Optionee signifies agreement with all of the
terms and conditions of this Agreement by failing to provide written objection
to the Company to any of the terms hereunder within 30 days of receipt of this
Agreement, and in any event by exercising an Option or a Performance Unit
granted hereunder.
SECTION 1. GRANT OF OPTION AND PERFORMANCE UNITS.
(a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase ______ Common Shares for
the amount of $_____ per Common Share (the "Exercise Price"), which is agreed to
be 100% of the Fair Market Value thereof on the Date of Grant. The number of
Common Shares subject to this Option and the Exercise Price shall be subject to
adjustment under certain limited circumstances as provided in Article 10 of the
Plan.
(b) PERFORMANCE UNITS. On the terms and conditions stated below, the
Company hereby grants to the Optionee _______ Performance Units, as defined
herein. Each
<PAGE>
Performance Unit shall entitle the Optionee to a cash payment, equal to the Net
Performance Unit Value, determined as of the most recent valuation. Net
Performance Unit Value shall be determined on an annual basis (or at more
frequent intervals as the Company may determine from time to time in its sole
discretion), and shall be communicated to the Optionee within a reasonable time
following the determination of such value.
(c) TANDEM ISSUANCE OF OPTION AND PERFORMANCE UNITS. Each
Performance Unit shall be issued in tandem with an Option to acquire one share
hereunder, so that the exercise of a Performance Unit will result in the
cancellation of the Option associated with such Performance Unit, and the
exercise of an Option will result in the cancellation of the Performance Unit
associated with such Option. Performance Units will expire on the date three
(3) months following the fifth anniversary of the date the Performance Unit was
granted. Upon the expiration of a Performance Unit, the Option associated with
such Performance Unit shall remain exercisable until such Option otherwise
expires pursuant to the terms of this Agreement.
(d) 1992 STOCK INCENTIVE PLAN. This Option is granted pursuant to
the Plan, the provisions of which are incorporated into this Agreement by
reference, and a copy of which is available upon request at no charge to the
Optionee from the Company. In the event of any inconsistency between the
provisions of the Plan and the provisions of this Agreement, the provisions of
the Plan shall prevail.
(e) TAX TREATMENT. This Option is not intended to qualify as an
incentive stock option described in Section 422(b) of the Code.
(f) EXPIRATION DATE. Notwithstanding any other provision contained
herein, this Option shall expire not later than the date immediately preceding
the tenth anniversary of the Date of Grant.
SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement or as permitted by the
Plan, this Option, and any interest therein, shall not be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to sale under execution, attachment or similar process.
SECTION 3. RIGHT TO EXERCISE OPTION AND PERFORMANCE UNITS.
(a) VESTING. This Option shall become exercisable by the Optionee
with respect to the total number of Common Shares subject to this Option as set
forth under Section 1(a) above (the "Total Award Common Shares"), subject to the
continued employment of the Optionee by the Company or its subsidiaries on each
date either set forth below, and subject to the provisions of Section 3(e)
hereof, in annual increments of the Total Award Common Shares beginning on the
first anniversary of the Date of Grant, such that (i) no portion of this
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Option will be exercisable prior to such first anniversary of the Date of Grant;
(ii) upon and after such first anniversary of the Date of Grant, the Optionee
may purchase up to twenty-five percent (25%) of the Total Award Common Shares,
provided the optionee has been continually employed by the Company or its
subsidiaries since the date of grant; (iii) upon and after the second, third
and fourth anniversaries of the Date of Grant, respectively, the Optionee may
purchase an additional twenty-five percent (25%) of the Total Award Common
Shares, provided in each case that the Optionee has been continually employed by
the Company or its subsidiaries since the Date of Grant.
(b) MINIMUM NUMBER OF SHARES AND PERFORMANCE UNITS. This Option
shall be exercisable for at least 100 Common Shares (without regard to
adjustments to the number of Common Shares subject to this Option pursuant to
Article 10 of the Plan) or, if less, (i) the number of shares with respect to
which this Option has become vested under Section 3(a) above, or (ii) all of the
remaining Common Shares subject to this Option. Performance Units shall be
exercisable in minimum increments of 100 or, if less, (i) the number of
Performance Units which have become vested under Section 3(a) above or (ii) all
of the remaining Performance Units granted hereunder.
(c) FULL VESTING ON CHANGE IN CONTROL. Notwithstanding subparagraph
(a) hereof, this Option shall become fully exercisable as to the Total Award
Common Shares, and all Performance Units granted hereunder shall become fully
exercisable, immediately preceding any Change in Control with respect to the
Company. In the event that the Committee determines that a Change in Control is
likely to occur, the Company shall so advise the Optionee, and the provisions of
this subparagraph (c) shall take effect as of the date ten (10) days prior to
the anticipated date of such Change in Control.
(d) ACCELERATED VESTING IN CERTAIN CASES. Notwithstanding
subparagraph (a) hereof, if the Optionee terminates employment with the Company
and its subsidiaries on account of death or Disability, all options and
Performance Units granted hereunder shall become fully exerciseable. Moreover,
if the Optionee terminates employment with the Company and its subsidiaries on
account of Retirement, all options and Performance Units granted hereunder shall
become fully exerciseable, but only if such Retirement occurs at least two (2)
years after the date of grant.
(e) VESTING CONTINGENT ON SATISFACTORY PERFORMANCE. Notwithstanding
subparagraph (a) hereof, the continued accrual of vesting pursuant to
subparagraph (a) is contingent upon the Optionee's satisfactory job performance,
and the Company may, in its sole discretion, upon notice to the Optionee suspend
or delay the vesting of Options and Performance Shares hereunder for any period
of time in the event that the Company determines, within its sole discretion,
that the Optionee's performance is unsatisfactory.
(f) SUSPENSION OF VESTING DURING CERTAIN LEAVES OF ABSENCE.
Notwithstanding subparagraph (a) hereof, the continued accrual of vesting
pursuant to subparagraph (a) shall be suspended during the period of time in
which the Optionee is on a leave of absence of more than six months for any
reason other than (i) medical reasons, (ii)
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<PAGE>
pregnancy disability, (iii) a leave qualifying under the Family and Medical
Leave Act, or (iv) workers' compensation.
SECTION 4. EXERCISE OF OPTION AND PERFORMANCE UNITS.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's
representative may exercise this Option or any Performance Units by giving
written notice to the Company or its designee pursuant to Section 9(d). The
notice shall specify the election to exercise this Option and/or Performance
Units (as the case may be), the date of exercise, the number of Common Shares
for which the Option is being exercised, the number of Performance Units being
exercised, and the form of payment (if this Option is being exercised). The
notice shall be signed by the person or persons exercising this Option or
Performance Units. In the event that this Option or Performance Units are being
exercised by the representative of the Optionee, the notice shall be accompanied
by proof satisfactory to the Company of the representative's right to exercise
this Option. The Purchase Price for Common Shares shall be paid in a form that
conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is
given.
(b) ISSUANCE OF SHARES. After receiving a proper notice of exercise
of an Option, the Company shall cause to be issued a certificate or certificates
for the Common Shares so purchased, registered in the name of the person
exercising this Option. The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising this
Option.
(c) EXERCISE OF PERFORMANCE UNIT. After receiving a proper notice of
exercise of Performance Units, the Company shall cause to be paid to the
Optionee, within one month of exercise, an amount equal to the Net Performance
Unit Value for each Performance Unit so exercised, less any applicable tax
withholdings.
SECTION 5. TERM.
(a) BASIC TERM. This Option shall in any event expire on the date
specified in Section 1(f).
(b) TERMINATION OF EMPLOYMENT. Subject only to the provisions of
Section 3(d), upon the Optionee's termination of employment with the Company and
its subsidiaries for any reason, whether as a result of a voluntary or
involuntary event of termination of employment (including a termination of
employment as may be provided for or determined under an employment contract, if
any, entered into between the Company or its subsidiary and the Optionee) (each,
a "Termination Event"), no unvested portion of the Total Award Common Shares or
Performance Units thereafter shall vest or become exercisable. With respect to
the vested or exercisable portion of the Total Award Common Shares or
Performance Units as of the date of such a Termination Event, this Option shall
expire on the earlier of (i) the expiration date specified in Section 1(f) or
(ii) whichever of the following is applicable: (A) in the case of a
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Termination Event resulting from death or Disability, the date one year
following such Termination Event; (B) in the case of a Termination Event
resulting from Retirement, the date two years following such Termination Event;
or (C) in all other cases, the date three (3) months following such Termination
Event.
(c) DIVESTMENT OF OPTIONS. Notwithstanding anything to the contrary
contained herein, this Option and all Performance Units shall immediately become
forfeited and expire in the event that the Company terminates the Optionee's
employment on account of conduct inimical to the best interests of the Company,
including, without limitation, conduct constituting a violation of law or
Company policy, fraud, theft, conflict of interest, dishonesty or harassment.
The determination whether the Optionee's employment has been terminated on
account of conduct inimical to the best interests of the Company shall be made
by the Company in its sole discretion.
SECTION 6. LEGALITY OF INITIAL ISSUANCE.
No Common Shares shall be issued upon the exercise of this Option
unless and until the Company has determined that:
(a) A registration statement for the Common Shares is effective under
the Securities Act or an exemption from the registration requirements
thereof has been perfected;
(b) Any applicable listing requirement of any stock exchange on which
Common Shares are listed has been satisfied; and
(c) Any other applicable provisions of state or federal law have been
satisfied.
SECTION 7. NO REGISTRATION RIGHTS.
The Company may, but shall not be obligated to, register or qualify
the Common Shares for resale or other disposition by the Optionee under the
Securities Act or any other applicable law.
SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES.
(a) RESTRICTIONS. Regardless of whether the offering and sale of
Common Shares under the Plan have been registered under the Securities Act or
have been registered or qualified under the securities laws of any state, the
Company may impose restrictions upon the sale, pledge or other transfer of such
Common Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Company and its counsel, such
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<PAGE>
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Securities Act, the securities laws of any state or any other
law.
(b) INVESTMENT INTENT AT EXERCISE. If the Common Shares under the
Plan are not registered under the Securities Act but an exemption is available
which requires an investment representation or other representation, the
Optionee shall represent and agree at the time of exercise that the Common
Shares being acquired upon exercising this Option are being acquired for
investment, and not with a view to the sale or distribution thereof, and shall
make such other representations as are deemed necessary or appropriate by the
Company and its counsel.
(c) ADMINISTRATION. Any determination by the Company and its counsel
in connection with any of the matters set forth in this Section 8 shall be
conclusive and binding on the Optionee and all other persons.
SECTION 9. MISCELLANEOUS PROVISIONS
(a) WITHHOLDING TAXES. To the extent required by applicable federal,
state, local or foreign law, the Optionee shall make arrangements satisfactory
to the Company for the satisfaction of any withholding tax obligations that
arise by reason of the exercise of an Option hereunder, and no Option may be
exercised unless such obligation is satisfied.
(b) RIGHTS AS A STOCKHOLDER. Neither the Optionee nor the Optionee's
representative shall have any rights as a stockholder with respect to any Common
Shares subject to this Option until certificates for such Common Shares have
been issued in the name of the Optionee or the Optionee's representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be
construed as giving the Optionee the right to be retained as an employee of the
Company or its subsidiaries. The Company reserves the right to terminate the
Optionee's employment at any time for any reason, subject only to the terms of
any written employment contract entered into between the Company and the
Optionee.
(d) NOTICE. Any notice required by the terms of this Agreement shall
be given in writing and shall be deemed effective upon personal delivery or upon
deposit with the appropriate postal service, by registered or certified mail
with postage and fees prepaid and addressed to the party entitled to such notice
at the address shown below such party's signature on this Agreement, or at such
other address as such party may designate by ten (10) days advance written
notice to the other party to this Agreement. Notwithstanding the foregoing, no
notice of exercise, as required by Section 4(a), shall be effective until actual
receipt thereof by the Company or its designee.
(e) ENTIRE AGREEMENT. This Agreement and the Plan constitute the
entire agreement between the parties hereto with regard to the subject matter
hereof; provided, however, that in the event of any inconsistency or conflict
between any provision hereof and the terms of the Plan, the terms of the Plan
shall control.
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(f) CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State.
SECTION 10. DEFINITIONS.
(a) Capitalized terms defined in the Plan shall have the same meaning
when used in this Agreement.
(b) "CHANGE IN CONTROL" shall mean the occurrence of any of the
following events after the effective date of the Plan as set out in Section 15.1
of the Plan:
(1) A change in control required to be reported pursuant to Item
6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act");
(2) A change in the composition of the Company's Board of
Directors (the "Board"), as a result of which fewer than two-thirds of the
incumbent directors are directors who either (i) had been directors of the
Company 24 months prior to such change or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of the
directors who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or nomination; and
(3) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities ordinarily (and apart
from rights accruing under special circumstances) having the right to vote at
elections of directors (the "Base Capital Stock"); provided, however, that any
change in the relative beneficial ownership of securities of any person
resulting solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's ownership of
securities, shall be disregarded until such person increases in any manner,
directly or indirectly, such person's beneficial ownership of any securities of
the Company.
(c) "COMMON SHARE" shall mean one share of the common stock of the
Company.
(d) "DATE OF GRANT" shall mean the date of this Agreement, which is
the date first written above.
(e) "FAIR MARKET VALUE" shall mean the market price of a Common
Share, determined by the Committee as follows:
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<PAGE>
(1) If the Common Share was traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite-transactions report for such date;
(2) If the Common Share was traded over-the-counter on the date
in question and was classified as a national market issue, then the Fair Market
Value shall be equal to the last transaction price quoted by the NASDAQ system
for such date;
(3) If the Common Share was traded over-the-counter on the date
in question but was not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported representative
bid and asked prices quoted by the NASDAQ system for such date; and
(4) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
(f) "NET PERFORMANCE UNIT VALUE" shall mean the difference between
the Performance Unit Value and the Cost Basis, determined as follows:
(1) Performance Unit Value shall mean (A) the difference between
the After Tax Net Income and the Targeted Return on Stockholders' Equity,
multiplied by (B) the Grant Funding Rate;
(2) Cost Basis shall mean the Performance Unit Value as of the
end of the fiscal quarter immediately preceding the Date of Grant;
(3) After Tax Net Income shall mean the cumulative after tax net
income (determined without reduction for accrued obligations pursuant to
Performance Units), as measured from January 1 of the year of the Date of Grant,
and otherwise subject to such adjustments as may be determined by the Company in
its sole discretion;
(4) Targeted Return on Stockholders' Equity shall mean a
cumulative 20% annual targeted level of return on stockholders' equity, measured
from January 1 of the year of the Date of Grant. Targeted Return on
Stockholders' Equity is increased on a quarterly basis during the term of the
Performance Unit by adding to the prior quarter's Targeted Return on
Stockholders' Equity an amount equal to 5% of the ending actual consolidated
stockholder's equity balance (determined as of the end of the preceding fiscal
year); and
(5) Grant Funding Rate shall mean a percentage, determined
from time to time by the Company, to provide a level of funding for the Plan.
While the Company generally intends that the Grant Funding Rate will remain
fixed for the five year term of each Performance Unit, the Company reserves
the right, within its sole discretion, to change the Grant Funding Rate at
any time.
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<PAGE>
(g) "PURCHASE PRICE" shall mean the Exercise Price multiplied by the
number of Common Shares with respect to which this Option is being exercised.
(h) "RETIREMENT" shall mean a termination of employment of the
Optionee occurring at any time after the Optionee (i) has attained fifty (50)
years of age, and (ii) completed seven (7) years of service, as determined
pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan.
(i) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
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EXHIBIT 10.194
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into as of _____________________ between
THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and
_____________________ (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Board has adopted and the stockholders of the Company
have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended (the "Plan") in order to provide selected Key Employees and
Non-Employee Directors with an opportunity to acquire Common Shares; and
WHEREAS, the Committee has determined that the Optionee is a Key
Employee and that it would be in the best interests of the Company and its
stockholders to grant the stock option described in this Agreement (the
"Option") to the Optionee as an inducement to enter into or remain in the
service of the Company or its subsidiaries and as an incentive for
extraordinary efforts during such service:
NOW, THEREFORE, the Optionee and the Company agree to the
provisions set forth in this Agreement. The Optionee signifies agreement
with all of the terms and conditions of this Agreement by failing to provide
written objection to the Company to any of the terms hereunder within 30 days
of receipt of this Agreement, and in any event by exercising an Option
granted hereunder.
SECTION 1. GRANT OF OPTION.
(a) OPTION. On the terms and conditions stated below, the Company
hereby grants to the Optionee the option to purchase _____ Common Shares for
the amount of $_____ per Common Share (the "Exercise Price"), which is agreed
to be 100% of the Fair Market Value thereof on the Date of Grant. The number
of Common Shares subject to this Option and the Exercise Price shall be
subject to adjustment under certain limited circumstances as provided in
Article 10 of the Plan.
(b) 1992 STOCK INCENTIVE PLAN. This Option is granted pursuant to
the Plan, the provisions of which are incorporated into this Agreement by
reference, and a copy of which is available upon request at no charge to the
Optionee from the Company. In the event of any
<PAGE>
inconsistency between the provisions of the Plan and the provisions of this
Agreement, the provisions of the Plan shall prevail.
(c) TAX TREATMENT. This Option is intended to qualify as an
incentive stock option described in Section 422(b) of the Code.
(d) EXPIRATION DATE. Notwithstanding any other provision
contained herein, this Option shall expire not later than the date
immediately preceding the tenth anniversary of the Date of Grant.
SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement or as permitted by
the Plan, this Option, and any interest therein, shall not be transferred,
assigned, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to sale under execution, attachment or
similar process.
SECTION 3. RIGHT TO EXERCISE OPTION.
(a) VESTING. This Option shall become exercisable by the Optionee
with respect to the total number of Common Shares subject to this Option as
set forth under Section 1(a) above (the "Total Award Common Shares"), subject
to the continued employment of the Optionee by the Company or its
subsidiaries on each date either set forth below, and subject to the
provisions of Section 3(e) hereof, in annual increments of the Total Award
Common Shares beginning on the first anniversary of the Date of Grant, such
that (i) no portion of this Option will be exercisable prior to such first
anniversary of the Date of Grant; (ii) upon and after such first anniversary
of the Date of Grant, the Optionee may purchase up to twenty-five percent
(25%) of the Total Award Common Shares, provided the optionee has been
continually employed by the Company or its subsidiaries since the date of
grant; (iii) upon and after the second, third and fourth anniversaries of
the Date of Grant, respectively, the Optionee may purchase an additional
twenty-five percent (25%) of the Total Award Common Shares, provided in each
case that the Optionee has been continually employed by the Company or its
subsidiaries since the Date of Grant.
(b) MINIMUM NUMBER OF SHARES. This Option shall be exercisable
for at least 100 Common Shares (without regard to adjustments to the number
of Common Shares subject to this Option pursuant to Article 10 of the Plan)
or, if less, (i) the number of shares with respect to which this Option has
become vested under Section 3(a) above, or (ii) all of the remaining Common
Shares subject to this Option.
(c) FULL VESTING ON CHANGE IN CONTROL. Notwithstanding
subparagraph (a) hereof, this Option shall become fully exercisable as to the
Total Award Common Shares immediately preceding any Change in Control with
respect to the Company. In the event that the
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Committee determines that a Change in Control is likely to occur, the Company
shall so advise the Optionee, and the provisions of this subparagraph (c)
shall take effect as of the date ten (10) days prior to the anticipated date
of such Change in Control.
(d) ACCELERATED VESTING IN CERTAIN CASES. Notwithstanding
subparagraph (a) hereof, if the Optionee terminates employment with the
Company and its subsidiaries on account of death or Disability, all options
granted hereunder shall become fully exerciseable. Moreover, if the Optionee
terminates employment with the Company and its subsidiaries on account of
Retirement, all options granted hereunder shall become fully exerciseable,
but only if such Retirement occurs at least two (2) years after the date of
grant.
(e) VESTING CONTINGENT ON SATISFACTORY PERFORMANCE.
Notwithstanding subparagraph (a) hereof, the continued accrual of vesting
pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory
job performance, and the Company may, in its sole discretion, upon notice to
the Optionee suspend or delay the vesting of Options hereunder for any period
of time in the event that the Company determines, within its sole discretion,
that the Optionee's performance is unsatisfactory.
(f) SUSPENSION OF VESTING DURING CERTAIN LEAVES OF ABSENCE.
Notwithstanding subparagraph (a) hereof, the continued accrual of vesting
pursuant to subparagraph (a) shall be suspended during the period of time in
which the Optionee is on a leave of absence of more than six months for any
reason other than (i) medical reasons, (ii) pregnancy disability, (iii) a
leave qualifying under the Family and Medical Leave Act, or (iv) workers'
compensation.
SECTION 4. EXERCISE OF OPTION.
(a) NOTICE OF EXERCISE. The Optionee or the Optionee's
representative may exercise this Option by giving written notice to the
Company (or its designee) pursuant to Section 9(d). The notice shall specify
the election to exercise this Option, the date of exercise, the number of
Common Shares for which it is being exercised and the form of payment. The
notice shall be signed by the person or persons exercising this Option. In
the event that this Option is being exercised by the representative of the
Optionee, the notice shall be accompanied by proof satisfactory to the
Company of the representative's right to exercise this Option. The Purchase
Price for Common Shares shall be paid in a form that conforms to Sections 6.1
through 6.3 of the Plan at the time such notice is given.
(b) ISSUANCE OF SHARES. After receiving a proper notice of
exercise, the Company shall cause to be issued a certificate or certificates
for the Common Shares so purchased, registered in the name of the person
exercising this Option. The Company shall cause such certificate or
certificates to be delivered to or upon the order of the person exercising
this Option.
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SECTION 5. TERM.
(a) BASIC TERM. This Option shall in any event expire on the date
specified in Section 1(d).
(b) TERMINATION OF EMPLOYMENT. Subject only to the provisions of
Section 3(d), upon the Optionee's termination of employment with the Company
and its subsidiaries for any reason, whether as a result of any voluntary or
involuntary event of termination of employment (including a termination of
employment as may be provided for or determined under an employment contract,
if any, entered into between the Company or its subsidiary and the Optionee)
(each, a "Termination Event"), no unvested portion of the Total Award Common
Shares thereafter shall vest or become exercisable. With respect to the
vested or exercisable portion of the Total Award Common Shares as of the date
of such a Termination Event, this Option shall expire on the earlier of (i)
the expiration date specified in Section 1(d) or (ii) whichever of the
following is applicable: (A) in the case of a Termination Event resulting
from death or Disability, the date one year following such Termination Event;
or (B) in all other cases, the date three (3) months following such
Termination Event.
(c) DIVESTMENT OF OPTIONS. Notwithstanding anything to the
contrary contained herein, this Option shall immediately become forfeited and
expire in the event that the Company terminates the Optionee's employment on
account of conduct inimical to the best interests of the Company, including,
without limitation, conduct constituting a violation of law or Company
policy, fraud, theft, conflict of interest, dishonesty or harassment. The
determination whether the Optionee's employment has been terminated on
account of conduct inimical to the best interests of the Company shall be
made by the Company in its sole discretion.
SECTION 6. LEGALITY OF INITIAL ISSUANCE.
No Common Shares shall be issued upon the exercise of this Option
unless and until the Company has determined that:
(a) A registration statement for the Common Shares is effective
under the Securities Act or an exemption from the registration
requirements thereof has been perfected;
(b) Any applicable listing requirement of any stock exchange on
which Common Shares are listed has been satisfied; and
(c) Any other applicable provisions of state or federal law have
been satisfied.
SECTION 7. NO REGISTRATION RIGHTS.
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The Company may, but shall not be obligated to, register or qualify
the Common Shares for resale or other disposition by the Optionee under the
Securities Act or any other applicable law.
SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES.
(a) RESTRICTIONS. Regardless of whether the offering and sale of
Common Shares under the Plan have been registered under the Securities Act or
have been registered or qualified under the securities laws of any state, the
Company may impose restrictions upon the sale, pledge or other transfer of
such Common Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Company and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with
the provisions of the Securities Act, the securities laws of any state or any
other law.
(b) INVESTMENT INTENT AT EXERCISE. If the Common Shares under the
Plan are not registered under the Securities Act but an exemption is
available which requires an investment representation or other
representation, the Optionee shall represent and agree at the time of
exercise that the Common Shares being acquired upon exercising this Option
are being acquired for investment, and not with a view to the sale or
distribution thereof, and shall make such other representations as are deemed
necessary or appropriate by the Company and its counsel.
(c) ADMINISTRATION. Any determination by the Company and its
counsel in connection with any of the matters set forth in this Section 8
shall be conclusive and binding on the Optionee and all other persons.
SECTION 9. MISCELLANEOUS PROVISIONS.
(a) WITHHOLDING TAXES. To the extent required by applicable
federal, state, local or foreign law the Optionee shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise by reason of the exercise of an Option hereunder and
no Option may be exercised unless such obligation is satisfied.
(b) RIGHTS AS A STOCKHOLDER. Neither the Optionee nor the
Optionee's representative shall have any rights as a stockholder with respect
to any Common Shares subject to this Option until certificates for such
Common Shares have been issued in the name of the Optionee or the Optionee's
representative.
(c) NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall be
construed as giving the Optionee the right to be retained as an employee of
the Company or its subsidiaries. The Company reserves the right to terminate
the Optionee's employment at any time for any reason, subject only to the
terms of any written employment contract entered into between the Company and
the Optionee.
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(d) NOTICE. Any notice required by the terms of this Agreement
shall be given in writing and shall be deemed effective upon personal
delivery or upon deposit with the appropriate postal service, by registered
or certified mail with postage and fees prepaid and addressed to the party
entitled to such notice at the address shown below such party's signature on
this Agreement, or at such other address as such party may designate by ten
(10) days advance written notice to the other party to this Agreement.
Notwithstanding the foregoing, no notice of exercise, as required by Section
4(a), shall be effective until actual receipt thereof by the Company or its
designee.
(e) ENTIRE AGREEMENT. This Agreement and the Plan constitute the
entire agreement between the parties hereto with regard to the subject matter
hereof; provided, however, that in the event of any inconsistency or conflict
between any provision hereof and the terms of the Plan, the terms of the Plan
shall control.
(f) CHOICE OF LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such
laws are applied to contracts entered into and performed in such State.
SECTION 10. DEFINITIONS.
(a) Capitalized terms defined in the Plan shall have the same
meaning when used in this Agreement.
(b) "CHANGE IN CONTROL" shall mean the occurrence of any of the
following events after the effective date of the Plan as set out in Section
15.1 of the Plan:
(1) A change in control required to be reported pursuant to
Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act");
(2) A change in the composition of the Company's Board of
Directors (the "Board"), as a result of which fewer than two-thirds of the
incumbent directors are directors who either (i) had been directors of the
Company 24 months prior to such change or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of
the directors who had been directors of the Company 24 months prior to such
change and who were still in office at the time of the election or nomination;
(3) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20 percent or more of
the combined voting power of the Company's then outstanding securities
ordinarily (and apart from rights accruing under special circumstances)
having the right to vote at elections of directors (the "Base Capital
Stock"); provided, however, that any change in the relative beneficial
ownership of securities of any person resulting solely from a reduction in
the aggregate number of outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of securities, shall be
disregarded until such
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person increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
(c) "COMMON SHARE" shall mean one share of the common stock of the
Company.
(d) "DATE OF GRANT" shall mean the date of this Agreement, which
is the date first written above.
(e) "FAIR MARKET VALUE" shall mean the market price of a Common
Share, determined by the Committee as follows:
(1) If the Common Share was traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for such date;
(2) If the Common Share was traded over-the-counter on the
date in question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;
(3) If the Common Share was traded over-the-counter on the
date in question but was not classified as a national market issue, then the
Fair Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the NASDAQ system for such
date; and
(4) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
(f) "PURCHASE PRICE" shall mean the Exercise Price multiplied by
the number of Common Shares with respect to which this Option is being
exercised.
(g) "RETIREMENT" shall mean a termination of employment of the
Optionee occurring at any time after the Optionee (i) has attained fifty (50)
years of age, and (ii) completed seven (7) years of service, as determined
pursuant to the terms of the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan.
(h) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
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EXHIBIT 10.195
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
AS AMENDED THROUGH DECEMBER 1, 1997
<PAGE>
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
AS AMENDED THROUGH DECEMBER 1, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- -----
<S> <C> <C>
1 Introduction and Purpose..................................... 1
2 Definitions.................................................. 2
3 Participation................................................ 14
4 Employer Contributions....................................... 16
5 Salary Reduction Agreements and Rollover Contributions....... 23
6 Allocation of Contributions.................................. 29
7 Special ESOP Provisions...................................... 30
8 Investment of Contributions, Valuations and Participants'
Cash Contribution Accounts................................. 37
9 Retirement Dates............................................. 39
10 Eligibility for Payment of Accounts and Vested Interests.... 40
11 Method of Payment of Accounts and Withdrawals................ 44
12 Maximum Amount of Allocation................................. 56
13 Voting Rights................................................ 59
14 Designation of Beneficiaries................................. 63
15 Administration of the Plan................................... 64
16 Expenses..................................................... 69
17 Employer Participation....................................... 70
18 Amendment or Termination of the Plan......................... 73
19 Top-Heavy Plan Requirements.................................. 76
20 General Limitations and Provisions........................... 82
21 Application to Puerto Rico Employees......................... 91
</TABLE>
<PAGE>
CHARLES SCHWAB
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
AS AMENDED THROUGH DECEMBER 1, 1997
SECTION 1. INTRODUCTION AND PURPOSE
1.1 The Plan Sponsor has established and maintains the Plan to enable
each Participant to benefit, in accordance with the terms of the Plan, from
contributions made by the Employer and from any increases in the value of the
Plan assets through investment of such assets. The Plan is comprised of
three parts: (i) a Section 401(k) plan, (ii) a profit sharing plan and (iii)
an employee stock ownership plan. The purpose of the employee stock
ownership plan portion of the Plan is to align Employees' interests with the
interests of shareholders. It is anticipated that Employer contributions to
the employee stock ownership plan will be invested primarily or entirely in
Shares of The Charles Schwab Corporation, that the employee stock ownership
plan may acquire such Shares of The Charles Schwab Corporation from time to
time with the proceeds of one or more Exempt Loans, the repayment of which
may be secured in part by a pledge of the Shares of The Charles Schwab
Corporation acquired with those loan proceeds, and that Employer
contributions to the employee stock ownership plan may be used in full or in
substantial part to the payment of interest on, and retirement of principal
of, such Exempt Loans.
This Plan is a restatement of the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan, which was initially effective as of October 1,
1983. The effective date of this restatement is December 13, 1996. The
rights of any person who terminated employment or who retired on or before
the effective date of this restated Plan or any provision hereof, including
his or her eligibility for benefits and the time and form in which benefits,
if any, will be paid, shall be determined solely under the terms of the Plan
provisions as in effect on the date of his or her termination of employment
or retirement, unless such person is thereafter reemployed and
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again becomes a Participant. The rights of any other person shall be
determined solely under the terms of this restated Plan, except as may
otherwise be required by law.
The Plan and Trust are intended to qualify as a plan and trust
which are qualified and exempt from taxation under Sections 401(a) and 501(a)
of the Code. The Plan is intended to qualify in part as a profit sharing
plan (as defined in Section 401(a)(27) of the Code) and in part as a stock
bonus plan and an employee stock ownership plan (as defined by Section
4975(e)(7) of the Code and Section 407(d)(6) of the Act) designed to invest
primarily in shares of stock of the Employer which meet the requirements for
"qualifying employer securities" under Section 4975(e)(8) of the Code and
Section 407(d)(5) of the Act. All provisions of the Plan and Trust shall be
construed accordingly.
All Trust Fund assets acquired under the Plan as a result of debt
incurred to purchase Shares, Employer contributions, income and other
additions to the Trust Fund shall be administered, distributed, forfeited and
otherwise governed by the provisions of the Plan. It is intended that the
Trust associated with the Plan be exempt from federal income taxation
pursuant to the provisions of Section 501(a) of the Code. Subject to the
provisions of Section 16 of the Plan, the assets of the Plan shall be applied
exclusively for the purposes of providing benefits to Participants and
Beneficiaries under the Plan and for defraying expenses incurred in the
administration of the Plan and its corresponding Trust.
SECTION 2. DEFINITIONS
When used herein the following terms shall have the following meanings:
2.1 "Account" means the account or accounts established and maintained
on behalf of a Participant pursuant to (i) Section 6.1 with respect to the
Participant's Cash Contribution Account and (ii) Section 7.1 with respect to
the Participant's ESOP Account.
2.2 "Act" means the Employee Retirement Income Security Act of 1974, as
now in effect or as hereafter amended.
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2.3 "Actual Deferral Percentage" means the average of the ratios
(calculated separately for each Employee) for each Plan Year of (a) the
amount of Elective Contributions and Matching Contributions or Qualified
Nonelective Contributions (if the Committee determines to take such Matching
Contributions or such Qualified Nonelective Contributions into account when
calculating Actual Deferral Percentage) on behalf of each Employee for the
relevant Plan Year to (b) the Employee's compensation (as defined in Treasury
Regulation 1.415-2(d)(10) or in such other manner as is prescribed under
Section 414(s) of the Code) while a Participant for the relevant Plan Year.
2.4 "Affiliated Employer" means any corporation which is included in a
controlled group of corporations (within the meaning of Section 414(b) of the
Code) which includes the Plan Sponsor, any trade or business (whether or not
incorporated) which is under common control with the Plan Sponsor (within the
meaning of Section 414(c) of the Code), any organization included in the same
affiliated service group (within the meaning of Section 414(m) of the Code)
as the Plan Sponsor and any other entity required to be aggregated with the
Plan Sponsor pursuant to the Regulations under Section 414(o) of the Code;
except that for purposes of applying the provisions of Sections 12 and 19
with respect to the limitations on contributions, Section 415(h) of the Code
shall apply.
2.5 "Beneficiary" means the beneficiary or beneficiaries designated by
a Participant pursuant to Section 14 to receive the amount, if any, payable
under the Plan upon the death of such Participant.
2.6 "Board of Directors" means the board of directors of Charles Schwab
& Co., Inc.
2.7 "Break in Service" means a Plan Year (or for purposes of
determining membership in the Plan pursuant to Section 3, the Computation
Period) during which an individual has not completed more than 500 Hours of
Service, as determined by the Committee in accordance with the Regulations.
A Break in Service shall be deemed to have commenced on the first day of the
Plan Year in which it occurs. Solely for purposes of determining whether a
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<PAGE>
Break in Service has occurred, an individual shall be credited with the Hours
of Service which such individual would have completed but for a maternity or
paternity absence, as determined by the Committee in accordance with this
Section 2.7 and the Code and Regulations; provided, however, that the total
Hours of Service so credited shall not exceed 501 Hours of Service and that
the individual shall timely provide the Committee with such information as it
shall require. Hours of Service credited for a maternity or paternity
absence shall be credited at eight Hours of Service per day and shall be
credited entirely (i) in the Plan Year or Computation Period in which the
absence began if such Hours of Service are necessary to prevent a Break in
Service in such Plan Year, or (ii) in the following Plan Year or Computation
Period. For purposes of this Section 2.7, maternity or paternity absence
shall mean an absence from work by reason of the individual's pregnancy, the
birth of the individual's child or the placement of a child with the
individual in connection with adoption of the child by such individual, or
for purposes of caring for a child for the period immediately following such
birth or adoption.
2.8 "Cash Contribution Account" means the account or accounts
established and maintained on behalf of a Participant pursuant to Section 6.1
with respect to the Participant's Elective Contributions, Matching
Contributions, Profit Sharing Contributions, Qualified Nonelective
Contributions or Rollover Contributions.
2.9 "Code" means the Internal Revenue Code of 1986, as now in effect or
as hereafter amended. All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.
2.10 "Committee" means the Administrative Committee of the Employer
provided for in Section 15. For purposes of the Act, the Employer shall be
the "named fiduciary" (with respect to the matters for which it is hereby
responsible under the Plan) of the Plan, and the Employer shall be the "plan
administrator" of the Plan within the meaning of Section 3(16)(A) of the Act.
2.11 "Compensation" means a Participant's W-2 compensation related to
services rendered to the Employer, excluding (i) living allowances, (ii)
travel or commuting allowances,
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(iii) reimbursements for financial planning, (iv) amounts that are paid as a
result of participation in the Employer's Long-Term Incentive Plan, (v)
employee referral awards, (vi) special incentive awards (other than regular
bonus programs), (vii) reimbursements for relocation expenses, (viii)
commissions (other than "dual commissions", commissions based on trading
results that are paid to traders who are also salaried and commissions where
the Participant's only form of remuneration is commissions), (ix) income
items attributable to the taxable portion of employee benefits and any cash
payments made as a result of an Employee's election not to receive insured
benefits pursuant to the Company's Pre-Tax Contribution Plan, (x) amounts
paid as short term disability benefits, (xi) any income items reflecting
grants in aid, and (xii) compensation in excess of $150,000 (adjusted for
cost of living to the extent permitted by Section 401(a)(17) of the Code and
Regulations). For purposes of determining the whole percentage of
Compensation for which a Participant may make a Salary Reduction Agreement,
and not for any other purposes, subparagraph (ix) hereof shall be
disregarded. Compensation shall be determined prior to reduction for any
contributions pursuant to such Participant's election under Section 5.1, and
any elective contributions made by the Employer on behalf of the Participant
in the Plan Year that are not includable in gross income under Section 125 of
the Code.
2.12 "Computation Period" means a 12 consecutive month period beginning
on the day an individual first performs an Hour of Service or first performs
an Hour of Service following a Break in Service. Thereafter, the Computation
Period shall be the Plan Year, commencing with the Plan Year that includes
the day immediately following the last day of the Computation Period
determined pursuant to the first sentence hereof.
2.13 "Contribution Percentage" means the average of the ratios
(calculated separately for each Participant for each Plan Year) of (a)(i)
Matching Contributions, if any, made by the Employer on behalf of a
Participant and (ii) Elective Contributions, (if the Committee elects to take
into account Elective Contributions when calculating the Contribution
Percentage) to (b) the Employee's compensation (as defined in Section
1.415-2(d)(10) of the Regulations or in such
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<PAGE>
other manner as is prescribed under Section 414(s) of the Code) while a
Participant for the relevant Plan Year.
2.14 "Deferred Retirement Date" shall have the meaning set forth in
Section 9.2.
2.15 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental
impairment that has continued without interruption for a period of at least
six months and that can be expected to be of long, continued and indefinite
duration. The determination of the Committee as to whether a Participant has
a Disability shall be final, binding and conclusive.
2.16 "Effective Date" means October 1, 1983.
2.17 "Elective Contributions" means contributions made to the Trust Fund
pursuant to a Participant's Salary Reduction Agreement entered into pursuant
to Section 5.1, and which are considered tax deferred under Section 401(k) of
the Code.
2.18 "Elective Contribution Subaccount" means the account established
and maintained on behalf of a Participant pursuant to Section 6.2(a) with
respect to his or her Elective Contributions and Qualified Nonelective
Contributions.
2.19 "Employee" means any "regular employee" of the Employer who is paid
through United States payroll and for whom the Employer is required to
withhold United States Federal employment taxes excluding (i) any person
covered by any other pension, profit sharing or retirement plan to which any
Employer or Affiliated Employer is required to contribute either directly or
indirectly, (ii) any nonresident alien individual who received no earned
income (within the meaning of Section 911(d)(2)) from the Employer which
constitutes income from sources within the United States, (iii) any employee
who is included in a unit of employees covered by a negotiated collective
bargaining agreement which does not provide for his or her membership in the
Plan, (iv) any individual who provides services to the Employer pursuant to
an independent contractor agreement, irrespective of whether such individual
is subsequently retroactively reclassified as a common law employee for
periods during which the Employer
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originally classified such individual as an independent contractor, and (v)
any individual who provides services to the Employer pursuant to an agreement
between the Employer and a temporary agency or other leasing organization. A
director of the Employer is not eligible for membership in the Plan unless
such director is also an Employee. A leased employee (within the meaning of
Section 414(n) of the Code) is not eligible for membership in the Plan unless
the Employer designates such individual as eligible for membership in the
Plan.
2.20 "Employer" means Charles Schwab & Co., Inc. and any Participating
Employer which adopts this Plan subject to the approval of the Board of
Directors.
2.21 "ESOP Account" means the account established and maintained on
behalf of a Participant pursuant to Section 7.1 with respect to his or her
ESOP Contributions.
2.22 "ESOP Contributions" means the Employer contributions, if any, made
to the Plan on behalf of a Participant pursuant to Section 4.2(c).
2.23 "ESOP/Profit Sharing Entry Date" means the first day of each
calendar month.
2.24 "Exempt Loan" means any loan to the Plan or Trust not prohibited by
Section 4975(c) of the Code and Section 406 of the Act because the loan meets
the requirements set forth in Section 4975(d)(3) of the Code, Section
408(b)(3) of the Act and the Regulations promulgated thereunder, the proceeds
of which loan are used within a reasonable time after receipt by the Trust
Fund only for any or all of the following purposes: (a) to acquire Shares;
(b) to repay the same Exempt Loan; or (c) to repay any previous Exempt Loan.
2.25 "Highly Compensated Participant" means any Participant who, during
the relevant period, is treated as a highly compensated employee under
Section 414(q) of the Code. For purposes of determining which Employee is a
Highly Compensated Participant, the look-back determination shall be made on
the basis of the calendar year. The Plan shall comply with the procedures of
Treasury Regulation 1.401(k)-1(f) to the extent applicable. For purposes of
determining which Employee is a Highly Compensated Participant:
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(A) Highly Compensated Participant means a Participant who
performs Services during the determination year and is described in one or
more of the following groups:
(1) An Employee who is a five percent (5%) owner, as
defined in Section 416(i)(1) of the Code, at any time during the
determination year or the look-back year.
(2) An Employee who: (a) had compensation from the
Employer in excess of $80,000 (indexed as referenced in Section 414(q)(1) of
the Code) during the look-back year and (b) if the Employer elects the
application of this Subsection 2.25(A)(2) for such look-back year, such
Employee was in the "top-paid group" for the look-back year.
(B) For purposes of this Section:
(1) The determination year is the Plan Year for which
the determination of who is a Highly Compensated Participant is being made.
(2) The look-back year is the calendar year ending with
or within the determination year.
(3) The "top-paid group" consists of the top twenty
percent (20%) of Employees ranked on the basis of compensation received
during the look-back year. For purposes of determining the number of
Employees in the top-paid group, Employees described in Section 414(q)(5) of
the Code and the Regulations promulgated thereunder are excluded.
(4) For purposes of this Section 2.25, the term
"compensation" means compensation as defined in Section 414(q)(4) of the Code.
(5) Employers aggregated under Section 414(b), (c), (m),
or (o) of the Code are treated as a single employer.
(6) Highly Compensated Participants include a former
Employee who had a separation year prior to the determination year and who
was a Highly Compensated Participant for either (A) the determination year in
which the Employee separated from Service or (B) any determination year
ending on or after the Employee's 55th birthday. With respect to an Employee
who separated from Service before January 1, 1987, an Employee
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will be included as a Highly Compensated Participant only if the Employee was
a five percent (5%) owner or received Compensation in excess of $50,000
during (1) the determination year in which the Employee separated from
Service (or the year preceding such separation year) or (2) any year ending
on or after such Employee's 55th birthday (or the last year ending before
such Employee's 55th birthday).
2.26 "Hours of Service" means hours during the applicable Computation
Period in which an individual performs Service or is treated as performing
Service and, except in the case of military service or as otherwise
determined by the Committee, for which the Participant is directly or
indirectly entitled to payment. For all purposes under the Plan, (i) an
individual scheduled to work more than twenty hours per week shall be
credited (under rules determined by the Committee, uniformly applicable to
all individuals similarly situated and in accordance with the Regulations)
with 190 Hours of Service for each calendar month in which the individual
would otherwise be credited with one or more Hours of Service and (ii) an
individual who is scheduled to work less than twenty hours per week shall be
credited with Hours of Service for the applicable period in which such Hours
of Service accrue in accordance with Labor Department Regulation 29 CFR
Section 2530.200b-2(c), which regulation is incorporated herein by reference.
Hours of Service for reasons other than the performance of duties shall be
credited in accordance with Labor Department Regulation 29 CFR Section
2530.200b-2(b), which regulation is incorporated herein by reference.
The term "Service" includes performance of duties (or periods which
are treated as the performance of duties) for the Employer or for any
Affiliated Employer (under rules determined by the Committee, uniformly
applicable to all individuals similarly situated and in accordance with the
Regulations) for which an individual is entitled to receive credit for
"Service", including (i) vacation, (ii) holiday, (iii) absence authorized by
the Employer for sickness or incapacity (including disability or leave of
absence), (iv) layoff, (v) jury duty, (vi) if and to the extent required by
the Military Selective Service Act, as amended or any other federal law,
service in the Armed Forces of the United States and (vii) an approved leave
of absence
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granted by the Employer to an individual on or after August 5, 1993 pursuant
to the Family Medical Leave Act, but only if such individual returns to work
for the Employer at the end of such approved leave. Service also includes
periods of time for which back pay, irrespective of mitigation of damages, is
awarded or agreed to by the Employer or any Affiliated Employer; provided
that such award or agreement is not already credited as Service under either
of the preceding two sentences. Service may also include any period of a
Participant's prior employment by an organization upon such terms and
conditions as the Committee may approve and subject to any required IRS
approval. Notwithstanding the foregoing, (i) Hours of Service credited with
respect to an individual's service with BankAmerica Corporation or a related
corporation between January 11, 1983 and March 31, 1987 shall be considered
Service only if such individual was employed by the Employer prior to
November 24, 1993, (ii) Hours of Service credited with respect to an
individual's service with BankAmerica Corporation or a related corporation
prior to January 11, 1983 shall be considered Service, but only if such
individual was employed by the Employer prior to April 1, 1987, (iii) Hours
of Service credited with respect to service with Mayer & Schweitzer, Inc.
prior to July 1, 1991 shall be considered Service, and (iv) Service shall
include service with The Rose Company prior to April 1, 1989, service with
Performance Technologies, Inc. prior to August 31, 1994, service with
TrustMark, Inc. prior to July 31, 1995, and service with Hampton Pension
Services, Inc. prior to November 6, 1995.
2.27 "IRS" means the United States Internal Revenue Service.
2.28 "Labor Department" means the United States Department of Labor.
2.29 "Matching Contribution" means any Employer contribution, if any,
made to the Plan on behalf of a Participant pursuant to Section 4.2(a).
2.30 "Matching Contribution Subaccount" means the account established
and maintained on behalf of a Participant pursuant to Section 6.2(b) with
respect to the Participant's Matching Contributions.
2.31 "Normal Retirement Date" shall have the meaning set forth in
Section 9.1.
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2.32 "Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 below.
2.33 "Participating Employer" means Charles Schwab & Co., Inc. or any
other Affiliated Employer, the board of directors or equivalent governing
body of which shall adopt the Plan and Trust Agreement by appropriate action
with the written consent of the Board of Directors. By its adoption of this
Plan, a Participating Employer shall be deemed to appoint Charles Schwab, &
Co., Inc., the Committee and the Trustee its exclusive agent to exercise on
its behalf all of the power and authority conferred by this Plan upon the
Employer. The authority of Charles Schwab & Co., Inc., the Committee and the
Trustee to act as such agent shall continue until the Plan is terminated as
to the Participating Employer and the relevant Trust Fund assets have been
distributed by the Trustee as provided in Section 17 of this Plan.
2.34 "Plan" means this Charles Schwab Profit Sharing and Employee Stock
Ownership Plan as the same is stated herein and as it may be amended from
time to time.
2.35 "Plan Sponsor" means The Charles Schwab Corporation.
2.36 "Plan Year" means the calendar year.
2.37 "Profit Sharing Contribution" means the Employer contribution, if
any, made to the Plan on behalf of a Participant pursuant to Section
4.2(b)(ii).
2.38 "Profit Sharing Subaccount" means the account established and
maintained on behalf of a Participant pursuant to Section 6.2(c) with respect
to the Participant's Profit Sharing Contributions.
2.39 "Purchasing Agent" means the agent designated by the Trustee to
enter into certain transactions with respect to Shares hereunder.
2.40 "Qualified Nonelective Contribution" means the Employer
contribution, if any, made to the Plan on behalf of a Participant pursuant to
Section 4.2(b)(i).
2.41 "Regulations" means the applicable regulations issued under the
Code or the Act by the IRS, the Labor Department or any other governmental
authority and any temporary rules or releases promulgated by such authorities
pending the issuance of such regulations.
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2.42 "Restated Effective Date" shall mean January 1, 1994.
2.43 "Retirement Date" means the Participant's Normal or Deferred
Retirement Date which has become effective pursuant to Section 9 below.
2.44 "Rollover Subaccount" means the account established and maintained
on behalf of a Participant pursuant to Section 6.2(d) with respect to the
Participant's Rollover Contributions.
2.45 "Rollover Contribution" means any contribution made by an Employee
pursuant to Section 5.6.
2.46 "Salary Reduction Agreement" means an agreement between a
Participant and the Employer entered into pursuant to Section 5.1.
2.47 "Section 401(k) Entry Date" means April 1 and October 1 of each
calendar year.
2.48 "Shares" means (i) with respect to Plan assets acquired with the
proceeds of an Exempt Loan, the common stock issued by The Charles Schwab
Corporation or any successor corporation thereto meeting the requirements of
both Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act for
"qualifying employer securities," and (ii) with respect to Plan assets other
than those acquired with the proceeds of an Exempt Loan, stock issued by The
Charles Schwab Corporation or any successor corporation thereto, of any type,
kind or class meeting the requirements of Section 407(d)(5) of the Act for
"qualifying employer securities". All valuations of Shares, where such
Shares are not readily tradable on an established securities market and where
such valuations relate to activities carried on by the Plan, shall be made by
one or more independent appraisers retained by the Committee, who meet the
requirements, if any, of the Code and Regulations. To the extent and in the
manner required by the Code and Regulations, all independent appraisers, if
any, making appraisals pursuant to the foregoing sentence shall be registered
with the IRS.
2.49 "Surviving Spouse" means the survivor of a Participant to whom such
Participant was legally married on the date of the Participant's death.
2.50 "Suspense Subfund" means the subfund established under Section 7.3.
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2.51 "Taxable Compensation" means the W-2 compensation paid to an
individual for Service during any period under consideration.
2.52 "Taxable Year" means the calendar year.
2.53 "Total Break in Service" means a period of five or more consecutive
Computation Periods in which a Participant incurs a Break in Service, with
respect to a Participant who did not have a nonforfeitable right to any
portion of his or her Profit Sharing Subaccount or ESOP Account prior to the
beginning of the first such Computation Period.
2.54 "Trustee" means the Trustee selected by the Employer to hold the
funds contributed by the Employer to provide benefits under the Plan or any
successor or substitute.
2.55 "Trust Agreement" means the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan Trust Agreement, as it may from time to time be
amended, and such additional and successor trust agreements as may be
executed.
2.56 "Trust Fund" means the funds held by the Trustee from which
payments to the Trustee are made to provide benefits under the Plan.
2.57 "Valuation Date" means the last day of each Plan Year or such
interim periods as the Committee may designate from time to time.
2.58 "Vested Interest" means the portion of a Participant's Account
which has become nonforfeitable pursuant to Section 10.3 below.
2.59 "Year of Eligibility Service" means a Computation Period during
which an Employee completes at least 1,000 Hours of Service.
2.60 "Year of Service" means a Computation Period during which an
individual completed at least 1,000 Hours of Service or satisfied any
alternative requirement, as determined by the Committee from time to time in
accordance with the Regulations.
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SECTION 3. PARTICIPATION
3.1 COMMENCEMENT OF PARTICIPATION.
(a) An Employee who is a Participant as of the date immediately
preceding the Restated Effective Date shall continue to be a Participant of
the Plan as of the Restated Effective Date.
(b) An Employee who is not a Participant on the Restated Effective
Date and who (A) is in Service on the Restated Effective Date or (B)
commences Service on or after the Restated Effective Date shall be eligible
to become a Participant of the Plan for purposes of:
(i) Elective Contributions, Matching Contributions and
Qualified Nonelective Contributions on the first Section 401(k) Entry Date
coincident with or next following his or her commencement of Service; and
(ii) Profit Sharing Contributions and ESOP Contributions on
the first ESOP/Profit Sharing Entry Date coincident with or next following
the date on which he or she completes a Year of Eligibility Service.
(c) An Employee who is eligible to become a Participant, but
declines to participate in the Plan, may become a Participant as of any
subsequent Section 401(k) Entry Date or ESOP/Profit Sharing Entry Date.
(d) An Employee who satisfies the requirements of Section
3.1(b)(ii) for participation but who terminates Service prior to becoming a
Participant in the Plan and subsequently becomes an Employee again prior to
incurring a Break in Service will become a Participant in the Plan for all
purposes as of the first day on which such individual again becomes an
Employee.
3.2 CESSATION OF PARTICIPATION. A Participant shall cease to be a
Participant upon the earliest to occur of (i) the Participant's retirement on
his or her Retirement Date, (ii) the Participant's death or Disability or
(iii) the Participant's termination of Service prior to his or her Retirement
Date followed by a Break in Service. A Participant who, without any Break in
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Service, ceases to be an Employee for any reason, shall not cease to be a
Participant, provided that, notwithstanding any other provision of the Plan,
and except as provided in Section 4.3, no contribution shall be made for the
benefit of such Participant, no contributions under the Plan shall be
allocated, added or otherwise credited to the Account of such Participant,
and no contributions, forfeitures or Shares released from a Suspense Subfund
shall be allocated, added or otherwise credited to the Account of such
Participant on or after the date on which such Participant ceases to be an
Employee and before the first day of the Plan Year coincident with or
preceding the date, if any, on which such Participant again resumes Service
as an Employee.
3.3 READMISSION AFTER CESSATION OF PARTICIPATION. A Participant who
has incurred a Total Break in Service and subsequently returns to Service
shall be treated as a new Employee for all purposes of the Plan. In all
other cases, a former Participant who returns to Service following a Break in
Service shall again become a Participant as of the first date of such former
Participant's return to Service, except that (i) such Participant shall not
be eligible to commence Elective Contributions until the first Section 401(k)
Entry Date or ESOP/Profit Sharing Entry Date coincident with or next
following the date the Participant returns to Service, and (ii) if such
former Participant is not then an Employee, such former Participant shall
again become a Participant as of the first day on which such former
Participant again becomes an Employee.
3.4 WAIVER OF PARTICIPATION. An individual who has satisfied the
requirements for participation set forth in Section 3.1 may permanently waive
participation in the Plan, but only if such individual is on temporary
transfer of employment to a Participating Employer from an Affiliated
Employer that is not a Participating Employer.
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SECTION 4. EMPLOYER CONTRIBUTIONS
4.1 ELECTIVE CONTRIBUTIONS. The Employer shall, subject to the
limitations of Sections 5 and 12, contribute to the Trust Fund for each Plan
Year on behalf of all Participants the total amount of Elective Contributions
designated to be contributed pursuant to Salary Reduction Agreements under
Section 5.1. Such contributions shall be paid in cash by the Employer to the
Trustee as soon as practicable, but in no event later than 90 days from the
date on which such amounts otherwise would have been payable to the
Participant in cash.
4.2 EMPLOYER CONTRIBUTIONS.
(a) Subject to the limitations of Section 12, the Employer shall
contribute Matching Contributions to the Trust Fund on behalf of all
Participants for whom Elective Contributions have been made equal to a
percentage of such Elective Contributions made for each such Participant.
The percentage (and, if desired, a maximum dollar amount) of Matching
Contributions shall be determined from time to time by the Board of Directors
and communicated to the Participants.
(b) Subject to the limitations of Section 12, for any Plan Year,
the Board of Directors may designate (i) a percentage of the aggregate
Compensation of all Participants or a fixed dollar amount to be contributed
to the Plan as Qualified Nonelective Contributions on behalf of certain
Participants who are not Highly Compensated Participants and may designate
(ii) a percentage of the aggregate Compensation of all Participants or a
fixed dollar amount to be contributed to the Plan as Profit Sharing
Contributions on behalf of all Employees who are or would be Participants but
for their election not to make Elective Contributions. Provided, however,
that effective as of January 1, 1995, no further Profit Sharing Contributions
shall be made to the Plan.
(c) Subject to the limitations of Section 12, and the provisions
of any applicable loan or contribution agreement, the Employer shall
contribute to the Trust Fund for each Plan Year as ESOP Contributions such
sum as the Board of Directors may, in its sole
16
<PAGE>
discretion, determine, which sum may be zero. All or any part of the
contributions made under this Section 4.2(c) may be applied to repay any
outstanding Exempt Loan. The Committee may, subject to any pledge or similar
agreement, direct or determine the proportions of such contributions which
are applied to repay each such Exempt Loan and, with respect to any
particular Exempt Loan, the proportion of such contribution to be applied to
repay principal and interest on such Exempt Loan.
4.3 ALLOCATION OF MATCHING CONTRIBUTIONS, PROFIT SHARING CONTRIBUTIONS
AND ESOP CONTRIBUTIONS. Matching Contributions shall only be allocated to
those Participants employed on the last day of the Plan Year. Profit Sharing
Contributions and ESOP Contributions shall only be allocated to Participants
who are members of the Allocation Group for the Plan Year. For purposes of
Sections 4 and 7, the term "Allocation Group" means the group consisting of
(i) each Participant who completed at least One Thousand (1,000) Hours of
Service during the Plan Year and is employed by the Employer as of the last
day of the Plan Year, and (ii) each Participant whose employment with the
Employer terminated during the Plan Year by reason of Disability, death or
retirement on or after the Participant's Retirement Date. Profit Sharing
Contributions and ESOP Contributions shall be allocated among the Accounts of
Participants who are members of the Allocation Group for the Plan Year in the
same proportion that a Participant's Compensation during the Plan Year bears
to the total Compensation during the Plan Year of all Participants who are
members of the Allocation Group for such Plan Year. For purposes of the
preceding sentence, Compensation earned by a Participant prior to the
Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall not be
taken into account.
4.4 TIMING OF EMPLOYER CONTRIBUTIONS.
(a) Any Profit Sharing Contributions, Qualified Nonelective
Contributions and ESOP Contributions shall be deemed made on account of a
Taxable Year if (i) the Board of Directors determines the amount of such
contribution by appropriate action and announces the amount in writing to its
Employees within 30 days after the end of such Taxable Year, (ii) the
Employer designates such amount in writing as payment on account of such
Taxable Year or
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<PAGE>
(iii) the Employer claims such amount as a deduction on its federal tax
return for such Taxable Year.
(b) Profit Sharing Contributions, Matching Contributions, and,
subject to the provisions of any Exempt Loan, ESOP Contributions for any
particular Taxable Year may be paid to the Trustee in installments, but in
any event such contributions shall be paid no later than the due date for the
Employer's federal income tax return for such Taxable Year. The Employer
may, during any Taxable Year, make advance payments toward its contributions
for such Taxable Year. Any income, earnings or appreciation earned by any
amount contributed by the Employer prior to the end of the Plan Year shall be
treated as part of the Profit Sharing Contributions, Matching Contributions,
or ESOP Contributions, as the case may be, for such Plan Year. On or about
the date of such payment the Committee shall be advised of the amount of such
payment upon which its allocation pursuant to Section 4.3 is to be calculated.
4.5 FORFEITURES. Forfeitures of Profit Sharing Contributions arising
during the Plan Year pursuant to Section 10 shall be used to reduce the
amount of Matching Contributions made for such Plan Year pursuant to Section
4.2(a). Forfeitures of Shares attributable to ESOP Contributions (or ESOP
Contributions) arising during the Plan Year pursuant to Section 10 shall be
reallocated as ESOP Contributions on the last day of the Plan Year in which
such forfeiture occurs to all Participants entitled to receive Shares
attributable to ESOP Contributions (or ESOP Contributions), in the same
proportion as contributions are allocated pursuant to Sections 4.3 and 7.2.
Provided, in either case, that forfeitures shall first be used to fund
adjustments to Participants' Accounts required to correct operational errors,
to the extent directed by the Committee, or to fund any amounts to be
recredited to a Participant's Account pursuant to Section 10.5.
4.6 CONTRIBUTION PERCENTAGE TEST.
(a) Participant's Contribution Percentages must satisfy at least
one of the following tests:
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(1) The Contribution Percentage for the Highly
Compensated Participants shall not exceed the Contribution Percentage of all
other Participants for the preceding Plan Year multiplied by 1.25; or
(2) (A) The excess of the Contribution Percentage for
the Highly Compensated Participants over the Contribution Percentage of all
other Participants for the preceding Plan Year shall not be more than two
percentage points and (B) the Contribution Percentage for Highly Compensated
Participants shall not be more than the Contribution Percentage for all other
Participants for the preceding Plan Year multiplied by 2.
(b) The Employer may elect to apply the foregoing tests by
using current Plan Year data rather than utilize data from the preceding Plan
Year. If such an election is made, it may not be changed except as provided
by Secretary of the Treasury. Notwithstanding the foregoing, for the 1997
Plan Year, the Employer may rely on the transitional relief set forth in
Internal Revenue Service Notice 97-2 to use current Plan Year data to apply
the foregoing tests.
(c) All Matching Contributions and Elective Contributions
that are made under two or more plans that are aggregated for purposes of
Sections 401(a)(4) and 410(b) of the Code are to be treated as made under a
single plan; and if two or more plans are permissively aggregated such plans
shall satisfy Sections 401(a)(4) and 410(b) as though they were a single plan
in accordance with Section 410(m) of the Code and Section 1.401(m)-1 of the
Regulations.
(d) For purposes of this Section 4.6, Matching Contributions
are taken into account for a Plan Year only if (i) made on account of the
Participant's Elective Contributions for the Plan Year, (ii) allocated to the
Participant's Account during the Plan Year and (iii) paid to the Trust Fund
prior to the end of the twelfth month following the close of the Plan Year.
(e) In applying the tests set forth in this Section 4.6, the
following rules shall apply:
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<PAGE>
(1) In the case of an Employee who receives no Matching
Contributions, the Matching Contributions that are to be included in
determining the Participant's Contribution Percentage are zero;
(2) The availability of Matching Contributions shall not
discriminate in favor of Highly Compensated Participants.
(3) The distribution of excess aggregate contributions
will include the income allocable thereto and shall be made on the basis of
the amount of Matching Contributions (and Elective Contributions, if the
Regulations permit and the Committee elects to take into account Elective
Contributions when calculating the Contribution Percentage) made on behalf of
each such Highly Compensated Participant. The income allocable to the excess
aggregate contributions includes income for the Plan Year for which the
excess aggregate contributions were made in accordance with Section
1.401(m)-1(e)(3)(ii) of the Regulations.
(4) A Participant shall include any Employee who is
directly or indirectly eligible to receive an allocation of Matching
Contributions and includes (i) an Employee who would be a Participant but for
the failure to make required contributions and (ii) a Participant whose right
to receive Matching Contributions has been suspended because of an election
(other than certain one-time elections) not to participate.
(f) For Plan Years commencing after December 31, 1998 for
which the Employer uses Section 410(b)(4)(B) of the Code to test minimum
coverage compliance, the Employer may exclude from consideration all
Participants (other than Highly Compensated Participants) who have not met
the minimum age and service requirements of Section 410(a)(1)(A) of the Code
in determining whether the tests set forth in Subsection 4.6(a) are met.
4.7 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS.
(a) The Committee shall determine as of the end of the Plan Year,
and at such other time or times in its discretion, whether one of the
Contribution Percentages of Section 4.6 is satisfied for such Plan Year. If
neither of the tests set forth in Section 4.6 is satisfied, the Committee
shall distribute the excess aggregate contributions in the manner described
in this
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Section 4.7. For purposes of this Section 4.7, "excess aggregate
contributions" means, with respect to any Plan Year and with respect to any
Participant, the excess of the aggregate amount of (i) Matching Contributions
(and any earnings and losses allocable thereto prior to distribution) and
(ii) the Elective Contributions (if the Regulations permit and the Committee
elects to take into account Elective Contributions when calculating the
Participant's Contribution Percentage) of Highly Compensated Participants for
such Plan Year, over the maximum amount of such contributions that could be
made on behalf of Participants without violating the requirements of Section
4.6. The amount of each Highly Compensated Participant's excess aggregate
contributions shall be determined by reducing the Matching Contributions of
all Highly Compensated Participants whose Contribution Percentage as adjusted
by this Section 4.7 are at the highest percentage rate for the Plan Year on a
pro rata basis by one hundredth of one percent (0.01%). The Committee shall
continue to utilize this procedure until one of the tests of Section 4.6 is
satisfied.
(b) If the Committee is required to distribute excess aggregate
contributions for any Highly Compensated Participant for a Plan Year in order
to satisfy the requirements of Section 4.6, then the Committee shall
distribute such excess aggregate contributions with respect to such Highly
Compensated Participants to the extent practicable before April 15th of the
Plan Year next following the Plan Year for which such excess aggregate
contributions were made, but in no event later than the end of the Plan Year
following such Plan Year. For each of such Participants, the amounts so
distributed shall be made in the following order of priority:
(i) by distributing Matching Contributions and earnings
thereon, to the extent necessary; and
(ii) by distributing Elective Contributions (to the extent
such amounts are included in the Contribution Percentage), and earnings
thereon.
All such distributions shall be made to Highly Compensated
Participants on the basis of the respective portions of such amounts
attributable to each such Highly Compensated
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Participant. No spousal consent shall be required of any married Participant
who receives a refund of excess aggregate contributions.
4.8 AGGREGATE LIMIT FOR CONTRIBUTION PERCENTAGE AND ACTUAL DEFERRAL
PERCENTAGE.
(a) The sum of the Contribution Percentage and the Actual Deferral
Percentage for Highly Compensated Participants for the Plan Year shall not
exceed the "aggregate limit" defined in this Section 4.8.
(b) The term "aggregate limit" means the greater of (1) or (2)
below:
(1) The sum of (a) the greater of the Actual Deferral
Percentage for all Participants other than the Highly Compensated
Participants or the Contribution Percentage for all Participants other than
the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and
(b) the lesser of such Actual Deferral Percentage or Contribution Percentage
plus 2, but not greater than 2 multiplied by the lesser of such Actual
Deferral Percentage or Contribution Percentage.
(2) The sum of (a) the lesser of the Actual Deferral
Percentage for all Participants other than the Highly Compensated
Participants or the Contribution Percentage for all Participants other than
the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and
(b) the greater of such Actual Deferral Percentage or Contribution percentage
plus 2, but not greater than 2 multiplied by the greater of such Actual
Deferral Percentage or Contribution Percentage.
(c) If the aggregate limit is exceeded, the Committee shall
determine whether to: (i) make Qualified Nonelective Contributions to permit
the satisfaction of the test set forth in subsection (a) hereof; (ii) reduce
the Contribution Percentage of the Highly Compensated Participants as set
forth in Section 4.7; or (iii) reduce the Actual Deferral Percentage of the
Highly Compensated Participants as set forth in Section 5.5.
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SECTION 5. SALARY REDUCTION AGREEMENTS
AND ROLLOVER CONTRIBUTIONS
5.1 SALARY REDUCTION AGREEMENTS.
(a) A Participant may elect to make Elective Contributions in any
Plan Year by entering into a written Salary Reduction Agreement with the
Employer. Each Salary Reduction Agreement shall provide that a portion of
the Participant's Compensation shall be paid through payroll deduction to the
Trust Fund as an Elective Contribution pursuant to Section 4.1 rather than
paid currently to the Participant. The Salary Reduction Agreement shall
provide for Elective Contributions equal to any whole percentage between one
percent (1%) and fifteen percent (15%) of a Participant's Compensation in any
payroll period, not to exceed the limitation set forth in Section 402(g) of
the Code (adjusted automatically for increases in accordance with the
Regulations). Notwithstanding the foregoing provisions of this Section 5.1,
the Committee may, but need not, adopt a procedure to enable Participants to
make lump sum Elective Contributions under the Plan through payroll
deductions. No Salary Reduction Agreement shall be effective unless the
Participant has filed a written investment direction pursuant to Section 8.3.
(b) A Salary Reduction Agreement will be taken into account for
any Plan Year only if it relates to Compensation that would have been
received by the Participant in the Plan Year (but for the deferral election).
(c) In the event that the aggregate amount of Elective
Contributions by a Participant exceeds the limitation described in subsection
(a) of this Section 5.1, the amount of such excess, increased by any income
and decreased by any losses attributable thereto, shall be refunded to the
Participant no later than the April 15th of the calendar year following the
calendar year for which the Elective Contributions were made. If a
Participant also participates, in any calendar year, in any other plans
subject to the limitations set forth in Section 402(g) of the Code and has
made excess deferrals under this Plan when combined with the other plans
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subject to such limits, to the extent the Participant designates, in writing
submitted to the Committee no later than the March 1 of the calendar year
next following the calendar year for which the Elective Contributions were
made, any Elective Contributions under this Plan as excess deferrals, the
amount of such designated excess, increased by any income and decreased by
any losses attributable thereto, shall be refunded to the Participant no
later than the April 15 of the calendar year next following the calendar year
for which the Elective Contributions were made.
5.2 CHANGE OR SUSPENSION OF SALARY REDUCTION AGREEMENTS. Subject to
Section 5.1, a Participant may enter into or change his or her Salary
Reduction Agreement on each Section 401(k) Entry Date, effective as of the
first day of the Section 401(k) Entry Date, in accordance with rules
determined by the Committee. In addition, a Participant may also suspend his
or her Salary Reduction Agreement at any time, in accordance with rules
determined by the Committee. A Participant who suspends his or her Salary
Reduction Agreement in accordance with this Section 5.2 may enter into a new
Salary Reduction Agreement effective as of the next succeeding Section 401(k)
Plan Entry Date.
A Participant's most recent Salary Reduction Agreement shall
continue unchanged from year to year unless the Participant notifies the
Committee in writing of a change in such Salary Reduction Agreement in
accordance with the rules determined by the Committee.
5.3 Actual Deferral Percentage Test.
(a) Participants' Elective Contributions must satisfy at least one of
the following tests:
(1) The Actual Deferral Percentage for the Highly Compensated
Participants shall not exceed the Actual Deferral Percentage of all other
Participants for the preceding Plan Year multiplied by 1.25; or
(2) (A) The excess of the Actual Deferral Percentage for the
Highly Compensated Participants over the Actual Deferral Percentage of all other
Participants for the preceding Plan Year shall not be more than two percentage
points, and (B) the Actual Deferral
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Percentage for the Highly Compensated Participants shall not be more than the
Actual Deferral Percentage for all other Participants for the preceding Plan
Year multiplied by 2.
(b) The Employer may elect to apply the foregoing tests by using
current Plan Year data rather than utilize data from the preceding Plan Year.
If such an election is made, it may not be changed except as provided by
Secretary of the Treasury. Notwithstanding the foregoing, for the 1997 Plan
Year, the Employer may rely on the transitional relief set forth in Internal
Revenue Service Notice 97-2 to use current Plan Year data to apply the
foregoing tests.
(c) All Elective Contributions that are made under two or more
plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of
the Code are to be treated as made under a single plan; and if two or more
plans are permissively aggregated, such plans shall satisfy Sections
401(a)(4) and 410(b) as though they were a single plan in accordance with
Section 410(k) of the Code and Section 1.401(k)-1 of the Regulations. For
purposes of calculating the Actual Deferral Percentage of any Highly
Compensated Participant all cash or deferred arrangements of the Employer or
any Affiliated Employer in which such Highly Compensated Participant
participates shall be treated as one cash or deferred arrangement.
(d) In applying the tests set forth in this Section 5.3, the
following rules shall apply:
(1) In the case of a Participant who makes no Elective
Contributions, the Elective Contributions that are to be included in
determining the Participant's Actual Deferral Percentage are zero;
(2) The distribution of excess contributions will include the
income allocable thereto and shall be made on the basis of the amount of
Elective Contributions on behalf of each such Highly Compensated Participant.
The income allocable to the excess contributions includes income for the Plan
Year for which the excess contributions were made in accordance with Section
1.401(k)-1(f)(4)(ii) of the Regulations.
(e) For Plan Years commencing after December 31, 1998 for which
the Employer uses Section 410(b)(4)(B) of the Code to test minimum coverage
compliance, the
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Employer may exclude from consideration all Participants (other than Highly
Compensated Participants) who have not met the minimum age and service
requirements of Section 410(a)(1)(A) of the Code in determining whether the
tests set forth in Subsection 5.3(a) are met.
5.4 AMENDMENT OR REVOCATION OF SALARY REDUCTION AGREEMENT BY COMMITTEE.
The Committee shall determine as of the end of the Plan Year, and at such
other time or times in its discretion, whether one of the Actual Deferral
Percentage tests of Section 5.3 will be satisfied for such Plan Year. In the
event that neither of such Actual Deferral Percentage Tests is satisfied, the
Committee may amend or revoke the Salary Reduction Agreement of any
Participant at any time if it determines that such an amendment or revocation
is necessary to ensure that at least one of the Actual Deferral Percentage
tests of Section 5.3 will be satisfied for any Plan Year. The determination
of whether it is necessary to amend or revoke any Salary Reduction Agreement
shall be made pursuant to Section 5.3 and the procedure for such amendment or
revocation shall be determined pursuant to Section 5.5(a).
5.5 DISTRIBUTION OF EXCESS CONTRIBUTIONS.
(a) If neither of the tests set forth in Section 5.3 are
satisfied, the Committee shall in its discretion, to the extent permissible
under the Code and the Regulations, refund the excess contributions in the
manner described in Section 5.5(b). For purposes of this Section 5.5,
"excess contributions" means, with respect to any Plan Year, the excess of
the aggregate amount of Elective Contributions (and any earnings and losses
allocable thereto prior to distribution) made by Highly Compensated
Participants for such Plan Year, over the maximum amount of such Elective
Contributions that could be made by such Highly Compensated Participants
without violating the requirements of Section 5.3.
(b) If required in order to comply with the provisions of
Subsection 5.3 and the Code, the Committee shall refund excess contributions
for a Plan Year. The distribution of such excess contributions shall be made
to Highly Compensated Participants, to the extent practicable, before the
March 15th of the Plan Year next following the Plan Year for which such
excess contributions were made, but in no event later than the end of the
Plan Year next
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following such Plan Year. Any such distribution shall be made to each Highly
Compensated Participant whose Elective Contributions are the highest for the
Plan Year, until one of the tests of Section 5.3 is satisfied. Matching
Contributions attributable to Elective Contributions returned to a Highly
Compensated Participant shall be distributed as provided in Section 4.6.
5.6 ROLLOVER CONTRIBUTIONS.
(a) A Participant may make a Rollover Contribution to the Plan in
accordance with rules established by the Committee uniformly applied
consisting of an eligible rollover distribution, as defined in Section
11.8(b), from a plan qualified under Section 401(a) of the Code or an
individual retirement account qualified under Section 408(a) of the Code (no
part of which is attributable to any source other than an eligible rollover
distribution from a qualified plan under Section 401(a) of the Code);
provided such eligible rollover distribution is in cash and contributed to
the Plan on or before the 60th day after the day in which such Participant
received such eligible rollover distribution. If a Participant elects to
make a Rollover Contribution, the Committee may require such evidence,
assurances, opinions and certifications, including a statement from the
previous plan that such plan was a qualified plan, that the Committee may
deem necessary to establish to its satisfaction that the amounts to be
contributed qualify as an eligible rollover distribution and will not affect
the qualification of the Plan or the tax-exempt status of the Trust under
Sections 401(a) and 501(a) of the Code, respectively. Except as otherwise
permitted by Section 5.7, in no event shall any assets be transferred to this
Plan from any profit sharing, pension or retirement plan that would cause
this Plan to become a "transferee" plan (within the meaning set forth in
Section 401(a)(11)(B) of the Code).
(b) Any Rollover Contribution shall be allocated to the
appropriate Participant's Rollover Contribution Subaccount which shall be
established and separately accounted for. A Participant shall have at all
times a nonforfeitable right in the amount credited to his or her Rollover
Contribution Subaccount.
(c) Each request by a Participant to make a Rollover Contribution
shall be subject to review by the Committee which shall make a case by case
determination that each
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Rollover Contribution meets the requirements set forth in Section 5.6(a), and
such other requirements or conditions as the Committee may, from time to time
and in its sole discretion, impose; provided, however, that any determination
made by the Committee pursuant to this Section 5.6 shall not have the effect
of discriminating in favor of Participants who are officers, shareholders or
who are Highly Compensated Participants.
5.7 TRUSTEE-TO-TRUSTEE TRANSFER OF ASSETS. Notwithstanding anything in
Section 5.6 to the contrary, in the event of an acquisition by the Employer
or the Plan Sponsor of a company which maintains a plan and trust which are
qualified under Sections 401(a) and 501(a) of the Code, respectively, the
Board of Directors may (but shall not be required to) authorize a
"trustee-to-trustee" transfer of assets from such qualified plan into the
Plan and Trust Fund. The Trustee may require such evidence, assurances,
opinions and certifications, including a statement from the acquired
company's plan that such plan and trust are qualified under Sections 401(a)
and 501(a) of the Code, which the Trustee may deem necessary to establish to
its satisfaction that the amounts to be transferred will not affect the
qualification of the Plan or the tax-exempt status of the Trust under
Sections 401(a) and 501(a) of the Code, respectively.
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SECTION 6. ALLOCATION OF CONTRIBUTIONS
6.1 ESTABLISHMENT OF CASH CONTRIBUTION ACCOUNT. The Committee shall
establish and maintain or cause to be established and maintained with respect
to each Participant a Cash Contribution Account showing his or her interest
under the Plan and in the Trust Fund and all relevant data pertaining
thereto. Each Participant shall be furnished with a written statement of his
or her Cash Contribution Account at least once annually and upon any
distribution to him or her. In maintaining the Cash Contribution Accounts
under the Plan, the Committee can conclusively rely on the valuations of the
Trust Fund in accordance with the Plan. The establishment and maintenance
of, or allocations and credits to, the Cash Contribution Account of any
Participant shall not vest in any Participant any right, title or interest in
and to any Plan assets or benefits, except at the time or times and upon the
terms and conditions and to the extent expressly set forth in the Plan and in
accordance with the terms of the Trust Fund.
6.2 ESTABLISHMENT OF SUBACCOUNTS. Each Participant's Cash Contribution
Account shall contain each of the following applicable subaccounts therein:
(a) All Elective Contributions on behalf of a Participant under
Section 4.1 and Qualified Nonelective Contributions on behalf of a
Participant under Section 4.2(b)(i) shall be credited to the Participant's
Elective Contribution Subaccount.
(b) All Matching Contributions on behalf of a Participant under
Section 4.2(a) shall be allocated and credited to the Participant's Matching
Contribution Subaccount.
(c) All Profit Sharing Contributions on behalf of a Participant
under Section 4.2(b)(ii) shall be allocated and credited to the Participant's
Profit Sharing Subaccount.
(d) All Rollover Contributions on behalf of a Participant under
Section 5.6 shall be allocated and credited to the Participant's Rollover
Contribution Subaccount.
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SECTION 7. SPECIAL ESOP PROVISIONS
7.1 INVESTMENT OF ESOP ACCOUNTS. The ESOP Accounts of all Participants
shall be invested exclusively in Shares, except for cash or cash equivalent
investments held (a) for the limited purpose of making Plan distributions to
Participants and Beneficiaries, (b) pending the investment by the Purchasing
Agent of contributions or other cash receipts in Shares, (c) pending use to
repay an Exempt Loan, (d) for purposes of paying, under the terms described
in the Plan or Trust Agreement, fees and expenses incurred with respect to
the Plan or Trust and not paid for by the Participating Employers or (e) in
the form of de minimis cash balances. Neither any Participating Employer nor
the Purchasing Agent, the Committee or the Trustee shall have any
responsibility or duty to time any transaction involving Shares in order to
anticipate market conditions or changes in stock value, nor shall any such
person have any responsibility or duty to sell Shares held in the ESOP
Accounts (or otherwise to provide investment management for Shares held in
the ESOP Accounts) in order to maximize return or minimize loss.
Participating Employer contributions made in cash, and other cash received by
the Trustee, may be used by the Purchasing Agent to acquire Shares from
shareholders of the Employer or directly from the Employer.
7.2 ALLOCATION TO ESOP ACCOUNTS.
(a) Subject to the provisions of Section 4, the ESOP Account
maintained for each Participant will be credited as of the last day of each
Plan Year with the Participant's allocable share of:
(i) Shares purchased by the Purchasing Agent using cash
contributed by or on behalf of the Participating Employer employing such
Participant (or contributed directly to the Trust Fund) and
(ii) Shares released from the Suspense Subfund pursuant to
Section 7.3 and allocable to the contribution made by or on behalf of such
Participating Employer pursuant to Section 7.4.
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(b) Shares attributable to ESOP Contributions shall be allocated
among the Accounts of Participants who are members of the Allocation Group
for the Plan Year in the same proportion that a Participant's Compensation
during the Plan Year bears to the total Compensation during the Plan Year of
all Participants who are members of the Allocation Group for such Plan Year.
For purposes of the preceding sentence, Compensation earned by a Participant
prior to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii)
shall not be taken into account.
(c) Shares contributed directly to the Trust Fund for a Plan Year
shall be allocated under Section 7.2(a)(i) in the same proportion as Shares
purchased by the Trust Fund and allocated under Section 7.2(b).
7.3 SUSPENSE SUBFUND FOR ESOP ACCOUNTS. Shares acquired by the
Participants' ESOP Accounts through an Exempt Loan shall be added to and
maintained in the Suspense Subfund and shall thereafter be released from the
Suspense Subfund and allocated to Participants' ESOP Accounts as provided in
Sections 7.3 and 7.4. Shares acquired for the Trust Fund with the proceeds
of an Exempt Loan shall be released from the Suspense Subfund as the Exempt
Loan is repaid, in accordance with the provisions of this Section 7.3.
(a) For each Plan Year until the Exempt Loan is fully repaid, the
number of Shares released from the Suspense Subfund shall equal the number of
unreleased Shares immediately before such release for the current Plan Year
multiplied by the "Release Fraction." As used herein, the term "Release
Fraction" shall mean a fraction, the numerator of which is the amount of
principal and interest paid on the Exempt Loan for such current Plan Year and
the denominator of which is the sum of the numerator plus the principal and
interest to be paid on such Exempt Loan for all future years during the term
of such Exempt Loan (determined without reference to any possible extensions
or renewals thereof). For purposes of computing the denominator of the
Release Fraction, if the interest rate on the Exempt Loan is variable, the
interest to be paid in subsequent Plan Years shall be calculated by assuming
that the interest rate
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in effect as of the end of the applicable Plan Year will be the interest rate
in effect for the remainder of the term of the Exempt Loan.
Notwithstanding the foregoing, in the event such Exempt Loan shall
be repaid with the proceeds of a subsequent Exempt Loan (the "Substitute
Loan"), such repayment shall not operate to release all such Shares in the
Suspense Subfund, but, rather, such release shall be effected pursuant to the
foregoing provisions of this Section 7.3(a) on the basis of payments of
principal and interest on such Substitute Loan.
(b) If required by any pledge or similar agreement, or if
permitted by such pledge or agreement and required by the Committee pursuant
to a one-time, irrevocable designation (which shall be made, if at all, in
connection with the making of an Exempt Loan) by the Committee, then, in lieu
of applying the provisions of Section 7.3(a) hereof with respect to an Exempt
Loan, Shares shall be released from the Suspense Subfund as the principal
amount of such Exempt Loan is repaid (without regard to interest payments),
provided the following three conditions are satisfied:
(i) The Exempt Loan shall provide for annual payments of
principal and interest at a cumulative rate that is not less rapid at any
time than level annual payments of such amounts for ten years;
(ii) The interest portion of any payment shall be disregarded
only to the extent it would be treated as interest under standard loan
amortization tables; and
(iii) If the Exempt Loan is renewed, extended or refinanced,
the sum of the expired duration of the Exempt Loan and the renewal, extension
or new Exempt Loan period shall not exceed ten years.
(c) If at any time there is more than one Exempt Loan outstanding,
then separate accounts may be established under the Suspense Subfund for each
such Exempt Loan. Each Exempt Loan for which a separate account is
maintained may be treated separately for purposes of the provisions governing
the release of Shares from the Suspense Subfund under this Section 7.3
(including for purposes of determining whether Section 7.3(a) or Section
7.3(b)
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governs the release of Shares from any particular Suspense Subfund) and for
purposes of the provisions governing the application of Participating
Employer contributions to repay an Exempt Loan under Section 4.2.
(d) All Shares released from the Suspense Subfund during any Plan
Year shall be allocated among Participants as prescribed by Section 7.4.
7.4 DISPOSITION OF SHARES RELEASED FROM SUSPENSE SUBFUND.
(a) Shares released from the Suspense Subfund for a Plan Year in
accordance with Section 7.3 shall be held in the Trust Fund on an unallocated
basis until allocated by the Committee as of last day of the Plan Year.
Shares released from the Suspense Subfund on account of a payment for a Plan
Year of principal or interest on an Exempt Loan, to the extent payment is
made with contributions for such Plan Year, shall be allocated under Section
7.2(a)(ii) in the same proportion as Shares purchased with contributions
under Section 7.2(b).
(b) (i) Shares released from the Suspense Subfund on account of the
payment for a Plan Year of principal or interest on an Exempt Loan to the extent
such payment is made with dividends paid on Shares allocated to ESOP Accounts,
shall be allocated in the same proportion as dividends used to pay principal or
interest on such Exempt Loan would have been allocated under Section 7.9(b) had
such dividends not been so used; and
(ii) Subject to Section 4.2, Shares released from the Suspense
Subfund on account of the payment of principal or interest on an Exempt Loan, to
the extent such payment is made with dividends on Shares not allocated to
Accounts, shall be allocated to those ESOP Accounts and in the same proportion
as Shares released pursuant to Section 7.4(b)(i); provided that Shares so
released shall be otherwise allocated if necessary to satisfy the requirements
of the Code (other than Section 404(k)) and any Regulations thereunder.
(c) All Shares in the Trust Fund, other than the Shares held in the
Suspense Subfund as of the last day of any Plan Year, must be allocated to ESOP
Accounts as of the last day of any Plan Year.
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7.5 LIMITATIONS ON ALLOCATIONS TO ESOP ACCOUNTS. Notwithstanding the
foregoing provisions of this Section 7:
(a) If more than one-third of all ESOP Contributions for a Plan
Year which are deductible only under Section 404(a)(9) of the Code would be
allocated, in the aggregate, to Participants described in Section 414(q) of
the Code, then the Committee may reduce such allocations pro rata in an
amount sufficient to ensure that such ESOP Contributions will be deductible
with respect to such Plan Year; and
(b) Any contributions which are prevented from being allocated due
to the restriction contained in Section 7.5(a) shall be allocated as of the
last day of the Plan Year pursuant to Sections 7.2 and 7.4 as though those
Participants described in Section 414(q) of the Code did not participate in
the Plan.
7.6 ACQUISITION OF SHARES.
(a) Notwithstanding the foregoing provisions of this Section 7, in
the event that Shares are acquired in a transaction to which Section 1042 of
the Code applies, then, in accordance with the Regulations, such Shares shall
not be allocated, directly or indirectly, to prohibited individuals as
defined in Section 409(n)(1) of the Code for the duration of the
nonallocation period (as defined in Section 409(n)(3)(C) of the Code).
(b) If Shares are prevented from being allocated due to the
prohibition contained in Section 7.6(a), the allocation of Shares
attributable to ESOP Contributions (or ESOP Contributions) otherwise provided
under Section 7.2 shall be adjusted to reflect such result.
7.7 EFFECT OF CHANGE IN PLAN SPONSOR'S CAPITALIZATION. Any Shares
received by the Trustee as a result of a stock split, dividend, conversion,
or as a result of a reorganization or other recapitalization of the Plan
Sponsor shall be allocated as of the day on which the Shares are received by
the Trustee in the same manner as the Shares to which they are attributable
are then allocated.
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7.8 TRUSTEE AND COMMITTEE DISCRETION TO ENGAGE IN TRANSACTIONS IN
SHARES. Neither the Purchasing Agent, the Trustee nor the Committee shall be
required to engage in any transaction, including, without limitation,
directing the purchase or sale of Shares, which it determines in its sole
discretion may subject itself, its Participants, the Plan, any Participating
Employer, or any Participant to liability under federal or other state laws.
7.9 VALUATION OF ESOP ACCOUNTS.
(a) Subject to the requirements of Section 7.9(b), the fair market
value of the assets of the ESOP Accounts shall be determined as of each
Valuation Date, in accordance with generally accepted valuation methods and
practices including, but not limited to, in the case of Shares, the use of
one or more independent appraisers.
(b) The value of a Participant's ESOP Account as of any Valuation
Date shall equal the sum of:
(i) The aggregate value (as determined under Section 7.9(a))
of all Shares and dividends on Shares previously allocated to such
Participant's ESOP Account as of such Valuation Date; and
(ii) Subject to Section 7.9(c), the aggregate value (as
determined under Section 7.10(a)) of dividends, if any, received during the
Plan Year on Shares allocated to such Participant's ESOP Account.
(iii) Such Participant's allocable portion (determined in
accordance with the rules set forth in Section 7.4 for determining
Participant's allocable portion of Shares released from the Suspense Subfund)
of the earnings, if any, on all amounts contributed to the Trust Fund for
purposes other than the repayment of an Exempt Loan.
(c) Except as provided in Section 7.7, dividends payable, if any,
with respect to Shares held by the Participant's ESOP Account will be, in the
discretion of the Committee and in conformity with the terms of the Shares on
which such dividends are paid, (i) used for the purpose of repaying one or
more Exempt Loans, (ii) distributed from the Trust Fund to Participants or
their Beneficiaries not later than 90 days after the close of the Plan Year
in which
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they are paid to the Trust Fund, (iii) paid directly to such Participants or
their Beneficiaries, (iv) retained in the Trust Fund and allocated pursuant
to Section 7.9(b), or (v) paid or utilized in a combination of any or all of
the foregoing four options.
(d) The Committee shall establish accounting procedures for the
purpose of making the allocations, valuations and adjustments to
Participant's ESOP Accounts in accordance with the provisions of the Plan.
From time to time, the Committee may modify its accounting procedures for the
purpose of achieving equitable and nondiscriminatory allocations among the
ESOP Accounts of Participants in accordance with the provisions of the Plan.
7.10 ROLE OF PURCHASING AGENT.
(a) All purchases of Shares made by the Trust Fund shall be made
by the Purchasing Agent. The Trustee shall forward to the Purchasing Agent
all amounts contributed to the employee stock ownership plan, and all amounts
to be invested in Shares pursuant to participant investment directions given
pursuant to Sections 8.3, 8.4 and 8.5. Amounts to be invested in Shares
shall be invested in Shares in the amount, in the manner and at the price
determined by the Purchasing Agent in its sole discretion, provided such
price shall be the fair market value of such Shares at the time of purchase.
The Purchasing Agent shall in its sole discretion select the broker-dealer
through which the purchase of such Shares shall be executed. The Purchasing
Agent shall also invest any cash dividends received on any Shares which are
allocated to Participants' Accounts and held as part of the Plan as provided
in Section 5.05(c) of the Trust Agreement.
(b) The Purchasing Agent shall sell Shares only at the direction
of the Trustee, which shall issue such instructions only at the direction of
the Committee; provided that such Committee direction shall not be required
for any sales of Shares required pursuant to the participant investment
directions given pursuant to Sections 8.3, 8.4 or 8.5, or pursuant to the
provisions of Section 13.5 or 13.6.
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SECTION 8. INVESTMENT OF CONTRIBUTIONS, VALUATIONS
AND PARTICIPANTS' CASH CONTRIBUTION ACCOUNTS
8.1 DELIVERY OF CONTRIBUTIONS TO TRUST FUND. All monies, securities or
other property contributed to Participants' Cash Contribution Accounts shall be
delivered to the Trustee under the Trust Fund, to be managed, invested,
reinvested and distributed in accordance with the Plan and the Trust Fund.
8.2 PARTICIPANTS' RIGHT TO SELECT INVESTMENTS. Each Participant shall
have the right to invest his or her Cash Contribution Account among one or more
investment funds selected by the Company, which may include a fund established
for investment in Shares.
8.3 PARTICIPANT INVESTMENT ELECTION. As of any date permitted by the
Committee, a Participant may, in accordance with the rules of the Committee
uniformly applied, specify the percentage (in minimum multiples as may be
determined from time to time by the Committee) of contributions which are made
to the Participant's Cash Contribution Account that shall be invested in
investment funds selected by the Committee. An investment election may be made
separately with respect to (i) the aggregate of the Participant's Elective
Contribution Subaccount, Matching Contribution Subaccount, and Rollover
Contribution Subaccount and (ii) the Participant's Profit Sharing Subaccount.
8.4 CHANGE IN INVESTMENT ELECTION FOR FUTURE CONTRIBUTIONS. Any
investment direction specified by a Participant shall be deemed to be a
continuing direction until changed. A Participant may change an investment
direction as to future contributions made by such Participant or on his or her
behalf to the subaccounts of his or her Cash Contribution Account as of any day
permitted by the Committee in accordance with the rules of the Committee
uniformly applied.
8.5 CHANGE IN INVESTMENT ELECTION FOR PRIOR CONTRIBUTIONS. As of any date
permitted by the Committee, a Participant may change the percentages (in minimum
multiples as may be determined from time to time by the Committee) in which the
investment of the portion of his or
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her Cash Contribution Account attributable to prior contributions shall be
allocated among the funds maintained by the Trustee. Such changes of
investment allocation may be made separately with respect to (i) the
aggregate of the Participant's Elective Contribution Subaccount, Matching
Contribution Subaccount, and Rollover Contribution Subaccount, and (ii) the
Participant's Profit Sharing Subaccount.
8.6 VALUATION OF CASH CONTRIBUTION ACCOUNTS.
(a) As of each Valuation Date, Participants' Cash Contribution
Accounts shall be valued pursuant to the terms of the Plan. Such valuation
shall be conclusive and binding upon all persons having an interest in the
Trust Fund.
(b) The Committee shall adjust the value of each Elective
Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing
Subaccount, or Rollover Contribution Subaccount, as the case may be,
maintained under Participants' Cash Contribution Accounts as of each
Valuation Date to reflect the effect of income received and accrued, realized
and unrealized profits and losses, and all other transactions of the
preceding period. Such adjustments shall be made with respect to the period
since the next preceding Valuation Date by (i) deducting from each such
Subaccount the total of all payments made from such Subaccount during such
period, (ii) adding to or deducting from, as the case may be, each such
Subaccount such proportion of each item of income, profit or loss as the
amount in such Subaccount as of the next preceding Valuation Date bears to
the total of the amounts in all of such Participants' Elective Contribution
Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or
Rollover Contribution Subaccount, as the case may be, as of the preceding
Valuation Date and (iii) adding contributions to each such Elective
Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing
Subaccount, or Rollover Contribution Subaccount, as the case may be, pursuant
to Sections 4 and 5 of the Plan. In making such allocations, the Committee
can conclusively rely on the valuations of the Subaccounts by the Trustee in
accordance with the Plan and the Trust.
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SECTION 9. RETIREMENT DATES
9.1 NORMAL RETIREMENT DATE. The Normal Retirement Date of a
Participant shall be his or her 65th birthday. Upon attainment of his or her
Normal Retirement Date, a Participant shall have a nonforfeitable right to
100% of his or her Account.
9.2 DEFERRED RETIREMENT DATE. A Participant who remains in Service
after his or her Normal Retirement Date may retire on a Deferred Retirement
Date which shall be the first day of the month coincident with or next
following his or her termination of Service or as specified in a written
application to the Committee.
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SECTION 10. ELIGIBILITY FOR PAYMENT OF ACCOUNTS
AND VESTED INTERESTS
10.1 PARTICIPANTS' RIGHT TO ACCOUNT UPON TERMINATION DUE TO RETIREMENT,
DEATH OR DISABILITY.
(a) A Participant shall have a nonforfeitable right to his or her
Account upon the occurrence of any of the following events while employed by
the Employer:
(i) attainment of his or her Retirement Date;
(ii) his or her death; or
(iii) his or her Disability.
(b) Upon the termination of Service of any Participant on or after
his or her Retirement Date or by reason of his or her death or Disability
("Terminated Participant"), the Terminated Participant (or, in the event of
the Participant's death, his or her Beneficiary) shall be entitled to an
amount equal to the Terminated Participant's Account, including any
subsequent contribution allocated to the Terminated Participant's Account
pursuant to Sections 6 or 7 with respect to the Plan Year in which the
Participant's Service is terminated. The Participant's Account shall be
distributable, in accordance with the methods and rules of distribution
described in Section 11, as soon as practicable following the Participant's
termination of Service. The value of the Participant's Account shall be
determined as of the Valuation Date coincident with or immediately preceding
the date of distribution of the Participant's Account.
10.2 PARTICIPANTS' RIGHT TO ACCOUNT UPON OTHER TERMINATION OF SERVICE.
Upon the termination of Service of any Participant prior to his or her
Retirement Date for any reason other than death or Disability, the Terminated
Participant shall be entitled to receive an amount equal to the sum of (i)
100% of the Participant's Elective Contribution Subaccount, Matching
Contribution Subaccount, and Rollover Contribution Subaccount and (ii) the
Participant's Vested Interest in his or her Profit Sharing Subaccount and
ESOP Account, including the Participant's Vested Interest in any subsequent
contribution allocated to the Participant's Account pursuant to
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Sections 6 or 7 with respect to the Plan Year in which the Participant's
Service terminated. The Participant's Account shall be distributable, in
accordance with the methods and rules of distribution described in Section
11, as soon as practicable following the Valuation Date immediately following
the Participant's termination of Service. The value of the Participant's
Account shall be determined as of the Valuation Date coincident with or
immediately preceding the date of distribution of the Participant's Account.
If such Terminated Participant's Vested Interest is less than 100 percent,
the non-vested balance of such Participant's Profit Sharing Subaccount and
ESOP Account shall be forfeited and reallocated pursuant to Section 4.5 as of
the last day of the earlier of (i) the Plan Year in which the Participant's
Account is distributed, or (ii) the Plan Year in which the Participant incurs
a Total Break in Service.
10.3 VESTING SCHEDULE FOR DETERMINING VESTED INTERESTS. For all
purposes of this Plan, a Participant's Vested Interest in his or her Profit
Sharing Subaccount and ESOP Account shall consist of (i) the Participant's
percentage of his or her Profit Sharing Subaccount and (ii) the percentage of
the Participant's ESOP Account, both as determined from the following vesting
schedule on the basis of the number of Years of Service which the Participant
has completed as of the date of the Participant's termination of Service.
VESTING SCHEDULE
<TABLE>
<CAPTION>
Years of Service Percentage
---------------- ----------
<S> <C>
Less than three years 0%
Three years but less than four years 25%
Four years but less than five years 50%
Five years or more 100%
</TABLE>
10.4 BREAKS IN SERVICE. If a Participant's Service is terminated prior
to his or her Retirement Date for any reason other than the Participant's
death or Disability prior to completing three Years of Service, and such
Participant incurs a Total Break in Service, such Participant shall not be
entitled to any benefit attributable to amounts allocated to the
Participant's Profit Sharing Subaccount or ESOP Account prior to such Total
Break in Service.
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<PAGE>
If a Participant returns to Service, Years of Service before such return
shall be counted, in addition to Years of Service following such return, in
determining the Participant's Vested Interest in the amount credited to the
Participant's Profit Sharing Subaccount or ESOP Account subsequent to the
Participant's return to Service. If such Participant does not complete one
Year of Service following his or her return, then the Participant shall not
be entitled to any further benefit under the Plan and the non-vested balance
of any Profit Sharing Contribution or ESOP Contributions credited or
recredited to such Participant's Profit Sharing Subaccount or ESOP Account
subsequent to the Participant's return shall be forfeited and reallocated
pursuant to Section 4.5 upon the Participant's termination of Service. All
forfeitures shall occur in conformity with the ordering rules of Section
54.4975-11(d) of the Regulations.
10.5 PARTICIPANT'S RIGHT TO RESTORATION OF ACCOUNT UPON RETURN TO
SERVICE. If a Terminated Participant who had a vested interest in such
Participant's Profit Sharing Subaccount or ESOP Account returns to Service
prior to incurring a Total Break in Service, the non-vested balance of the
Terminated Participant's Account, if any, forfeited pursuant to Section 10.2
shall be recredited to such Participant's Account, provided that, not later
than the fifth anniversary of the first date on which the Participant is
subsequently employed, such Participant repays the full amount of any
distribution made to the Participant upon his or her prior termination of
Service. Any amount so repaid, together with any non-vested portion of such
Participant's Account recredited pursuant to this Section 10.5, shall be
invested in the Trust Fund. If such Participant fails to make a repayment of
any distributed amounts pursuant to this Section 10.5, the non-vested portion
of such Participant's Account, if any, shall not be recredited.
10.6 PARTICIPANT'S RIGHT TO ACCOUNT UPON DEATH AFTER TERMINATION OF
SERVICE. Subject to the provisions of Section 10, if a Terminated
Participant dies before payment of the full value of his or her Account from
the Trust Fund, an amount equal to the current value of the unpaid portion of
the Participant's Vested Interest in his or her Account, including any
subsequent contribution allocated to the Terminated Participant's Account
pursuant to Sections 6 or 7 with respect to the Plan Year in which the
Participant's Service is terminated, shall be distributable, in
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accordance with the methods and rules of distribution described in Section
11, as soon as practicable following the Participant's death. The value of
the Participant's Account shall be determined as of the Valuation Date
coincident with or immediately preceding the date of distribution of the
Participant's Account.
10.7 AMENDMENT OF VESTING SCHEDULE. If the vesting schedule contained
in Section 10.3 is amended, each Participant who has completed at least three
(3) Years of Service may elect, during the election period specified in this
Section, to have his or her vested percentage determined without regard to
such amendment. For purposes of this Section, the election period shall
begin as of the date on which the amendment changing the vesting schedule is
adopted, and shall end on the latest of the following dates: (i) the date
occurring sixty (60) days after the Plan amendment is adopted; (ii) the date
which is sixty (60) days after the day on which the Plan amendment becomes
effective; (iii) the date which is sixty (60) days after the day the
Participant is issued written notice of the Plan amendment by the Committee;
or (iv) such later date as may be specified by the Committee. The election
provided for in this Section shall be made in writing and shall be
irrevocable when made.
10.8 DISTRIBUTION FOLLOWING ATTAINMENT OF AGE 59-1/2 TO FORMER
PARTICIPANTS OF THE HAMPTON PENSION SERVICES, INC. 401(k) RETIREMENT SAVINGS
PLAN. A Participant who was employed by Hampton Pension Services, Inc. on
November 6, 1995 shall be entitled to receive, at any time following the date
such Participant attains age 59-1/2, a distribution of all or any portion of
the Participant's Account, to the extent attributable to any amounts that
were transferred to the Plan from such Participant's former account in The
Hampton Pension Services, Inc. 401(k) Retirement Savings Plan.
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<PAGE>
SECTION 11. METHOD OF PAYMENT OF ACCOUNTS
AND WITHDRAWALS
11.1 METHODS OF PAYMENT. Any benefit payable under the Plan, except
as otherwise provided in Section 11.2 shall be payable as soon as practicable
following the last day of the calendar month in which falls a Participant's
termination of Service (or other event requiring a distribution under the Plan),
in one lump sum payment from the Trust Fund, provided that the Participant may
elect to direct the Committee to directly transfer all or any portion of his or
her "eligible rollover distribution" (as defined in Section 11.8 below) to
another tax-qualified plan pursuant to Section 401(a)(31) of the Code. A
Participant who has no Vested Interest in his or her Account upon his or her
termination of Service will be deemed to have received a full distribution of
his or her Account as of such date. A Participant may also elect to receive a
distribution of his or her Account as soon as practicable following the first
anniversary of the last day of the calendar month in which occurs such
termination of Service (or other event requiring a distribution under the Plan),
or as soon as practicable following the Participant's Normal Retirement Date.
Subject to the provisions of Section 11.3 with respect to the
distribution of Shares, any distribution hereunder shall be made in cash;
provided, however, that pursuant to procedures adopted from time to time by the
Committee, a Participant may elect to receive a distribution in the form of
shares of the assets in which such Participant's Account was invested
immediately prior to the distribution, but only if such distribution is made
directly to a rollover IRA established with the Employer as custodian.
11.2 COMMENCEMENT OF PAYMENT. Notwithstanding any other provision of the
Plan to the contrary, (i) if a Participant has a Vested Interest in his or her
Account with a value of $3,500 or less it shall be distributed in one lump sum
as soon as is administratively feasible following the last day of the calendar
month in which such Participant's termination of employment occurs, and (ii) if
a Participant has a Vested Interest in his or her Account with a value of more
than
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<PAGE>
$3,500 it shall not commence to be distributed without the consent of the
Participant before the Participant's Normal Retirement Date.
In the absence of receipt of such consent by the Committee, payment
of the benefit to such Participant shall commence as soon as practicable
after the Participant's attainment of his or her Normal Retirement Date,
which benefit shall be in an amount equal to the value of the Participant's
distributable Account as of the Valuation Date coincident with or immediately
following the Participant's attainment of his or her Normal Retirement Date.
In any case where distribution of any benefit amount from the Participant's
Cash Contribution Account is to be deferred, the Committee shall either (i)
establish or cause to be established a special account for the benefit of the
former Participant, to be invested by the Trustee in a fixed investment
account established by the Trustee or (ii) cause all amounts in the
Participant's Cash Contribution Account deferred by the Participant to be
invested at the Participant's election in the same manner as the normal Cash
Contribution Accounts maintained for Participants under to the Plan.
11.3 SPECIAL RULES FOR DISTRIBUTION OF SHARES.
(a) Distribution of a Participant's Vested Interest from his or
her Account which is invested in Shares will be made entirely in whole
Shares, with the value of any fractional interest in Shares paid in cash;
provided, that pursuant to procedures adopted from time to time by the
Committee, a Participant may elect to receive such distribution in the form
of cash. Any cash or other property in a Participant's ESOP Account will be
used by the Purchasing Agent to acquire Shares, valued as of the last day of
the calendar month in which occurs (i) the Participant's election to receive
a distribution of his or her Account pursuant to Section 11.1, (ii) the
Participant's termination of Service, in the case of a distribution pursuant
to Section 11.2(i), or (iii) the Participant's Normal Retirement Date (or the
Participant's death, if earlier), in the case of a distribution pursuant to
Section 11.2(ii) to a Participant who failed to consent to a distribution
prior to his or her Normal Retirement Date (the "Share Conversion Date").
Notwithstanding the foregoing, if applicable corporate charter or bylaw
provisions restrict
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<PAGE>
ownership of substantially all outstanding Shares to Employees or to a plan
or trust described in Section 401(a) of the Code, then any distribution of a
Participant's Vested Interest in the Participant's ESOP Account shall be in
cash. When a distribution consists in whole or in part of Shares, and if
such Shares consists of more than one class of securities, the distribution
of such Shares shall consist of substantially the same proportion of each
such class of Shares as such classes of Shares represent proportions of the
Participant's Account. If the record date for dividends payable with respect
to Shares distributable to a Participant occurs following the Share
Conversion Date, such dividends shall not be considered attributable to such
Shares, but shall be considered as earnings of the Fund and allocated among
Participants' Accounts pursuant to Section 8.6(b).
(b) Notwithstanding anything in Section 11 to the contrary, in the
discretion of the Committee, Section 11.1 may not apply to Shares held in a
Participant's ESOP Account until the close of the Plan Year in which any
Exempt Loan used to acquire such Shares is repaid in full.
(c) If at the time of distribution, Shares distributed from the
Trust Fund that were acquired with the proceeds of an Exempt Loan are not
treated as "readily tradable on an established market" within the meaning of
Section 409(h) of the Code and Regulations, such Shares shall be subject to a
put option in the hands of a Qualified Holder by which such Qualified Holder
may sell all or any part of such Shares to the Trust. Should the Trust
decline to purchase all or any part of such Shares, the Employer shall
purchase those Shares that the Trust declines to purchase. The put option
shall be subject to the following conditions:
(i) The term "Qualified Holder" shall mean the Participant or
Beneficiary receiving the distribution of such Shares, any other party to whom
the Shares are transferred by gift or reason of death, or any trustee of an
individual retirement account (as defined under Code Section 408) to which all
or any portion of the distributed Shares is transferred pursuant to a tax-free
"rollover" transaction satisfying the requirements of Sections 402 and 408 of
the Code.
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<PAGE>
(ii) During the 60-day period following any distribution of
such Shares, a Qualified Holder shall have the right to require the Trust or
the Employer to purchase all or a portion of the distributed Shares held by
the Qualified Holder. The purchase price to be paid for any such Shares
shall be their fair market value determined as of the Valuation Date
coinciding with or immediately preceding the exercise of the put option under
this Section 11.3(c)(ii), provided that in the case of a transaction between
the Plan and a "disqualified person" within the meaning of Section 4975(e)(2)
of the Code, such fair market value shall be determined as of the date of the
transaction.
(iii) If a Qualified Holder shall fail to exercise such put
option, the put option shall temporarily lapse upon the expiration of the
60-day period. As soon as practicable following the last day of the Plan
Year in which the 60-day option period expires, the Employer shall notify the
non-electing Qualified Holder (if he or she is then a shareholder of record)
of the valuation of the Shares as of that date. During the 60-day period
immediately following receipt of such valuation notice, the Qualified Holder
shall again have the right to require the Employer to purchase all or any
portion of the distributed Shares. The purchase price to be paid therefor
shall be based on the valuation of the Shares as of the Valuation Date
coinciding with or immediately preceding the exercise of the option under
this Section 11.3(c)(iii), provided that in the case of a transaction between
the Plan and a "disqualified person" within the meaning of Section 4975(e)(2)
of the Code, such fair market value shall be determined as of the date of the
transaction.
(iv) The foregoing put options under Section 11.3(c)(ii) and
(iii) hereof shall be effective solely against the Employer and shall not
obligate the Plan or Trust in any manner.
(v) Except as otherwise required or permitted by the Code,
the put options under this Section 11.3(c) shall satisfy the requirements of
Section 54.4975-7(b) of the Treasury Regulations to the extent, if any, that
such requirements apply to such put options.
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<PAGE>
If a Qualified Holder exercises a put option under this
Section 11.3(c), payment for the Shares shall be made in substantially equal
annual payments over a period beginning not later than 30 days after the
exercise of the put option and not exceeding five years (provided that
adequate security and reasonable interest are provided with respect to unpaid
amounts).
Except as provided in this Section 11.3(c) or in Section 11.2,
no shares acquired with the proceeds of an Exempt Loan may be subject to a
put, call or other option, or buy-sell or similar arrangement while held by
or distributed from the Plan. The rights and protections set forth in this
Section 11.3(c) shall be non-terminable.
11.4 PAYMENTS TO SURVIVING SPOUSE OR BENEFICIARY. If a Participant or
former Participant dies before the commencement of his or her benefits under
the Plan, such Participant's or former Participant's Vested Interest in his
or her Account is payable in full to his or her Surviving Spouse. If such
Participant has no Surviving Spouse, he or she may designate a Beneficiary
pursuant to Section 14. A Participant may with the written consent of his or
her spouse elect to designate a Beneficiary other than or in addition to his
or her spouse. The written consent of the spouse must acknowledge the effect
of such election and must be witnessed by a representative of the Plan or a
notary public. Any such election may not be changed without spousal consent.
Such an election or revocation must be made in accordance with the
procedures developed by the Committee in accordance with the Code and
Regulations.
11.5 LATEST DATE FOR COMMENCEMENT OF BENEFITS.
(a) Payments will commence no later than 60 days following the
latest of the close of the Plan Year in which:
(i) the Participant attains his or her Normal Retirement
Date,
(ii) occurs the 10th anniversary of the year in which the
Participant commenced participation in the Plan, or
(iii) the Participant terminates his or her Service with the
Employer.
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<PAGE>
(b) Notwithstanding the provisions of the foregoing sentence, if
the amount payable cannot be ascertained, or, subject to the provisions of
Section 20.6, the Participant cannot be located after reasonable efforts, a
payment retroactive to the date determined under the foregoing sentence may
be made not later than 60 days after the earliest date on which the amount of
such payment can be ascertained under the Plan or the date on which the
Participant is located (whichever is applicable).
(c) Notwithstanding any other provision of the Plan, benefits
payable to a Participant who is a five percent (5%) owner, as defined in
Section 416 of the Code with respect to the Plan Year ending in the calendar
year in which the Participant attains age 70 1/2, shall commence no later than
April 1st of the calendar year following the calendar year in which such
Participant attains age 70 1/2. Commencing July 1, 1997, to the extent
permitted by the Code and Regulations, Participants who are not five percent
(5%) owners may elect to commence distribution of their benefits on April 1st
of the calendar year following the later of the calendar year in which such
Participant attains age 70 1/2 or the calendar year following the calendar
year in which such Participant retires.
(d) If a Participant dies before benefits have commenced,
distributions to any Surviving Spouse or Beneficiary shall be made as soon as
administratively feasible, but not later than five years after such
Participant's death. In the event that payment is made to the Participant's
Surviving Spouse, such distribution shall not commence later than the date on
which such Participant would have had to commence distributions under Section
401(a)(9) of the Code (or, in either case, on any later date prescribed by
Regulations). If the Participant's Surviving Spouse dies after such
Participant's death but before distribution has been made to such Surviving
Spouse, the Section 11.5(d) shall be applied to require payment of any
benefits as if such Surviving Spouse were the Participant.
(e) Pursuant to Regulations, any benefit paid to a child shall be
treated as if paid to a Participant's Surviving Spouse if such amount would
become payable to such Surviving Spouse on the child's attaining majority, or
other designated event permitted by Regulations.
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<PAGE>
11.6 REDIRECTION OF INVESTMENT OF ESOP ACCOUNT. Effective March 1,
1990, upon both attaining age 50 and completing five Years of Service, a
Participant shall be permitted to direct the Plan to transfer all or any
portion of the Vested Interest in the Participant's ESOP Account to the
Participant's Cash Contribution Account. Under rules prescribed by the
Committee, such directions shall be permitted during semi-annual periods, to
be determined by the Committee, effective as soon as administratively
feasible, but not later than 30 days from the date on which such direction is
given, and shall be made in ten percent (10%) increments of the Participant's
Vested Interest in his or her ESOP Account. In the event that the
Participant's Account does not provide at least three investment options to
the Participant other than investment in Shares, the Committee shall provide
diversification options to any Participant required to be given such
diversification options under Section 401(a)(28)(B) of the Code in a manner
consistent with the Code. Notwithstanding the foregoing, the ability to make
transfers may be restricted by the Committee to the extent necessary to
comply with any applicable federal securities laws (including Rule 144);
provided, however, that in no event shall a Participant be prevented from
transferring any amount necessary in order to meet the diversification
requirements set forth in Section 401(a)(28)(B) of the Code.
11.7 HARDSHIP WITHDRAWALS.
(a) A Participant who is an Employee may elect to withdraw all or
any portion of the Vested Interest in his or her Cash Contribution Account
attributable to Elective Contributions (but excluding any earnings on
Elective Contributions accruing after December 31, 1988), Profit Sharing
Contributions (if, and only if, the withdrawal is occasioned by a life
threatening illness to the Participant) by giving written notice thereof to
the Committee specifying such date, which shall not be less than 30 days
following the date such notice is given to the Committee. Such notice shall
designate that the hardship withdrawal shall be withdrawn from the investment
funds in which the Participant has directed investment of the Participant's
Cash Contribution Account.
(b) The Committee may authorize a hardship withdrawal only for:
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<PAGE>
(i) medical expenses described in Section 213(d) of the Code
incurred or immediately anticipated by the Participant, the Participant's
spouse, or any dependents of the Participant (as defined in Section 152 of the
Code);
(ii) the purchase (excluding mortgage payments) of a principal
residence of the Participant;
(iii) the payment of tuition and related educational fees for
the next 12 months of post-secondary education for the Participant or the
Participant's spouse, children, or dependents; or
(iv) the need to prevent the eviction of the Participant from
the Participant's principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(c) A hardship withdrawal may be authorized only to the extent
necessary to satisfy the hardship. A distribution will be deemed to be
necessary to satisfy the hardship only if the distribution is not in excess of
the amount of the immediate and heavy financial need of the Participant and such
Participant's tax obligations as a result of such distribution and the Employee
certifies in writing that such a hardship exists (and the Committee has no
knowledge to the contrary); provided that the Committee may set stricter
standards for making such determination on a nondiscriminatory basis; and
provided further that the Participant must obtain the written consent of his or
her spouse to the extent required by law. The Committee's decision shall be
final and binding on the Participant.
(d) In the event that a Participant's Vested Interest is less than
100% at the time of making a withdrawal from his Profit Sharing Subaccount
pursuant to Section 11.7(a), the Participant's Vested Interest in his or her
Profit Sharing Subaccount at any relevant time thereafter shall be equal to an
amount ("X") determined by the following formula: X = P [AB + (R x D)] - (R x
D). For purposes of applying the formula: P is the Participant's Vested
Interest at the relevant time, AB is the balance of the Participant's Profit
Sharing Subaccount at the relevant time; D is the amount distributed to the
Participant pursuant to Section 11.7(a); and
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<PAGE>
R is the ratio of the Participant's Profit Sharing Subaccount balance at the
relevant time to the Participant's Profit Sharing Subaccount balance
immediately after the distribution pursuant to Section 11.7(a).
11.8 DIRECT ROLLOVERS TO ANOTHER QUALIFIED PLAN OR IRA.
(a) This Section 11.8 applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Section 11.8, a
distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a direct
rollover.
(b) An eligible rollover distribution is any distribution of all or
any portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributee's
designated Beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section 401(a)(9)
of the Code; and the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(c) An eligible retirement plan is an individual retirement account
described in section 408(a) of the Code, an individual retirement annuity
described in section 408(b) of the Code, an annuity plan described in section
403(a) of the Code or a qualified trust described in section 401(a) of the Code,
that accepts the distributee's eligible rollover distribution. However, in the
case of an eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual retirement
annuity.
(d) A distributee includes a Participant or former Participant. In
addition, the Participant's or former Participant's Surviving Spouse and the
Participant's or former Participant's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as
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<PAGE>
defined in Section 414(p) of the Code, are distributees with regard to the
interest of the Surviving Spouse, spouse or former spouse.
(e) A direct rollover is a payment by the Plan to the eligible
retirement plan specified by the distributee.
(f) If a distribution is one to which Sections 401(a)(11) and 417 of
the Code do not apply, such distribution may commence less than 30 days after
the notice required under Section 1.411(a)-11(c) of the Regulations is given,
provided that:
(1) the Committee clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively
elects a distribution.
11.9 CERTAIN SECURITIES LAW RESTRICTIONS. Any distribution of Shares
pursuant to this Section 11 shall be subject to all applicable laws, rules and
regulations and to such approvals by stock exchanges or governmental agencies as
may be deemed necessary or appropriate by the Board of Directors. Each
distributee may be required to give the Employer a written representation that
such distributee will not be involved in a violation of state or federal
securities laws, including the Securities Act of 1933, as amended; the form of
such written representation will be prescribed by the Board of Directors.
11.10 PARTICIPANT LOANS.
(a) Upon a Participant's written request the Committee may direct the
Trustee to make a loan to such Participant from such Participant's Account.
Loans to Participants pursuant to this Section 11.10 shall be administered by
the Committee and shall be subject to a Participant Loan Policy and such other
procedures as may be adopted from time to time by the Committee. The Company
shall not have the discretion to refuse a loan request, so long as the
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terms of the loan comply with the requirements of this Section 11.10 and the
Participant Loan Policy. The terms of the loan shall be determined by the
Committee, subject to the limits set forth in this Section, and shall be
evidenced by the Participant's promissory note. Loans shall be held in a
segregated Account of the Trust. An Employee who has made a Rollover
Contribution shall be considered a Participant for purposes of this Section,
even if such Employee has not yet become a Participant pursuant to Section 3.
(b) The aggregate outstanding balance of all loans to a
Participant from this Plan and all other qualified plans maintained by the
Employer, when added to any principal repayments on any participant loans
made within the twelve-month period preceding the date on which the loan is
made, may not exceed the lesser of (i) $50,000 or (ii) 50% of the vested
interest in the Participant's Account as of the day of making the loan.
(c) Principal and interest shall be repaid in level, periodic
installments by payroll deductions not less frequent than quarterly over a
definite period of time not to exceed five (5) years, provided, however, that
in the case of a loan the proceeds of which are used by the Participant to
acquire a principal residence of the Participant, the loan may be repayable
over a reasonable period of time in excess of five (5) years as determined by
the Committee.
(d) All loans shall be secured by a lien on the Participant's
interest in the trust. The amount of the loan may not exceed fifty percent
(50%) of the value of the Participant's vested Account balance at the time
the loan is made. The Committee may determine that any distribution made
pursuant to the Plan shall be reduced by an amount up to the outstanding
principal and interest balance of the loan.
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<PAGE>
(e) Any loan made pursuant to this Section 11.10 must not
constitute a prohibited transaction as defined in Section 4975 of the Code.
(f) Loan repayments will be suspended under the Plan as permitted
under Section 414(u)(4) of the Code.
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SECTION 12. MAXIMUM AMOUNT OF ALLOCATION
12.1 SECTION 415 LIMITATIONS. Annual additions to a Participant's Account
with respect to any Plan Year may not exceed the limitations set forth in
Section 415 of the Code, which are incorporated herein by reference. For
these purposes, (i) "annual additions" shall have the meaning set forth in
Section 415(c)(2) of the Code, as modified elsewhere in the Code and the
Regulations, (ii) the limitation year shall mean the Plan Year unless any
other twelve consecutive month period is designated pursuant to a written
resolution adopted by the Employer, (iii) "compensation" shall have the
meaning elected by the Employer pursuant to Section 415(c)(3) of the Code,
and (iv) "annual additions" shall include annual additions under all other
defined contribution plans maintained by the Employer or any Affiliated
Employer. Effective for Plan Years beginning on or after January 1, 1998,
"compensation" shall be computed without reduction for a Participant's
elective deferrals under Section 402(g)(3) of the Code or for contributions
made by the Employer or the Participant under Section 125 of the Code. If
the requirements of Section 7.5(a) are satisfied, the term "annual additions"
shall not include any amounts credited to the Participant's Account (i)
resulting from rollover contributions, (ii) due to Participating Employer
contributions relating to interest payments on an Exempt Loan deductible
under Section 404(a)(9)(B) of the Code, or (iii) attributable to a forfeiture
of Shares acquired with the proceeds of an Exempt Loan.
Effective for limitation years commencing prior to January 1, 1999, if a
Participant in the Plan also participates in any defined benefit plan (as
defined in Sections 414(j) and 415(k) of the Code) maintained by the Employer or
any Affiliated Employer, in the event that in any Plan Year the sum of the
Participant's Defined Benefit Fraction (as defined in Section 415(e)(2) of the
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Code) and the Participant's Defined Contribution Fraction (as defined in
Section 415(e)(3) of the Code) exceed 1.0, the benefit under such defined
benefit plan or plans shall be reduced in accordance with the provisions of
that plan or those plans, so that the sum of such fractions with respect to
the Participant will not exceed 1.0. If this reduction does not ensure that
the limitation set forth in Section 12.1 is not exceeded, then the annual
addition to any defined contribution plan, other than the Plan, shall be
reduced in accordance with the provisions of that plan but only to the extent
necessary to ensure that such limitation is not exceeded.
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12.2 REFUND OR FORFEITURE OF AMOUNTS IN EXCESS OF SECTION 415 LIMITS.
(a) In the event that amounts which would otherwise be allocated
to a Participant's Account under the Plan must be reduced by reason of the
limitations of Section 12.1, then such reduction shall be made in the
following order or priority, but only to the extent necessary:
(i) first the Participant's Profit Sharing Contributions
shall be forfeited and reallocated pursuant to this Section 12.2; and then
(ii) the Participant's Matching Contributions shall be
forfeited and reallocated pursuant to this Section 12.2; and then
(iii) the Participant's Elective Contributions shall be
refunded to the Participant; and then
(iv) Shares allocated to the Participant's Account
attributable to ESOP Contributions shall be forfeited and reallocated
pursuant to this Section 12.2.
(b) Forfeitures arising under the Plan and allocable to such
Participant in respect of such Plan Year shall be reallocated to the Accounts
of other Participants as of the end of the Plan Year for which such reduction
is made in the manner provided under Section 4.5 above.
(c) If, with respect to any Plan Year, there is an excess
contribution on account of the limitations contained in this Section 12.2,
and such excess cannot be fully allocated in accordance with Section 12.2(b)
because of the limitations prescribed in this Section 12, the amount of such
excess which cannot be so allocated shall be held in suspense and allocated
in the succeeding Plan Year prior to any other contributions by the Employer
for such Plan Year.
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SECTION 13. VOTING RIGHTS
13.1 VOTING OF SHARES IN GENERAL. Except as otherwise required by the
Act, the Code and the Regulations, all voting rights of Shares held in
Participants' Accounts shall be exercised by the Purchasing Agent only as
directed by the Participants or their Beneficiaries in accordance with the
provisions of this Section 13.
13.2 VOTING OF ALLOCATED SHARES.
(a) If any Participating Employer has a registration-type class of
securities (as defined in Section 409(e)(4) of the Code or any successor
statute thereto), then, with respect to all corporate matters submitted to
shareholders, all Shares (including fractional interests in Shares) allocated
and credited to the Accounts of Participants shall be voted in accordance
with the directions of such Participants as given to the Purchasing Agent
(subject to the provisions of Sections 13.4 and 13.6).
(b) If no Participating Employer has a registration-type class of
securities (as defined in Section 409(e)(4) of the Code or any successor
statute thereto), then, only with respect to corporate matters relating to a
corporate merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business, or such other similar transaction that Regulations require, all
Shares allocated and credited to the Accounts of Participants shall be voted
only in accordance with the directions of such Participants as given to the
Purchasing Agent. Any allocated Shares with respect to which Participants
are entitled to vote pursuant to this Section 13.2 and for which such
directions are not received by the Purchasing Agent shall not be voted by the
Purchasing Agent. The Purchasing Agent shall vote all Shares held in the
Trust Fund allocated to the Accounts of Participants from whom voting
instructions are not required to be solicited under Section 13.2 only as the
Purchasing Agent directs in the Purchasing Agent's sole discretion in
accordance with the Act, after the Purchasing Agent determines such action to
be in the best interests of the Participants and their Beneficiaries.
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13.3 MECHANICS OF VOTING ALLOCATED SHARES. If Participants are entitled
under Section 13.2 to direct the vote with respect to allocated Shares, then,
at least 30 days before each annual or special shareholders' meeting of the
Employer (or, if such schedule cannot be met, as early as practicable before
such meeting), the Committee shall furnish to each Participant a copy of the
proxy solicitation material sent generally to shareholders, together with a
form requesting confidential instructions concerning the manner in which the
Shares allocated to such Participant's Account (including fractional Shares
to 1/1000th of a Share) are to be voted. Upon timely receipt of such
instructions, the Purchasing Agent (after combining votes of fractional
Shares to give effect to the greatest extent possible to Participants'
instructions) shall vote the Shares as instructed. The instructions received
by the Purchasing Agent from each Participant shall be held by the Purchasing
Agent in strict confidence and shall not be divulged or released to any
person, including, without limitation, any officers or Employees of any
Participating Employer, or of any other Employer. The Trustee, the Employer,
the Purchasing Agent and the Committee shall not make recommendations to
Participants on whether to vote or how to vote.
13.4 VOTING OF UNALLOCATED SHARES AND UNVOTED ALLOCATED SHARES. With
respect to unallocated shares held in the Trust Fund and allocated shares
held in the Trust Fund for which no voting instructions are received, the
Purchasing Agent shall vote such Shares in the same proportions as the Shares
for which Participant voting instructions have been received.
13.5 TENDER OR EXCHANGE OF ALLOCATED SHARES. The Committee shall notify
each Participant of each tender or exchange offer for the Shares and utilize
its best efforts to distribute or cause to be distributed to each Participant
in a timely manner all information distributed to shareholders of the
Employer in connection with any such tender or exchange offer. Each
Participant shall have the right from time to time with respect to the Shares
allocated to the Participant's Account (including fractional Shares to
1/1000th of a Share) to instruct the Purchasing Agent in writing as to the
manner in which to respond to any tender or exchange offer which shall be
pending or which may be made in the future for all Shares or any portion
thereof. A Participant's instructions shall remain in force until superseded
in writing by the
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Participant. The Purchasing Agent shall tender or exchange whole Shares only
as and to the extent so instructed. If the Purchasing Agent does not receive
instructions from a Participant regarding any tender or exchange offer for
Shares, the Purchasing Agent shall have no discretion in such matter and
shall not tender or exchange any such Shares in response thereto. Unless and
until Shares are tendered or exchanged, the individual instructions received
by the Purchasing Agent from Participants shall be held by the Purchasing
Agent in strict confidence and shall not be divulged or released to any
person, including, without limitation, any officers or Employees of any
Participating Employer, or of any other Employer; provided, however, that the
Purchasing Agent shall advise the Employer, at any time upon request, of the
total number of Shares not subject to instructions to tender or exchange.
13.6 TENDER OR EXCHANGE OF UNALLOCATED SHARES. The Purchasing Agent
shall tender unallocated Shares held in the Trust Fund in proportion to the
ratio that (A) the number of Shares with respect to which Participant
instructions in favor of the tender have been received bears to (B) the
number of shares with respect to which Participant instructions for or
against the tender have been received, provided the Purchasing Agent
determines that such action is consistent with its fiduciary obligations
under the Act. Neither the Purchasing Agent, the Committee nor the Trustee
shall have the discretion or power to sell, convey or transfer any
unallocated Shares held in the Participant's Accounts in response to a tender
or exchange offer unless a court of competent jurisdiction determines that
the Purchasing Agent is authorized to sell, convey or transfer any
unallocated Shares held in the Accounts in response to any tender or exchange
offer. In exercising any discretion or power, the Purchasing Agent shall
consider, to the extent permitted by applicable law, including the
Regulations, not only the potential increase in value, if any, in the
Accounts of the Participants as a result of a tender or exchange of the
unallocated Shares, but also the impact of any change in the management or
control of the Employer in the long run, including but not limited to whether
Participants will receive larger or smaller employee benefits than at present
under the Plan.
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13.7 VOTING OF DECEASED PARTICIPANT'S SHARES. If this Section 13 applies
to Shares allocated to the Account of a deceased Participant, such Participant's
Beneficiary shall be entitled to direct the manner in which to respond to any
tender or exchange offer as if such Beneficiary were the Participant.
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SECTION 14. DESIGNATION OF BENEFICIARIES
14.1 DESIGNATION OF BENEFICIARY. Each Participant shall file with the
Committee a written designation of one or more persons as the Beneficiary who
shall be entitled to receive the amount, if any, payable under the Plan upon
his or her death. A Participant may from time to time revoke or change his
or her Beneficiary designation without the consent of any prior Beneficiary
by filing a new designation with the Committee. The last such designation
received by the Committee shall be controlling; provided, however, that no
designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt. A Participant's
Beneficiary designation shall not be effective to the extent that payments to
the Surviving Spouse are required pursuant to Section 11, and in no event
shall it be effective as of a date prior to such receipt.
14.2 FAILURE TO DESIGNATE BENEFICIARY. If no such Beneficiary
designation is in effect at the time of a Participant's death, or if no
designated Beneficiary survives the Participant, the payment of the amount,
if any, payable under the Plan upon his or her death shall be made to the
Participant's Surviving Spouse, if any; or if the Participant has no
Surviving Spouse, then to the Participant's children, if any, in equal
shares; or if the Participant has no children, to the Participant's parents,
if any, in equal shares; or if the Participant has no parents, to the
Participant's brothers and sisters, if any, in equal shares. If the
Participant has no brothers or sisters, payment shall be made to the
Participant's estate. If the Committee is in doubt as to the right of any
person to receive such amount, the Committee may direct the Trustee to retain
such amount, without liability for any interest thereon, until the rights
thereto are determined, or the Committee may direct the Trustee to pay such
amount into any court of appropriate jurisdiction and such payment shall be a
complete discharge of the liability of the Plan and the Trust Fund therefor.
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SECTION 15. ADMINISTRATION OF THE PLAN
15.1 THE COMMITTEE. The Committee shall have general responsibility for
the administration, interpretation and construction of the Plan. The
Committee shall be responsible for establishing and maintaining Plan records,
including responsibility for compliance with the Actual Deferral Percentage
and Actual Contribution Percentage tests described in Sections 4.6 and 5.3,
and the Committee shall be responsible for complying with the reporting and
disclosure requirements of the Act. The Committee shall report to the Board
of Directors, or to a committee of the Board of Directors designated for that
purpose, periodically as shall be specified by the Board of Directors or such
designated committee, with regard to the matters for which it is responsible
under the Plan.
15.2 THE TRUSTEE. Except as otherwise provided in the Trust Agreement
or the Plan, the Trustee may act only as directed by the Committee, the
Employer or any other party, as applicable. The Trustee shall have
responsibility under the Plan for the management and control of the assets of
the Plan. The Committee shall periodically review the performance and
methods of the Trustee. The Employer or the Committee shall have the power
to appoint, remove or change the Trustee and, to the extent that the Trust
Fund is invested in assets other than Shares, shall have the power to appoint
or remove one or more investment advisers and to delegate to such adviser
authority and discretion to manage (including the power to acquire and
dispose of) the assets of the Plan, provided that (i) such adviser with such
authority and discretion shall be either a bank or a registered investment
adviser under the Investment Advisers Act of 1940, and shall acknowledge in
writing that it is a fiduciary with respect to the Plan and (ii) the
Committee shall periodically review the investment performance and methods of
each adviser(s) with such authority and discretion. The Committee shall
establish investment standards and policies and communicate the same to the
Trustee. If annuities are to be purchased under the Plan, the Committee
shall determine what contracts should be made available to terminated
Participants or purchased by the Trust Fund.
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15.3 COMMITTEE'S RESPONSIBILITY FOR ENTERING INTO EXEMPT LOANS AND
VALUATION OF SHARES. The Committee shall have responsibility for directing
the Trustee as to whether and under what terms it shall enter into an Exempt
Loan and for directing the Purchasing Agent whether and under what terms it
shall purchase or otherwise dispose of Shares. In the event that there is no
generally recognized market for Shares, the Committee shall be the named
fiduciary with responsibility for determining the fair market value of the
Shares, provided, that any such determination shall be in accordance with
applicable Regulations, if any, and the Committee shall, in making such
determination, retain an independent appraiser to make such valuation on
behalf of the Committee in accordance with Section 7.9.
15.4 COMMITTEE'S POWER TO ENGAGE OUTSIDE EXPERTS. The Committee may
arrange for the engagement of such legal counsel, who may be counsel for the
Employer, and make use of such agents and clerical or other personnel as they
each shall require or may deem advisable for purposes of the Plan. The
Committee may rely upon the written opinion of such counsel and the
accountants engaged by the Committee and may delegate to any such agent of
said Committee its authority to perform any act hereunder, including without
limitation, those matters involving the exercise of discretion, provided that
such delegation shall be subject to revocation at any time at the discretion
of said Committee. The Committee shall engage such certified public
accountants, who may be accountants for the Employer, as it shall require or
may deem advisable for purposes of the Plan.
15.5 COMPOSITION OF COMMITTEE. The Committee shall consist of at least
three members, each of whom shall be appointed by, shall remain in office at
the will of, and may be removed, with or without cause, by the Board of
Directors. Any member of said Committee may resign at any time. No member of
said Committee shall be entitled to act on or decide any matter relating
solely to himself or any of his or her rights or benefits under the Plan.
The members of the Committee shall not receive any special compensation for
serving in their capacities as members of such Committee but shall be
reimbursed for any reasonable expenses incurred in connection therewith.
Except as otherwise required by the Act, no bond or other security need be
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required of the Committee or any member thereof in any jurisdiction. Any
member of the Committee, or any agent to whom said Committee delegates any
authority, and any other person or group of persons, may serve in more than
one fiduciary capacity (including service both as a Trustee and
administrator) with respect to the Plan.
15.6 ACTIONS OF COMMITTEE. The Committee shall elect or designate its
own chairman, establish its own procedures and the time and place for its
meetings and provide for the keeping of minutes of all meetings. A majority
of the members of the Committee shall constitute a quorum for the transaction
of business at a meeting of the Committee. Any action of the Committee may
be taken upon the affirmative vote of a majority of the members of the
Committee at a meeting or, at the direction of its Chairman, without a
meeting, by mail, telephone or facsimile, provided that all of the members of
the Committee are informed by mail or telephone of their right to vote on the
proposal and of the outcome of the vote thereon.
15.7 DISBURSEMENT OF PLAN FUNDS. The Committee shall cause to be kept
full and accurate accounts of receipts and disbursements of the Plan, shall
cause to be deposited all funds of the Plan to the name and credit of the
Plan in such depositories as may be designated by the Committee, shall cause
to be disbursed the monies and funds of the Plan when so authorized by the
Committee and shall generally perform such other duties as may be assigned to
them from time to time by the Committee.
15.8 APPLICATION FOR BENEFITS. Each Participant or Beneficiary
believing himself eligible for benefits under the Plan shall apply for such
benefits by completing and filing with the Committee an application for
benefits on a form supplied by the Committee. Before the date on which
benefit payments commence, each such application must be supported by such
information and data as the Committee deems relevant and appropriate.
Evidence of age, marital status (and, in the appropriate instances, health,
death or disability) and location of residence shall be required of all
applicants for benefits. All claims for benefits under the Plan shall,
within a reasonable period of time, be decided by one or more persons
designated in writing by the chairman of the Committee.
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15.9 DENIED CLAIMS FOR BENEFITS. In the event that any claim for
benefits is denied in whole or in part, the Participant or Beneficiary whose
claim has been so denied shall be notified of such denial in writing by the
Committee. The notice advising of the denial shall specify the reason or
reasons for denial, make specific reference to pertinent Plan provisions,
describe any additional material or information necessary for the claimant to
perfect the claim (explaining why such material or information is needed) and
shall advise the Participant or Beneficiary, as the case may be, of the
procedure for the appeal of such denial. All appeals shall be made by the
following procedure:
(a) The Participant or Beneficiary whose claim has been denied
shall file with the Committee a notice of desire to appeal the denial. Such
notice shall be filed within sixty (60) days of notification by the Committee
of claim denial, shall be made in writing and shall set forth all of the
facts upon which the appeal is based. Appeals not timely filed shall be
barred.
(b) The Committee shall, within thirty (30) days of receipt of the
Participant's or Beneficiary's notice of appeal, establish a hearing date on
which the Participant or Beneficiary may make an oral presentation to the
Committee in support of his or her appeal. The Participant or Beneficiary
shall be given not less than ten (10) days' notice of the date set for the
hearing.
(c) The Committee shall consider the merits of the claimant's
written and oral presentations, the merits of any facts or evidence in
support of the denial of benefits and such other facts and circumstances as
the Committee shall deem relevant. If the claimant elects not to make an
oral presentation, such election shall not be deemed adverse to the
claimant's interest, and the Committee shall proceed as set forth below as
though an oral presentation of the contents of the claimant's written
presentation had been made.
(d) The Committee shall render a determination upon the appealed
claim which determination shall be accompanied by a written statement as to
the reasons therefor. The determination so rendered shall be binding on all
parties.
(e) For all purposes under the Plan, such decisions on claims
(where no review is requested) and decisions on review (where review is
requested) shall be final, binding
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and conclusive on all interested persons as to participation and benefit
eligibility, the Employee's amount of Compensation and any other matter of
fact or interpretation relating to the Plan.
15.10 INDEMNIFICATION. To the maximum extent permitted by law, no member
of the Committee shall be personally liable by reason of any contract or
other instrument executed by such member of the Committee or on his or her
behalf in the Committee member's capacity as a member of such Committee nor
for any mistake of judgment made in good faith, and the Employer shall
indemnify and hold harmless, directly from its own assets (including the
proceeds of any insurance policy the premiums of which are paid from the
Employer's own assets), each member of the Committee and each other officer,
employee or director of the Employer to whom any duty or power relating to
the administration or interpretation of the Plan or to the management and
control of the assets of the Plan may be delegated or allocated, against any
cost or expense (including counsel fees) or liability (including any sum paid
in settlement of a claim with the approval of the Employer) arising out of
any act or omission to act in connection with the Plan unless arising out of
such person's own fraud or willful misconduct. The Employer shall advance
funds for legal expenses to the extent permitted by the Act.
15.11 AGENT FOR SERVICE OF PROCESS. The Committee or such other person
as may from time to time be designated by the Committee shall be the agent
for service of process under the Plan.
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SECTION 16. EXPENSES
16.1 PAYMENT OF PLAN EXPENSES. The expenses incurred in the management and
administration of the Plan shall be paid from the Trust Fund, except to the
extent the Employer, in its sole discretion, may choose to pay such expenses
from time to time; provided that any Trustee expenses paid to The Charles Schwab
Trust Company shall be payable solely by the Employer. Such expenses shall
include (i) the fees and expenses of any employee and of the Trustee for the
performance of their duties under the Plan and Trust Fund (including but not
limited to obtaining investment advice, record keeping services and legal
services), (ii) the expenses incurred by the members of the Committee in the
performance of their duties under the Plan (including reasonable compensation
for any legal counsel, certified public accountants, consultants and agents, and
cost of services rendered with respect to the Plan) and (iii) all other proper
charges and disbursements of the Trustee or the members of the Committee
(including settlements of claims or legal actions approved by counsel to the
Plan).
16.2 EXPENSES ATTRIBUTABLE TO INVESTMENT OF PLAN ASSETS AND TAXES.
Brokerage fees, transfer taxes and any other expenses incident to the purchase
or sale of securities by the Trustee shall be deemed to be part of the cost of
such securities, or deducted in computing the proceeds therefrom, as the case
may be. Expenses attributable to investments of the Trust Fund shall be paid
out of the Trust Fund, except to the extent the Employer, in its sole
discretion, may choose to pay such expenses from time to time; provided that
expense entirely attributable to any one investment or to any one investment
fund shall be allocated pro rata in accordance with Account balances among
Accounts invested in such investment or investment fund. Taxes, if any, of any
and all kinds whatsoever which are levied or assessed on any assets held or
income received by the Trustee shall be paid out of the Trust Fund.
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SECTION 17. EMPLOYER PARTICIPATION
17.1 ADOPTION OF PLAN BY AFFILIATED EMPLOYER. Any Affiliated Employer may
adopt the Plan and the Trust Fund by resolution of its board of directors or
equivalent governing body provided that (i) the Board of Directors has not
expressly disallowed participation by such Affiliated Employer in the Plan;
(ii) the Affiliated Employer has not previously expressly declined to
participate in the Plan; or (iii) the Affiliated Employer is not precluded from
participating in the Plan by a legally binding written document that precludes
such participation; and provided further that the Board of Directors consents to
such adoption. Any Affiliated Employer which so adopts the Plan shall be deemed
to appoint Charles Schwab & Co., Inc., the Committee and the Trustee its
exclusive agents to exercise on its behalf all of the power and authority
conferred under the Plan or the Trust Agreement. This authority shall continue
until the Plan is terminated and the relevant Trust Fund assets have been
distributed.
17.2 TERMINATION OF PARTICIPATION BY PARTICIPATING EMPLOYER. A
Participating Employer may terminate its participation in the Plan by giving the
Committee prior written notice specifying a termination date which shall be the
last day of a month at least 60 days subsequent to the date such notice is
received by the Committee. The Board of Directors may terminate any
Participating Employer's participation in the Plan, as of any termination date
specified by the Committee, for the failure of the Participating Employer to
make proper contributions or to comply with any other provision of the Plan.
17.3 EFFECT OF TERMINATION OF PARTICIPATION BY PARTICIPATING EMPLOYER.
Upon termination of the Plan as to any Participating Employer, such
Participating Employer shall not make any further contributions under the Plan
and no amount shall thereafter be payable under the Plan to or with respect to
any Participants then employed by such Participating Employer, except as
provided in this Section 17. To the maximum extent permitted by the Act, any
rights of Participants no longer employed by such Participating Employer and of
former Participants and their Beneficiaries and Surviving Spouses and other
eligible survivors under the Plan shall
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be unaffected by such termination and any transfer, distribution or other
disposition of the assets of the Plan as provided in this Section 17 shall
constitute a complete discharge of all liabilities under the Plan with
respect to such Participating Employer's participation in the Plan and any
Participant then employed by such Participating Employer.
The interest of each such Participant who is in Service with such
Participating Employer as of the termination date is the amount, if any,
credited to his or her Account after payment of or provision for expenses and
charges and appropriate adjustment of the Accounts of all such Participants
for expenses and charges as described in Section 16, and all forfeitures
shall be nonforfeitable as of the termination date, and upon receipt by the
Committee of IRS approval of such termination, the full current value of such
amount shall be paid from the Trust Fund in the manner described in Section
17.4 or transferred to a successor employee benefit plan which is qualified
under Section 401(a) of the Code; provided, however, that in the event of any
transfer of assets to a successor employee benefit plan the provisions of
Section 17.4 will apply. No advances against such payments shall be made
prior to such receipt of approval, but after such receipt the Committee, in
its sole discretion, may direct the Trustee to make one or more advances in
accordance with Section 11.1.
All determinations, approvals and notifications referred to above
shall be in form and substance and from a source satisfactory to the
Committee. To the maximum extent permitted by the Act, the termination of the
Plan as to any Participating Employer shall not in any way affect any other
Participating Employer's participation in the Plan.
17.4 LIMITATIONS ON TRANSFER OF PLAN ASSETS TO SUCCESSOR PLAN. No
transfer of the Plan's assets and liabilities to a successor employee benefit
plan (whether by merger or consolidation with such successor plan or
otherwise) shall be made unless each Participant would, if either the Plan or
such successor plan then terminated, receive a benefit immediately after such
transfer which (after taking account of any distributions or payments to such
Participants as part of the same transaction) is equal to or greater than the
benefit such Participant would have been entitled to receive immediately
before such transfer if the Plan had then been
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terminated. The Committee may also request appropriate indemnification from
the employer or employers maintaining such successor plan before making such
a transfer.
17.5 SHARES ALLOCATED TO SUSPENSE FUND EXCLUDED FROM TRANSFER OF PLAN
ASSETS TO SUCCESSOR PLAN. Notwithstanding any provision of this Section 17 to
the contrary, any Shares allocated to a Suspense Subfund shall not be
transferred to a successor employee benefit plan except as is required or
permitted by the Committee in accordance with the terms of an Exempt Loan and
the Regulations.
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SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN
18.1 AMENDMENT, SUSPENSION OR TERMINATION OF PLAN.
(a) Subject to the provisions of Section 18.1(b) and (c) hereof,
the board of directors of the Plan Sponsor reserves the right at any time to
suspend or terminate the Plan, any contributions thereunder, or any other
agreement or arrangement forming a part of the Plan, in whole or in part and
for any reason, and to adopt any amendment or modification thereto, all
without the consent of any Participating Employer, Participant, Beneficiary,
Surviving Spouse or other eligible survivor. Subject to the provisions of
Section 18.1(b) and (c) hereof, the Board of Directors reserves the right at
any time to amend or modify the Plan. Each Participating Employer by its
adoption of the Plan shall be deemed to have delegated this authority to the
Board of Directors.
(b) The Board of Directors shall not make any amendment or
modification which would (i) retroactively impair any rights to any benefit
under the Plan which any Participant, Beneficiary, Surviving Spouse or other
eligible survivor would otherwise have had at the date of such amendment by
reason of the contributions theretofore made or (ii) make it possible for any
part of the funds of the Plan (other than such part as is required to pay
taxes, if any, and administration expenses as provided in Section 16) to be
used for or diverted to any purposes other than for the exclusive benefit of
Participants and their Beneficiaries and Surviving Spouses and other eligible
survivors under the Plan prior to the satisfaction of all liabilities with
respect thereto.
18.2 POWER TO RETROACTIVELY AMEND, SUSPEND OR TERMINATE PLAN PROVISIONS.
Subject to the provisions of Section 18.1, any amendment, modification,
suspension or termination of any provision of the Plan may be made
retroactively if necessary or appropriate to qualify or maintain the Plan as
a plan meeting the requirements of Sections 401(a) of the Code or any other
applicable provision of law (including the Act) as now in effect or hereafter
amended or adopted and the Regulations issued thereunder.
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18.3 NOTICE OF AMENDMENT, SUSPENSION OR TERMINATION. Notice of any
amendment, modification, suspension or termination of the Plan shall be given
by the Board of Directors or the board of directors of the Plan Sponsor, as
the case may be, to the Trustee and all Participating Employers.
18.4 EFFECT OF TERMINATION OF PLAN. Upon termination of the Plan, no
Participating Employer shall make any further contributions under the Plan
and no amount shall thereafter be payable under the Plan to or with respect
to any Participant except as provided in this Section 18, and to the maximum
extent permitted by the Act, transfers or distributions of the assets of the
Plan as provided in this Section 18 shall constitute a complete discharge of
all liabilities under the Plan. The provisions of the Plan which are
necessary for the operation of the Plan and the distribution or transfer of
the assets of the Plan shall remain in force.
Upon receipt by the Committee of IRS approval of such termination,
the full current value of such adjusted amount, and the full value of each
account described in Sections 6.2 and 7.1 above, shall be paid from the Trust
Fund to each Participant and former Participant (or, in the event of the
death of a Participant or former Participant, to the Surviving Spouse or
Beneficiary thereof) in any manner of distribution specified in Section 11
above, including payments which are deferred until the Participant's
termination of Service, as the Committee shall determine. Without limiting
the foregoing, any such distribution may be made in cash or in property, or
both, as the Committee in its sole discretion may direct.
All determinations, approvals and notifications referred to above
shall be in form and substance and from a source satisfactory to the
Committee.
18.5 PARTIAL TERMINATION OF PLAN. In the event that any governmental
authority, including without limitation the IRS, determines that a partial
termination (within the meaning of the Act) of the Plan has occurred or if
there is a complete discontinuance of Employer contributions then (i) the
interest of each Participant affected thereby in his or her Account shall
become nonforfeitable as of the date of such partial termination or complete
discontinuance of contributions and (ii) the provisions of Sections 18.2,
18.3 and 18.4 above, which in the opinion
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of the Committee are necessary for the execution of the Plan and the
allocation and distribution of the assets of the Plan, shall apply.
18.6 TRUST FOR EXCLUSIVE BENEFIT OF PARTICIPANT. In no event shall any
part of the Trust Fund (other than such part as is required to pay taxes, if
any, and administration expenses as provided in Section 16 above) be used for
or diverted to any purposes other than for the exclusive benefit of
Participants and their Beneficiaries and Surviving Spouses under the Plan.
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SECTION 19. TOP-HEAVY PLAN REQUIREMENTS
19.1 TOP-HEAVY PLAN - IN GENERAL. For any Plan Year for which this Plan
is a Top-Heavy Plan, the provisions of this Section 19 shall apply
notwithstanding any other provisions of the Plan.
19.2 EFFECT OF TOP-HEAVY STATUS. Each Participant who (i) is a Non-Key
Employee and (ii) is employed on the last day of the Plan Year, shall be
entitled to have contributions allocated to his or her Account of not less
than three percent (3%) of the Participant's Compensation (the "Minimum
Contribution Percentage") regardless of (i) whether such Non-Key Employee has
completed a Year of Service, and (ii) the amount of such Non-Key Employee's
Compensation; provided, however, that the minimum contribution percentage for
any Plan Year shall not exceed the percentage at which contributions are made
under the Plan for the Plan Year for the Key Employee for whom such
percentage is the highest for such Plan Year. For this purpose, such
percentage shall be determined by dividing the contributions made for such
Key Employee by so much of his or her Compensation (which solely for this
purpose includes Elective Contributions made by the Employer for the Key
Employee) for the Plan Year as does not exceed $150,000 (adjusted
automatically for increases in accordance with the Regulations).
Contributions taken into account under this Section 19.2 shall
include contributions under this Plan and under all other defined
contribution plans (as defined in Section 414(i) of the Code) required to be
included in an Aggregation Group; provided, however, that such contributions
shall not include (i) contributions to any defined contribution plan in the
required aggregation group if such contributions enable such a defined
contribution plan to meet the requirements of Sections 401(a)(4) or 410 of
the Code or (ii) contributions under the Social Security Act or any other
federal or state law.
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19.3 TOP-HEAVY VESTING SCHEDULE.
In the event that the Plan is a Top-Heavy Plan, all contributions shall
be vested according to the following vesting schedule:
<TABLE>
<CAPTION>
Years of Service Percentage
---------------- ----------
<S> <C>
Less than two years 0%
At least two years but less than three years 20%
At least three years but less than four years 50%
At least four years but less than five years 75%
Five years or more 100%
</TABLE>
19.4 DEFINITIONS.
(a) "Top-Heavy Plan" means this Plan for any Plan Year if, as of the
Determination Date, (i) the present value of the Accounts of all Participants
who are Key Employees (excluding former Key Employees) exceeds 60 percent of
the present value of all Participants' Accounts (excluding former Key
Employees) or (ii) the Plan is required to be in an Aggregation Group which
for such Plan Year is a Top-Heavy Group. In determining whether the Plan
constitutes a Top-Heavy Plan, the Committee shall make the following
adjustments:
(i) When more than one plan is aggregated, the Committee shall
determine separately for each plan as of any Determination Date, the present
value of accrued benefits of all Participants and the value of Accounts of
all Participants.
(ii) Any such determination shall include the present value of
distributions made to former Participants under the applicable plan
(including a terminated plan) during the five-year period ending on the
Determination Date, unless reflected in the value of the accrued benefits or
the Accounts of such former Participants as of the Determination Date.
(iii) Any such determination shall include any Rollover
Contribution from any other plan as follows:
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(A) If the Rollover Contribution is initiated by the
Employee and made to or from a plan maintained by a corporation which is not
an Affiliated Employer, the plan providing the distribution shall include
such distribution in the value of such accrued benefit or Account.
(B) If the Rollover Contribution is not initiated by the
Employee or made from a plan maintained by an Affiliated Employer, the plan
accepting the distribution shall include such distribution in the value of
such accrued benefit or Account.
(b) "Determination Date" means for any Plan Year the last day of the
next preceding Plan Year.
(c) "Aggregation Group" means all plans maintained by the Employer or
any Affiliated Employer which are required to be aggregated or permitted to
be aggregated. For purposes of this Section 19.4(c),
(i) The group of plans that are required to be aggregated (the
"required aggregation group") includes each plan of the Employer or any
Affiliated Employer in which a Key Employee is a Participant, and each other
plan of the Employer or any Affiliated Employer which enables a plan in which
a Key Employee is a Participant to meet the requirements of Sections
401(a)(4) or 410 of the Code; and
(ii) The group of plans that are permitted to be aggregated (the
"permissive aggregation group") includes the required aggregation group plus
one or more plans of the Employer or any Affiliated Employer that is not part
of the required aggregation group and that the Committee certifies as
constituting a plan within the permissive aggregation group. Such plan or
plans may be added to the permissive aggregation group only if the permissive
aggregation group would continue to meet the requirements of Sections
401(a)(4) and 410 of the Code.
(d) "Top Heavy Group" means the Aggregation Group, if as of any
Determination Date, the sum of (i) the present value of the accrued benefits
of all Participants who are Key Employees under all defined benefit plans
(within the meaning of Section 414(j) of the Code)
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included in the Aggregation Group plus (ii) the aggregate value of the
Accounts of all Participants who are Key Employees under all defined
contribution plans (within the meaning of Section 414(i) of the Code)
included in the Aggregation Group exceeds 60 percent of the sum of (i) the
present value of the accrued benefits for all Participants (excluding former
Key Employees), under all such defined benefit plans plus (ii) the aggregate
value of the Accounts of all Participants (excluding former Key Employees)
under all such defined contribution plans. If the Aggregation Group that is
a Top-Heavy Group is a required aggregation group, each plan in the
Aggregation Group will be a Top-Heavy Plan. If the Aggregation Group that is
a Top-Heavy Group is a permissive aggregation group, only those plans that
are part of the required aggregation group will be treated as a Top-Heavy
Plan. If the Aggregation Group is not a Top-Heavy Group, no plan within such
Aggregation Group will be a Top-Heavy Plan.
For purposes of Section 19.4(a), the present value of accrued benefits
under any defined benefit plan and the value of Accounts under any defined
contribution plan shall be determined as of the Valuation Date that is
coincident with the Determination Date in accordance with the Regulations.
(e) "Key Employee" means any Employee or former Employee who, at any
time during the Plan Year preceding the Determination Date or during any of
the four preceding Plan Years, is or was one of the following:
(i) An officer of the Employer or any Affiliated Employer having
annual compensation (within the meaning of Section 414(q)(4)) greater than 50
percent of the amount in effect under Section 415(b)(1)(A) of the Code for
any Plan Year (as adjusted for increases in the cost of living in accordance
with the Regulations). For purposes of the preceding sentence there shall be
treated as officers for any such Plan Year no more than the lesser of:
(A) 50 Employees, or
(B) the greater of three Employees or 10 percent of the
Employees of the Employer or any Affiliated Employer;
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(ii) One of the ten Employees owning (or considered as owning
within the meaning of Section 318 of the Code) more than a five percent (5%)
interest and one of the largest interests in the Employer or any Affiliated
Employer. An Employee will not be considered such an owner for any Plan Year
if the Employee's compensation (within the meaning of Section 414(q)(4)) is
less than $30,000 (as adjusted for increases in the cost of living in
accordance with the Regulations); for purposes of determining ownership
pursuant to Section 19.4(e)(ii) the aggregation rules of Section 414(b), (c)
and (m) of the Code apply.
(iii) Any person who owns (or considered as owning within the
meaning of Section 318 of the Code) more than a five percent interest in the
Employer;
(iv) Any person having compensation (within the meaning of
Section 414(q)(4)) of more than $150,000, and owning (or considered as owning
within the meaning of Section 318 of the Code) more than a one percent
interest in the Employer. For purposes of this Section 19.4(e), a
Beneficiary of a Key Employee shall be treated as a Key Employee and the
interests inherited by such Beneficiary shall be treated the same as if owned
by the Key Employee.
(f) "Non-Key Employee" means any "Non-Key Employee" as defined in
Section 416(i)(2) of the Code and the Regulations promulgated thereunder.
19.5 MAINTENANCE OF DEFINED BENEFIT PLAN IN ADDITION TO PLAN.
Effective for limitation years commencing prior to January 1, 2000, in
the event that the Plan is a Top-Heavy Plan for any Plan Year and the
Employer also maintains a defined benefit plan (within the meaning of Section
414 of the Code) which provides benefits on behalf of Participants, then one
of the two following provisions shall apply:
(1) If the Plan is a Top-Heavy Plan for any Plan Year but would not be a
"Top-Heavy Plan" for the Plan Year if "90 percent" were substituted for "60
percent" in Section 19.4(a), then Section 19.2 shall be applied for such Plan
Year by substituting "four percent" for "three percent."
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(2) If a Top-Heavy Plan would continue to be a "Top-Heavy Plan" for the
Plan Year if "90 percent" were substituted for "60 percent", then the
denominator of the defined contribution plan fraction shall be calculated for
such Plan Year by substituting "1.0" for "1.25", except with respect to any
Participant who is not entitled to an allocation of Employer contributions
and does not receive any accruals under any defined benefit plan (within the
meaning of Section 414(j) of the Code) maintained by the Employer.
In the event that another defined contribution plan or a defined benefit
plan maintained by the Employer provides contributions or benefits on behalf
of Participants, the Committee shall take such other plan into account as a
part of this Plan to the extent required by the Code and in accordance with
the Regulations.
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SECTION 20. GENERAL LIMITATIONS AND PROVISIONS
20.1 EXCLUSIVE BENEFIT OF PARTICIPANTS AND BENEFICIARIES. In no event
shall any part of the funds of the Plan be used for or diverted to any
purposes other than for the exclusive benefit of Participants and their
Beneficiaries under the Plan except as permitted under Section 403(c) of the
Act. Upon the transfer by a Participating Employer of any money to the
Trustee, all interest of the Participating Employer therein shall cease and
terminate.
20.2 NO RIGHTS TO CONTINUED EMPLOYMENT. Nothing contained in the Plan
shall give any employee the right to be retained in the employment of the
Employer or any Affiliated Employer or affect the right of the Employer or
any Affiliated Employer to dismiss any employee. The adoption and
maintenance of the Plan shall not constitute a contract between the Employer
and any employee or be consideration for, or an inducement to or condition
of, the employment of any employee.
20.3 TRUST SOLE SOURCE OF BENEFITS. The Trust Fund shall be the sole
source of benefits under the Plan and, except as otherwise required by the
Act, the Employer and the Committee assume no liability or responsibility for
payment for such benefits, and each Participant, Surviving Spouse,
Beneficiary or other person who shall claim the right to any payment under
the Plan shall be entitled to look only to the Trust Fund for such payment
and shall not have any right, claim or demand therefor against the Employer,
the Committee, or any Participant thereof, or any employee or director of the
Employer.
20.4 RISK OF DECREASE IN ASSETS. Each Participant, Beneficiary and
Surviving Spouse shall assume all risk in connection with any decrease in the
value of the assets of the Trust Fund and the Participants' Accounts or
special accounts and neither the Employer nor the Committee shall be liable
or responsible therefor.
20.5 INCAPACITY OF PARTICIPANT OR BENEFICIARY. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable
to care for his or her affairs because of illness or accident, or is a minor,
or has died, then any payment due such person or his
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or her estate shall be made to his or her duly appointed legal
representative. Any such payment shall be a complete discharge of the
liability of the Plan and the Trust Fund therefor.
20.6 ANTIALIENATION; QUALIFIED DOMESTIC RELATIONS ORDERS.
(a) Except insofar as may otherwise be required by law or pursuant
to the terms of a Qualified Domestic Relations Order, as set forth in this
Section 20.5, no amount payable at any time under the Plan and the Trust Fund
shall be subject in any manner to alienation by anticipation, sale, transfer,
assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind
nor in any manner be subject to the debts or liabilities of any person, and
any attempt to so alienate or subject any such amount, whether presently or
thereafter payable, shall be void. If any person shall attempt to, or shall,
alienate, sell, transfer, assign, pledge, attach, charge or otherwise
encumber any amount payable under the Plan and Trust Fund, or any part
thereof, or if by reason of his or her bankruptcy or other event happening at
any such time such amount would be made subject to his or her debts or
liabilities or would otherwise not be enjoyed by such person, then the
Committee, if it so elects, may direct that such amount be withheld and that
the same or any part thereof be paid or applied to or for the benefit of such
person.
(b) Upon receipt of notification of any judgment, decree or order
(including approval of a property settlement agreement) which relates to the
provision of child support, alimony payments, or marital property rights of a
spouse, former spouse, child, or other dependent of a Participant and which
is made pursuant to a state domestic relations law (including a community
property law) (herein referred to as a "domestic relations order"), the
Committee shall (i) notify the Participant and any prospective Alternate
Payee named in the order of the receipt and date of receipt of such domestic
relations order and of the Plan's procedures for determining the status of
the domestic relations order as a Qualified Domestic Relations Order, and
(ii) within a reasonable period after receipt of such order, determine
whether it constitutes a Qualified Domestic Relations Order. The Plan's
procedures for the determination of whether a domestic relations order
constitutes a Qualified Domestic Relations
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Order shall be set forth by the Committee in writing, shall provide for the
notification of each person specified in that order as entitled to payment of
benefits under the Plan (at the address included in the domestic relations
order) of such procedures promptly upon receipt by the Committee of such
domestic relations order, and shall permit the prospective Alternate Payee to
designate a representative for receipt of copies of notices that are sent to
the prospective Alternate Payee with respect to a domestic relations order.
(c) During any period in which the issue of whether a domestic
relations order is a Qualified Domestic Relations Order is being determined
(by the Committee, by a court of competent jurisdiction, or otherwise),
including the period beginning on the date of the Committee's receipt of the
order, the Committee shall segregate in a separate account in the Plan or in
an escrow account held by a Trustee the amounts, if any, which would have
been payable to the Alternate Payee during such period if the order had been
determined to constitute a Qualified Domestic Relations Order, provided that
if no payments would otherwise be made under the Plan to the Alternate Payee
or to the Participant or a Beneficiary of the Participant while the status of
the order as a Qualified Domestic Relations Order is being determined, no
segregation into a separate or escrow account shall be required. If a
domestic relations order is determined to be a Qualified Domestic Relations
Order within eighteen (18) months of the date of its receipt by the Committee
(or from the beginning of any other period during which the issue of its
being a Qualified Domestic Relations Order is being determined by the
Committee) the Committee shall cause to be paid to the persons entitled
thereto the amounts, if any, held in the separate or escrow account referred
to above in one lump sum. If a domestic relations order is determined not be
a Qualified Domestic Relations Order, or if the status of the domestic
relations order as a Qualified Domestic Relations Order is not finally
resolved within such eighteen month period, the Committee shall cause the
separate account or escrow account balance to be returned, with interest
thereon, to the Participant's Account or to be paid to the person or persons
to whom such amount would have been paid if there had been no such domestic
relations order, whichever shall
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apply. Any subsequent determination that such domestic relations order is a
Qualified Domestic Relations Order shall be prospective in effect only.
(d) (i) Benefits payable to an Alternate Payee shall be payable
in one lump sum and in no event shall such benefits continue beyond the
lifetime of the Alternate Payee. Such payment may be made at the time
specified in the Qualified Domestic Relations Order irrespective of whether
the Participant has attained the "earliest retirement age" (within the
meaning of Section 414(p)(4)(B) of the Code). In particular, no Alternate
Payee shall have the right with respect to any benefit payable by reason of a
Qualified Domestic Relations Order to (A) designate a beneficiary with
respect to amounts becoming payable under the Plan, (B) elect a method of
benefit distribution providing for benefits continuing beyond the Alternate
Payee's lifetime, (C) provide survivorship benefits to a spouse or dependent
of such Alternate Payee or to any other person, spouse, dependent or other
person, or (D) transfer rights under the Qualified Domestic Relations Order
by will or by state law of intestacy.
(ii) None of the payments, benefits or rights of any
Alternate Payee shall be subject to any claim of any creditor, and, in
particular, to the fullest extent permitted by law, all such payments,
benefits and rights shall be free from attachment, garnishment, trustee's
process, or any other legal or equitable process available to any creditor of
such Alternate Payee. No Alternate Payee shall have the right to alienate,
anticipate, commute, pledge, encumber or assign any of the benefits or
payments which he or she may expect to receive, contingently or otherwise,
under the Plan.
(iii) Alternate Payees shall not have any right to (A) borrow
money under any Participant loan provisions under the Plan, (B) exercise any
Participant investment direction rights or privileges under the Plan, (C)
exercise any other election, privilege, option or direction rights of the
Participant under the Plan except as specifically provided in the Qualified
Domestic Relations Order, or (D) receive communications with respect to the
Plan except as specifically provided by law, regulation or the Qualified
Domestic Relations Order.
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(iv) Each Alternate Payee shall advise the Committee in
writing of each change of his or her name, address or marital status, and of
each change in the provisions of the Qualified Domestic Relations Order or
any circumstance set forth therein which may be material to the Alternate
Payee's entitlement to benefits thereunder or the amount thereof. Until such
written notice has been provided to the Committee, the Committee shall be (A)
fully protected in not complying with, and in conducting the affairs of the
Plan in a manner inconsistent with, the information set forth in the notice,
and (B) required to act with respect to such notice prospectively only, and
then only to the extent provided for in the Qualified Domestic Relations
Order. The Committee shall not be required to modify or reverse any payment,
transaction or application of funds occurring before the receipt of any
notice that would have affected such payment, transaction or application of
funds, nor shall the Committee or any other party be liable for any such
payment, transaction or application of funds.
(v) Except as specifically provided for in the Qualified
Domestic Relations Order, an Alternate Payee shall have no right to interfere
with the exercise by the Participant or by any Beneficiary of their
respective rights, privileges and obligations under the Plan.
(e) For purposes of this Plan, a Qualified Domestic Relations Order
means any judgment, decree, or order (including approval of a property
settlement agreement) which has been determined by the Committee in
accordance with procedures established under the Plan, to constitute a
qualified domestic relations order within the meaning of Section 414(p)(1) of
the Code and Alternate Payee means any person entitled to current or future
payment of benefits under the Plan pursuant to a Qualified Domestic Relations
Order.
20.7 INABILITY TO LOCATE PARTICIPANT OR BENEFICIARY. If the Committee
cannot ascertain the whereabouts of any person to whom a payment is due under
the Plan, and if, after five years from the date such payment is due, a
notice of such payment due is mailed to the last known address of such
person, as shown on the records of the Committee or the Employer, and within
three months after such mailing such person has not made written claim
therefor, the Committee,
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if it so elects, may direct that such payment and all remaining payments
otherwise due to such person be canceled on the records of the Plan and the
amount thereof applied to reduce the contributions of the Employer, and upon
such cancellation, the Plan and the Trust Fund shall, to the maximum extent
permitted by the Act, have no further liability therefor except that, in the
event such person later notifies the Committee of his or her whereabouts and
requests the payment or payments due to such person under the Plan, the
amount so applied shall be paid to him or her as provided in Section 11. All
elections, designations, requests, notices, instructions, and other
communications from the Employer, a Participant, Beneficiary, Surviving
Spouse or other person to the Committee required or permitted under the Plan
shall be in such form as is prescribed from time to time by the Committee,
shall be mailed or delivered to such location as shall be specified by the
Committee, and shall be deemed to have been given and delivered only upon
actual receipt thereof by the Committee at such location.
20.8 FAILURE TO RECEIVE IRS APPROVAL. Notwithstanding any other
provision herein, if this Plan shall not be approved by the IRS under the
provisions of the Code and the Regulations for any reason (including failure
to comply with any condition for such approval imposed by the IRS)
contributions made after the restatement of this Plan and prior to such
denial shall be returned, without any liability to any person, within one
year after the date of denial of such approval.
20.9 CONTRIBUTIONS CONDITIONED ON DEDUCTIBILITY. Notwithstanding any
other provision herein, all contributions to the Trust Fund are expressly
conditioned upon their deductibility under Section 404 of the Code and the
Regulations, and in the event of the final disallowance of the deduction for
any contribution, in whole or in part, then such contribution (to the extent
the deduction is disallowed) shall upon direction of the Committee, which
shall be given in conformity with the provisions of the Act, be returned,
without liability to any person, within one year after such final
disallowance.
20.10 MISTAKE OF FACT. Notwithstanding any other provisions herein, if
any contribution is made by a mistake of fact, such contribution shall upon
the direction of the Committee, which
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shall be given in conformity with the provisions of the Act, be returned,
without liability to any person, within one year after the payment of such
contribution.
20.11 COMMUNICATIONS WITH COMMITTEE. All elections, designations,
requests, notices, instructions, and other communications from the Employer,
a Participant, Beneficiary, Surviving Spouse or other person to the Committee
required or permitted under the Plan shall be in such form as is prescribed
from time to time by such Committee, shall be mailed by first-class mail or
delivered to such location as shall be specified by such Committee, and shall
be deemed to have been given and delivered only upon actual receipt thereof
by such Committee at such location.
20.12 COMMUNICATIONS WITH PARTICIPANTS AND BENEFICIARIES. All notices,
statements, reports and other communications from the Employer or the
Committee to any Employee, Participant, Surviving Spouse, Beneficiary or
other person required or permitted under the Plan shall be deemed to have
been duly given when delivered to, or when mailed by first-class mail,
postage prepaid and addressed to, such Employee, Participant, Surviving
Spouse, Beneficiary or other person at his or her address last appearing on
the records of the Committee.
20.13 PRIOR SERVICE CREDIT. Upon such terms and conditions as the
Committee may approve, and subject to any required IRS approval, benefits may
be provided under the Plan to a Participant with respect to any period of the
Participant's prior employment by any organization, and such benefits (and
any Service credited with respect to such period of employment under Section
2.25) may be provided for, in whole or in part, by funds transferred,
directly or indirectly (including a rollover from an individual retirement
account), to the Trust Fund from an employee benefit plan of such
organization which qualified under Section 401(a) of the Code.
20.14 GENDER AND NUMBER. Except where otherwise required by the context,
whenever used in the Plan the masculine gender includes the feminine and the
singular shall include the plural.
20.15 HEADINGS. The captions preceding the Sections of the Plan have been
inserted solely as a matter of convenience and in no way define or limit the
scope or intent of any provisions of the Plan.
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20.16 GOVERNING LAW. The Plan and all rights thereunder shall be governed
by and construed in accordance with the Act and, to the extent not
inconsistent therewith, the laws of the State of California.
20.17 SEVERABILITY OF PROVISIONS. If any provision of the Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and
enforced as if such provisions had not been included.
20.18 HEIRS, ASSIGNS AND PERSONAL REPRESENTATIVES. The Plan shall be
binding upon the heirs, executors, administrators, successors and assigns of
the parties, including each Participant and Beneficiary, present and future
and all persons for whose benefit there exists any QDRO with respect to any
Participant (except that no successor to the Plan Sponsor shall be considered
a Plan Sponsor unless that successor adopts the Plan).
20.19 RELIANCE ON DATA AND CONSENTS. The Plan Sponsor, the Employer, each
participating Employer, the Board of Directors, the Committee, the Trustee,
all fiduciaries with respect to the Plan, and all other persons or entities
associated with the operation of the Plan, the management of its assets, and
the provision of benefits thereunder, may reasonably rely on the truth,
accuracy and completeness of all data provided by any Participant, Surviving
Spouse, Beneficiary, and Alternate Payee, including, without limitation, data
with respect to age, health and marital status. Furthermore, the Plan
Sponsor, the Employer, each participating Employer, the Board of Directors,
the Committee, the Trustee, and all fiduciaries with respect to the Plan may
reasonably rely on all consents, elections and designations filed with the
Plan or those associated with the operation of the Plan and its corresponding
Trust by any Participant, Surviving Spouse, Beneficiary, Alternate Payee, or
any representative of any such person, without duty to inquire into the
genuineness of any such consent, election or designation. None of the
aforementioned persons or entities associated with the operation of the Plan,
its assets and the benefits provided under the Plan shall have any duty to
inquire into any such data, and all may rely on such data being current to the
date of reference, it being the duty of the Participants,
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Surviving Spouses, Beneficiaries and Alternate Payees to advise the
appropriate parties of any change in such data.
20.20 QUALIFIED MILITARY SERVICE. Notwithstanding any provision of this
Plan to the contrary, contributions, benefits and service credit with respect
to qualified military service will be provided in accordance with Section
414(u) of the Code.
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SECTION 21. APPLICATION TO PUERTO RICO EMPLOYEES
21.1 MODIFICATIONS APPLICABLE TO PUERTO RICO. The provisions of
this Section shall govern the application of the provisions of the Plan to
Participants who are employed by the Company in and are residents of the
Commonwealth of Puerto Rico ("Puerto Rico Participants"):
(a) Notwithstanding Section 2.25, the definition of "Highly
Compensated Participant" shall be a Puerto Rico Participant employed by the
Company who receives Compensation that exceeds the Compensation paid to two
thirds of the Puerto Rico Participants, as provided in Section 165(e) of the
Puerto Rico Income Tax Act;
(b) The following shall apply in lieu of the second sentence
of Section 5.1(a) hereof: The Salary Reduction Agreement shall provide for
Elective Contributions equal to any whole percentage between one percent (1%)
and ten Percent (10%) of a Participant's Compensation in any payroll period,
not to exceed $7,500 (reduced by any contributions made by the Participant to
an IRA) in any calendar year;
(c) The Actual Deferral Percentage Test set forth in Section
5.3 shall be applied separately with respect to Puerto Rico Participants.
For purposes of applying the Actual Deferral Percentage Test to Puerto Rico
Participants, the definition of Highly Compensated Employee contained in
subparagraph (a) hereof shall be used; and
(d) For purposes of applying subparagraphs (b) and (c) of this
Section 21.1, the definition of Compensation contained in Section 2.11 shall
be applied without regard to clause (xii) thereof.
In all other respects, the terms of this Plan shall apply to Puerto
Rico Participants.
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THE CHARLES SCHWAB CORPORATION
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET INCOME $270,277 $233,803 $172,604
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
BASIC SHARES:*
Weighted-average number of common shares outstanding 262,545 259,909 257,696
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
DILUTED SHARES:*
Weighted-average number of common shares outstanding 262,545 259,909 257,696
Common stock equivalent shares related to stock incentive plans 10,030 9,192 10,018
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common and common equivalent shares outstanding 272,575 269,101 267,714
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:*
Basic $ 1.03 $ .90 $ .67
Diluted $ .99 $ .87 $ .64
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects the September 1997 three-for-two common stock split.
SEE "EARNINGS PER SHARE" NOTE IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGARDING THE ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128 --
EARNINGS PER SHARE.
<PAGE>
THE CHARLES SCHWAB CORPORATION
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS BEFORE TAXES ON INCOME
AND EXTRAORDINARY CHARGE $ 447,247 $394,063 $277,104 $224,343 $206,272
- -----------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest expense - customer 480,988 368,462 321,225 178,067 114,609
Interest expense - other 65,495 57,410 35,998 20,169 17,943
Interest portion of rental expense 26,045 23,051 20,810 17,102 15,428
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed charges (A) 572,528 448,923 378,033 215,338 147,980
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE TAXES ON INCOME,
EXTRAORDINARY CHARGE AND FIXED CHARGES (B) $1,019,775 $842,986 $655,137 $439,681 $354,252
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES
(B) DIVIDED BY (A)* 1.8 1.9 1.7 2.0 2.4
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING
CUSTOMER INTEREST EXPENSE** 5.9 5.9 5.9 7.0 7.2
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</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, EXTRAORDINARY CHARGE AND FIXED CHARGES. "FIXED
CHARGES" CONSIST OF INTEREST EXPENSE INCURRED ON PAYABLES TO CUSTOMERS,
SUBORDINATED BORROWINGS, TERM DEBT, CAPITALIZED INTEREST AND ONE-THIRD OF
RENTAL EXPENSE, WHICH IS ESTIMATED TO BE REPRESENTATIVE OF THE INTEREST
FACTOR.
** BECAUSE INTEREST EXPENSE INCURRED IN CONNECTION WITH PAYABLES TO CUSTOMERS
IS COMPLETELY OFFSET BY INTEREST REVENUE ON RELATED INVESTMENTS AND MARGIN
LOANS, THE COMPANY CONSIDERS SUCH INTEREST TO BE AN OPERATING EXPENSE.
ACCORDINGLY, THE RATIO OF EARNINGS TO FIXED CHARGES AS ADJUSTED REFLECTS
THE ELIMINATION OF SUCH INTEREST EXPENSE AS A FIXED CHARGE.
<PAGE>
EXHIBIT 13.1
The Charles Schwab Corporation
1997 Annual Report to Stockholders
(only those portions specifically incorporated by reference into
The Charles Schwab Corporation 1997 Annual Report on Form 10-K)
<TABLE>
<CAPTION>
THE CHARLES SCHWAB CORPORATION
SELECTED FINANCIAL AND OPERATING DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
Growth Rates
-------------------------
Compounded Annual
---------- ------
5-Year 1-Year
1992-1997 1996-1997 1997 (1) 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues 25% 24% $ 2,299 $ 1,851 $ 1,420 $ 1,065 $ 965
Expenses excluding interest 25% 27% $ 1,852 $ 1,457 $ 1,142 $ 841 $ 758
Net income 27% 16% $ 270 $ 234 $ 173 $ 135 $ 118
Basic earnings per share (2, 3) 27% 14% $ 1.03 $ .90 $ .67 $ .53 $ .45
Diluted earnings per share (2, 3) 26% 14% $ .99 $ .87 $ .64 $ .51 $ .44
Dividends declared per common share (2) 33% 16% $ .139 $ .120 $ .094 $ .064 $ .042
Weighted-average number of common shares
outstanding (2, 4) 273 269 268 263 268
Trading revenues as a % of revenues (5) 62% 65% 66% 67% 75%
Non-trading revenues as a % of revenues (5) 38% 35% 34% 33% 25%
Effective income tax rate 39.6% 40.7% 37.7% 39.7% 39.7%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE MEASURES
Revenue growth 24% 30% 33% 10% 29%
Pre-tax profit margin 19.5% 21.3% 19.5% 21.1% 21.4%
After-tax profit margin 11.8% 12.6% 12.2% 12.7% 12.2%
Return on stockholders' equity 27% 31% 31% 32% 37%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION (AT YEAR END)
Total assets 23% 20% $16,482 $13,779 $10,552 $ 7,918 $6,897
Borrowings 19% 27% $ 361 $ 284 $ 246 $ 171 $ 185
Stockholders' equity 35% 34% $ 1,145 $ 855 $ 633 $ 467 $ 379
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1997 INCLUDES CHARGES FOR A LITIGATION SETTLEMENT OF $24 MILLION AFTER-TAX
($.09 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE).
(2) REFLECTS THE SEPTEMBER 1997 THREE-FOR-TWO COMMON STOCK SPLIT.
(3) BOTH BASIC AND DILUTED EARNINGS PER SHARE ARE NET OF THE EFFECT OF AN
EXTRAORDINARY CHARGE IN 1993 OF $.03 PER SHARE.
(4) AMOUNTS SHOWN ARE USED TO CALCULATE DILUTED EARNINGS PER SHARE.
(5) TRADING REVENUES INCLUDE COMMISSION AND PRINCIPAL TRANSACTION REVENUES.
NON-TRADING REVENUES INCLUDE MUTUAL FUND SERVICE FEES, NET INTEREST REVENUE
AND OTHER REVENUES.
CERTAIN PRIOR YEARS' REVENUES AND EXPENSES HAVE BEEN RECLASSIFIED TO CONFORM TO
THE 1997 PRESENTATION.
<PAGE>
THE CHARLES SCHWAB CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related
financial services for over 4.8 million active customer accounts(a). Customer
assets totaled $353.7 billion at December 31, 1997. CSC's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 272 domestic branch offices in 47 states, as well as a
branch in each of the Commonwealth of Puerto Rico and the United Kingdom.
Schwab served an estimated 55% of the discount brokerage market in 1997, up
from 52% in 1996(b). 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.
(CHART OMITTED)
The Company's strategy is to attract, retain and grow 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 1,164,000 new accounts and gather $68.9 billion
in net new customer assets during 1997.
The Company offers both a broad range of value-oriented products and
services tailored to meet customers' varying investment and financial needs, as
well as 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. The Company's Mutual Fund
Marketplace-Registered Trademark- provides customers with the ability to invest
in nearly 1,400 mutual funds from 219 fund families, including 825 Mutual Fund
OneSource-Registered Trademark- funds. The Company responds to changing customer
needs with continued product and service innovations. During 1997, Schwab
announced alliances with three investment banking firms to provide certain of
its customers access to initial and secondary public stock offerings managed by
these firms. Additionally, the Company began to offer access to futures and
commodities trading to certain of its most active customers.
The Company differentiates itself with multi-channel delivery systems which
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. The Company's online channels handled 37% of total
trades during 1997, up from 25% of total trades in 1996. Automated telephonic
channels include TeleBroker-Registered Trademark- -- Schwab's touch-tone
telephone trading service, and VoiceBroker-TM- -- Schwab's voice recognition
quote service. Schwab's automated telephonic channels handled 73% of the
110 million customer calls received during 1997, up from 67% of the 97 million
customer calls received in 1996.
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. In 1997, the
Company introduced a number of new Internet-based investment services, including
the Asset Allocation Toolkit-TM- for portfolio allocation guidance, and the
Mutual Fund OneSource Online and Market Buzz-TM- sites for research and
information. Schwab also introduced the SchwabLink Web-TM- site for independent
investment managers, which enables them to use the Internet to communicate
directly with Schwab service teams, as well as receive news and information
tailored to their needs. In addition, the Company launched a service that allows
customers of its Cayman Islands and Hong Kong subsidiaries to trade third-
- ---------------
(a) ACCOUNTS WITH BALANCES OR ACTIVITY WITHIN THE PRECEDING TWELVE MONTHS.
(b) SOURCE: SECURITIES INDUSTRY ASSOCIATION BASED ON THE AVERAGE OF THE FIRST
THREE QUARTERS OF EACH RESPECTIVE YEAR.
2
<PAGE>
party mutual funds online and obtain information on mutual fund performance and
fees, all through the Company's international Web site. Also during 1997, Schwab
introduced a speech recognition telephone trading service that enables customers
to trade any of the funds in the Mutual Fund Marketplace-Registered Trademark-
using vocal commands.
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 continued consolidation within the financial services industry. In
addition, the recent expansion and customer acceptance of conducting financial
transactions online has attracted competition from software development
companies and providers of online services. In 1997, price competition continued
to intensify in the area of online investing as competitors sought to gain
market share in this rapidly growing area. The Company experienced declines in
its average commission per revenue trade as the proportion of its customers
using electronic brokerage channels, which provide discounts from the Company's
standard commission rates, has increased. 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 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 development spending as essential for future growth and therefore
tries 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 period are not
necessarily indicative of results for a future period.
In addition to historical information, this Annual Report contains forward-
looking statements that reflect management's objectives and expectations as of
the date hereof. These statements relate to, among other things, the Company's
strategy (see Description of Business), sources of liquidity (see Liquidity and
Capital Resources -- Liquidity), capital expenditures and capital structure (see
Liquidity and Capital Resources -- Cash Flows and Capital Resources), Year 2000
project (see Liquidity and Capital Resources -- Year 2000), and revenue growth,
after-tax profit margin, and return on stockholders' equity (see Results of
Operations and Looking Ahead). Achievement of the expressed objectives and
expectations described in these statements is subject to certain risks and
uncertainties that could cause actual results to differ materially from the
expressed objectives and expectations. Important factors that may cause such
differences are noted throughout this Annual Report and in the Company's Annual
Report on Form 10-K 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 systems
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.
RESULTS OF OPERATIONS
FINANCIAL OVERVIEW
The Company achieved record revenues for the eighth consecutive year and
record earnings for the seventh consecutive year in 1997. One of the factors
contributing to this record performance was strong trading volumes in the
securities markets during the year. The combined daily average share volume for
the New York Stock Exchange (NYSE) and Nasdaq reached an all time high of
1,175 million shares in 1997, a 23% increase over 1996. The Standard & Poor's
500 Index (on a dividend reinvested basis) rose 33% during 1997.
(CHART OMITTED)
3
<PAGE>
Other key factors that contributed to the Company's financial performance
in 1997 include:
- - Assets in Schwab customer accounts rose $100.5 billion, or 40%, to a record
$353.7 billion. This increase resulted from net new customer assets of
$68.9 billion and net market gains of $31.6 billion.
- - A record 1,164,000 new Schwab customer accounts were opened, an increase of
18% from 985,000 opened in 1996.
- - Trading activity reached record levels as shown in the following table (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Daily Average Trades 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Online 39.6 20.2 12.4
TeleBroker-Registered Trademark- 13.5 13.1 9.4
Regional customer telephone service centers,
branch offices and other 52.9 47.9 36.8
- --------------------------------------------------------------------------------
Total (1) 106.0 81.2 58.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
% change 31% 39% 34%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes Mutual Fund OneSource-Registered Trademark- daily average trades
of 34.2 in 1997, 27.2 in 1996 and 17.8 in 1995.
Revenues increased mainly due to higher customer trading volume and an
increase in customer assets. Revenues of $2,299 million in 1997 grew 24% from
1996, exceeding management's annual long-term objective of 20% revenue growth,
due to a 23% increase in commission revenues, as well as a 37% increase in
mutual fund service fees and a 39% increase in interest revenue, net of interest
expense (referred to as net interest revenue). Non-trading revenues (which
consist of mutual fund service fees, net interest revenue, and other revenues)
increased $227 million, or 35%, to $867 million in 1997.
(CHART OMITTED)
The Company's earnings rose 16% to $270 million, or $.99 diluted earnings
per share, up from $234 million, or $.87 diluted earnings per share, in 1996.
Share and per share information throughout this report have been restated to
reflect the September 1997 three-for-two common stock split, effected in the
form of a 50% stock dividend.
The Company's 1997 results include charges for the settlement of a class-
action lawsuit involving M&S and other firms engaged in making markets in Nasdaq
securities. These charges totaled $24 million after-tax, or $.09 diluted
earnings per share. Excluding these charges, the Company's earnings would have
increased 26% from 1996.
The Company's operating expenses increased 27% during 1997 to
$1,852 million, primarily due to a 26% increase in compensation and benefits
expense, a 54% increase in advertising and market development spending, and a
71% increase in other expenses primarily due to the litigation settlement. The
Company's after-tax profit margin for 1997 was 11.8%, which was slightly lower
than the 12.6% margin in 1996, and above the Company's annual long-term
objective of 10%. Excluding the charges relating to the litigation settlement,
the Company's after-tax profit margin would have been 12.8%. Net income plus
depreciation and amortization increased 19% during 1997 to $395 million and
capital expenditures decreased $20 million in 1997 to $139 million.
Return on stockholders' equity was 27% in 1997, exceeding the Company's
annual long-term objective of 20%. The Company's Board of Directors declared a
cash dividend increase during 1997, raising the effective annual dividend rate
20%.
REVENUES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Composition of Revenues 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions 51% 52% 53%
Mutual fund service fees 19 17 15
Net interest revenue 15 14 15
Principal transactions 11 14 13
Other 4 3 4
- --------------------------------------------------------------------------------
Total 100% 100% 100%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
COMMISSIONS
The Company earns commission revenues by executing customer trades. These
revenues are affected by the number of customer accounts that traded, the
average number of commission-generating trades per account, and the average
commission per trade. Commission revenues were $1,174 million in 1997, compared
to $954 million in 1996 and $751 million in 1995.
(CHART OMITTED)
As shown in the table below, from 1995 to 1997, the total number of
customer revenue trades executed by the Company has increased over 78% as the
Company's customer base has grown. From 1995 to 1997, average commission per
revenue trade decreased 12%, mainly due to more trades placed through electronic
brokerage channels, which provide discounts from the Company's standard
commission rates.
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Commissions Earned on
Customer Revenue Trades 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer accounts that traded
during the year (in thousands) 2,380 2,037 1,619
Average customer revenue
trades per account 7.6 6.7 6.3
Total revenue trades (in thousands) 18,169 13,717 10,192
Average commission per revenue trade $ 64.27 $ 69.08 $ 73.11
Commissions earned on customer
revenue trades (in millions) (1) $ 1,168 $ 947 $ 745
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Excludes commissions on trades with specialists totaling $6 million in
1997, $7 million in 1996 and $6 million in 1995.
In December 1997, the Company announced a plan to integrate its online and
traditional brokerage services, and to reduce the price of online trades for
most of its customers. As a result, the Company expects average commission per
revenue trade to continue to decline.
MUTUAL FUND SERVICE FEES
The Company earns mutual fund service fees for record keeping and
shareholder services provided to third-party funds, and for transfer agent
services, shareholder services, administration and investment management
provided to its proprietary funds. These fees are based upon daily balances of
customer assets invested in third-party funds and upon the average daily net
assets of its proprietary funds.
Mutual fund service fees were $428 million in 1997, compared to
$311 million in 1996 and $219 million in 1995. The increases from 1995 to 1997
were primarily due to significant increases in customer assets in funds
purchased through Schwab's Mutual Fund OneSource-Registered Trademark- service,
and in customer assets in Schwab's proprietary funds, collectively referred to
as the SchwabFunds-Registered Trademark-.
At December 31, 1997, Schwab's Mutual Fund OneSource service enabled
customers to trade 825 mutual funds in 121 fund families without incurring
transaction fees. The service allows investors to access multiple mutual fund
companies, avoid brokerage transaction fees, and achieve investment diversity
among fund families. In addition, investors' record keeping and investment
monitoring are simplified through one consolidated statement. Customer assets
held by Schwab that have been purchased through the Mutual Fund OneSource
service, excluding Schwab's proprietary funds, were $56.6 billion, $39.2 billion
and $23.9 billion at the end of 1997, 1996 and 1995, respectively.
Additionally, customer assets invested in the Mutual Fund Marketplace-
Registered Trademark-, excluding the Mutual Fund OneSource service, were
$48.0 billion, $35.4 billion and $26.1 billion at the end of 1997, 1996 and
1995, respectively. Schwab charges a transaction fee on trades placed in the
funds included in the Mutual Fund Marketplace (except on trades through the
Mutual Fund OneSource service). These fees are recorded as commission revenues.
The SchwabFunds include money market funds, equity index funds, bond funds,
asset allocation funds, and funds that primarily invest in stock, bond and money
market funds. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money market
funds. Customer assets invested in the SchwabFunds were $55.8 billion,
$43.1 billion and $31.7 billion at the end of 1997, 1996 and 1995, respectively.
NET INTEREST REVENUE
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to customers and investments) and interest paid on
liabilities (mainly customer cash balances). Net interest revenue is affected by
changes in the volume and mix of these assets and liabilities, as well as by
fluctuations in interest rates.
Substantially all of the Company's net interest revenue is earned by
Schwab. In clearing its customers' trades, Schwab holds cash balances payable to
customers. In most cases, Schwab pays its customers interest on cash balances
awaiting investment, and may invest these funds and earn interest revenue.
Schwab also may lend funds to customers on a secured basis to purchase qualified
securities -- a practice commonly known as "margin lending." Pursuant to
Securities and Exchange Commission (SEC) regulations, customer cash balances
that are not used for margin lending are segregated into an investment account
that is maintained for the exclusive benefit of customers.
When investing segregated customer cash balances, Schwab must adhere to SEC
regulations that restrict investments to U.S. government securities,
participation certificates and mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by U.S.
banks and thrifts, and resale agreements collateralized by qualified securities.
Schwab's policies for credit quality and maximum maturity requirements are more
restrictive than these SEC regulations. In each of the last three years, resale
agreements accounted for over 70% of Schwab's investments of segregated customer
cash balances. The average maturities of Schwab's total investments of
segregated customer cash balances were 63 days in 1997, 60 days in 1996 and 48
days in 1995.
Net interest revenue was $354 million in 1997, compared to $255 million in
1996 and $211 million in 1995, as shown in the following table (in millions):
5
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST REVENUE
Margin loans to customers $489 $339 $264
Investments, customer-related 376 313 283
Other 35 29 21
- --------------------------------------------------------------------------------
Total 900 681 568
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Customer cash balances 481 368 321
Stock-lending activities 37 25 15
Borrowings 20 18 12
Other 8 15 9
- --------------------------------------------------------------------------------
Total 546 426 357
- --------------------------------------------------------------------------------
Net interest revenue $354 $255 $211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company's interest-earning assets are financed primarily by interest-
bearing customer cash balances. Other funding sources include noninterest-
bearing customer cash balances, proceeds from stock-lending activities,
borrowings, and stockholders' equity. Customer-related daily average balances,
interest rates, and average net interest margin are summarized as follows
(dollars in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $ 6,990 $5,883 $4,815
Average interest rate 5.38% 5.32% 5.88%
Margin loans to customers:
Average balance outstanding $ 6,367 $4,482 $3,221
Average interest rate 7.68% 7.57% 8.20%
Average yield on interest-earning assets 6.48% 6.29% 6.81%
FUNDING SOURCES (CUSTOMER-RELATED AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $10,661 $8,377 $6,553
Average interest rate 4.51% 4.40% 4.90%
Other interest-bearing sources:
Average balance outstanding $ 1,122 $ 775 $ 457
Average interest rate 4.44% 4.37% 4.54%
Average noninterest-bearing portion $ 1,574 $1,213 $1,026
Average interest rate on funding sources 3.97% 3.88% 4.26%
SUMMARY:
Average yield on interest-earning assets 6.48% 6.29% 6.81%
Average interest rate on funding sources 3.97% 3.88% 4.26%
- --------------------------------------------------------------------------------
Average net interest margin 2.51% 2.41% 2.55%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The increases in net interest revenue from 1995 to 1997 were primarily due
to higher levels of average earning assets.
Since the Company establishes the rates paid on customer cash balances and
charged on margin loans, a substantial portion of its net interest margin is
managed by the Company. However, the margin is highly influenced by external
factors such as the interest rate environment and competition. As interest rates
in general were higher in 1997 than in 1996, the Company's average net interest
margin increased during 1997. To pay competitive yields to customers in a lower
interest rate environment, the Company's average net interest margin declined
from 1995 to 1996.
PRINCIPAL TRANSACTIONS
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq securities. Factors that influence principal
transaction revenues include the volume of customer trades, market price
volatility, and changes in regulations, and industry customs and practices as
discussed below. As a market maker in Nasdaq and other securities, M&S generally
executes customer trades as principal. While substantially all Nasdaq security
trades originated by the customers of Schwab are directed to M&S, the majority
of M&S' trading volume comes from parties other than Schwab.
Principal transaction revenues were $258 million in 1997, compared to
$257 million in 1996 and $191 million in 1995. Revenues were essentially
unchanged from 1996 to 1997 primarily due to greater share volume handled by
M&S, substantially offset by lower average revenue per principal transaction
(see discussion below). The increase from 1995 to 1996 was primarily due to
greater share volume handled by M&S.
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which have significantly altered the manner
in which orders related to both Nasdaq and 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 NYSE, 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 changes to
reduce 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 1997 as compared to 1996. M&S'
average revenue per principal transaction declined 42% from the first to the
last quarter of 1997, while M&S' share volume increased 55% over the same
period. Had M&S' average revenue per principal transaction not decreased in 1997
compared to 1996, M&S' principal transaction revenues would have been
$80 million higher in 1997. Since the change to trading securities in increments
of one-sixteenth dollar per share was not implemented until 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 the average during substantially all of 1997. Recent and future
regulatory changes, changes in
6
<PAGE>
industry customs and practices, and changes in trading systems are expected to
continue to result in declines in average revenue per principal transaction, and
are expected to have a material adverse impact on M&S' revenues and profit
margin.
See "Commitments and Contingent Liabilities" note in the Notes to
Consolidated Financial Statements regarding certain civil litigation relating to
various principal transaction activities.
Revenues relating to Schwab's specialist operations were $21 million in
1997, $14 million in 1996 and $9 million in 1995.
OTHER REVENUES
Other revenues include retirement plan services fees and other brokerage
fees (mainly wire fees and minimum account balance fees). These revenues were
$86 million in 1997, compared to $74 million in 1996 and $48 million in 1995.
The increases from 1995 to 1997 were primarily due to increased customer
activity and an increase in retirement plan balances.
EXPENSES EXCLUDING INTEREST
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Expenses Excluding Interest as a Percentage
of Revenues 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits 42% 41% 42%
Communications 8 9 9
Occupancy and equipment 7 7 8
Advertising and market development 6 5 4
Depreciation and amortization 5 5 5
Commissions, clearance and floor brokerage 4 4 5
Professional services 3 3 3
Other 6 5 4
- --------------------------------------------------------------------------------
Total 81% 79% 80%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
COMPENSATION AND BENEFITS
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. Employees receive
variable compensation that is tied to the achievement of specified objectives
relating primarily to revenue growth, profit margin and growth in customer
assets. Therefore, a significant portion of compensation and benefits expense
will fluctuate with these measures.
(CHART OMITTED)
Compensation and benefits expense was $962 million in 1997, compared to
$766 million in 1996 and $594 million in 1995. Increases in compensation and
benefits expense between 1995 and 1997 were generally due to a greater number of
employees to support the Company's continued growth. The increase from 1995 to
1996 was also due to higher variable compensation resulting from the Company's
financial performance. The following table shows a comparison of certain
compensation and benefits components and employee data (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Variable compensation as a
% of compensation and benefits expense 23% 27% 24%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 14% 11% 12%
Full-time equivalent employees(1) 12.7 10.4 9.2
Revenues per average full-time equivalent
employee $198 $190 $185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
The Company encourages and provides for employee ownership of the Company's
common stock through its profit sharing and employee stock ownership plan, its
stock incentive plans and an automatic investment plan. The Company's overall
compensation structure is intended to attract, retain and reward highly
qualified employees, and to align the interests of employees with those of
stockholders. To further this alignment and in recognition of the Company's
financial performance, the Company awarded all non-officer employees a stock
option grant in 1997 which totaled options to buy 1,110,000 shares of common
stock. The Company also awarded all non-officer employees a stock grant in 1996
which totaled 252,000 shares of common stock.
At December 31, 1997, directors, management and employees, and their
respective families, trusts and foundations, owned, including stock held for
employees' benefit in the Company's profit sharing and employee stock ownership
plan, approximately 37% of the Company's outstanding common stock. In addition,
directors, management and employees held options to purchase common stock in an
amount equal to approximately 8% of the Company's outstanding common stock at
December 31, 1997.
COMMUNICATIONS
Communications expense includes telephone, postage, and news and quotation
costs. This expense was $183 million in 1997, compared to $165 million in 1996
and $129 million in 1995. The increases from 1995 to 1997 primarily resulted
from higher customer transaction volumes, including increased customer use of
electronic channels. The increase from 1996 to 1997 was also due to additional
leased telephone lines related to online service offerings.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment expense includes the costs of leasing and
maintaining the Company's office space, four regional customer telephone service
centers, a primary data center and 272 domestic branch offices. It also includes
lease and rental expenses on computer and other equipment.
7
<PAGE>
Occupancy and equipment expense was $154 million in 1997, compared to
$130 million in 1996 and $111 million in 1995. This trend reflects the Company's
continued growth and expansion, and its commitment to customer service. The
Company expanded its office space in 1997 and 1996, its primary data center in
1996, and each of its regional customer telephone service centers in 1995.
Schwab opened 40 new branch offices in 1997, 9 in 1996 and 19 in 1995.
ADVERTISING AND MARKET DEVELOPMENT
Advertising and market development expense includes media, print and direct
mail advertising expenses, and related production, printing and postage costs.
This expense was $130 million in 1997, compared to $84 million in 1996 and
$53 million in 1995. The increases from 1995 to 1997 were primarily a result of
the Company's increased media spending relating to campaigns covering Mutual
Fund OneSource-Registered Trademark- and online investing services, as well as
new product and service offerings. Print and direct mail advertisements were
also higher during this period. The Company's role as the official investment
firm for the Professional Golf Association Tour also contributed to the increase
from 1996 to 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes expenses relating to equipment and
office facilities, property, goodwill, leasehold improvements and other
intangibles. This expense was $125 million in 1997, compared to $98 million in
1996 and $69 million in 1995. The increases from 1995 to 1997 were primarily due
to newly acquired data processing and telecommunication equipment which
increased the Company's customer service capacity. Amortization expense related
to intangible assets was $15 million in 1997, compared to $12 million in 1996
and $14 million in 1995.
COMMISSIONS, CLEARANCE AND FLOOR BROKERAGE
Commissions, clearance and floor brokerage expense includes fees paid to
stock and option exchanges for trade executions, fees paid by M&S to broker-
dealers for orders received for execution, and fees paid to clearing entities
for trade processing. This expense was $92 million in 1997, compared to
$81 million in 1996 and $77 million in 1995. The increases from 1995 to 1997
were due to increases in the trading volume processed by M&S and Schwab.
PROFESSIONAL SERVICES
Professional services expense includes fees paid to consultants engaged to
support product, service and systems development, and legal and accounting fees.
This expense was $70 million in 1997, compared to $52 million in 1996 and
$41 million in 1995. The increases from 1995 to 1997 were primarily due to
higher levels of consulting fees in many areas, including new and expanded
products and services, systems development, and capacity expansion.
OTHER EXPENSES
Other expenses include those relating to travel and entertainment, errors
and bad debts, registration fees for employees, and other miscellaneous
expenses. None of these specific categories were more than 25% of total other
expenses (except for the litigation settlement in 1997 -- see discussion in
Financial Overview). These other expenses were $137 million in 1997, compared to
$80 million in 1996 and $69 million in 1995. The increase from 1996 to 1997 was
primarily due to the $39 million pre-tax charge for the litigation settlement,
and higher travel and entertainment expense. The remainder of the increase from
1996 to 1997, and the increase from 1995 to 1996 were primarily due to higher
volume-related expenses reflecting the Company's continued growth.
TAXES ON INCOME
The Company's effective income tax rate was 39.6% in 1997, 40.7% in 1996
and 37.7% in 1995. The effective income tax rate during 1995 was lower than in
1997 and 1996, primarily due to the settlement in 1995 of a U.S. Tax Court case.
LIQUIDITY AND CAPITAL RESOURCES
CSC operates as a holding company, conducting virtually all business
through its wholly owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity
consistent with its operations. A description of significant aspects of this
structure for CSC and its two principal subsidiaries, Schwab and M&S, follows.
LIQUIDITY
SCHWAB
Most of Schwab's assets are liquid, consisting primarily of short-term
(i.e., less than 90 days) investment-grade, interest-earning investments (the
majority of which are segregated for the exclusive benefit of customers pursuant
to regulatory requirements), receivable from customers, and receivable from
brokers, dealers and clearing organizations. Customer margin loans are demand
loan obligations secured by readily marketable securities. Receivable from and
payable to brokers, dealers and clearing organizations primarily represent
current open transactions, which usually settle, or can be closed out, within a
few business days.
Liquidity needs relating to customer trading and margin borrowing
activities are met primarily through cash balances in customer accounts, which
were $12.7 billion, $10.9 billion and $8.4 billion at December 31, 1997, 1996
and 1995, 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.
8
<PAGE>
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 December 31, 1997, Schwab had $823 million of net capital (11% of
aggregate debit balances), which was $667 million in excess of its minimum
required net capital and $434 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 December 31, 1997. At year end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
maturing in 1999. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintained uncommitted,
unsecured bank credit lines totaling $595 million at December 31, 1997. The need
for short-term borrowings arises primarily from timing differences between cash
flow requirements and the scheduled liquidation of interest-bearing investments.
Schwab used such borrowings for 11 days in 1997, 5 days in 1996 and 9 days in
1995, with the daily amounts borrowed averaging $85 million, $52 million and
$24 million, respectively. These lines were unused at December 31, 1997.
In 1997, Schwab entered into unsecured letter of credit agreements with
five banks totaling $450 million to satisfy the margin requirement of customer
option transactions with the Options Clearing Corporation. Schwab pays a fee to
maintain these letter of credit agreements.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&S' assets are liquid, consisting primarily of cash and
cash equivalents, marketable securities, and receivable from brokers, dealers
and clearing organizations.
M&S' liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At December 31, 1997, M&S had $5 million of
net capital (347% of aggregate debit balances), which was $4 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 in 1997.
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. The rating by Standard & Poor's was raised to
A- from BBB+ in October 1997.
As of December 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 December 31, 1997, $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 in 1997.
CASH FLOWS AND CAPITAL RESOURCES
Net income plus depreciation and amortization was $395 million during 1997,
up 19% from $332 million in 1996, allowing the Company to finance the majority
of its growth with internally generated funds. Depreciation and amortization
expense related to equipment, office facilities and property was $110 million in
1997 and $86 million in 1996. Amortization expense related to intangible assets
was $15 million in 1997 and $12 million in 1996.
(CHART OMITTED)
The Company's capital expenditures were $139 million in 1997 and
$160 million in 1996, or 6% and 9% of revenues, respectively. Capital
expenditures in 1997 were for equipment relating to continued enhancements of
its data processing and telecommunications systems, as well as leasehold
improvements and additional office facilities to support the Company's growth.
In addition, the Company
9
<PAGE>
opened 40 new branch offices during 1997, compared to 9 branch offices opened in
1996.
As has been the case in recent years, capital expenditures will vary from
period to period as business conditions change. While management retains
substantial flexibility to adjust capital expenditures as necessary, in general
the level of future expenditures will be influenced by the rate of growth in
customer assets and trading activities, staffing and facilities requirements,
and availability of relevant technology to support innovation in products and
services. Management currently anticipates that 1998 capital expenditures will
be approximately $190 million. These planned expenditures include $110 million
related to technology and $80 million for facilities expansion and improvements.
During 1997, the Company:
- Issued $111 million and repaid $28 million of Medium-Term Notes;
- Paid common stock dividends of $37 million;
- Repurchased 820,000 shares of its common stock for $18 million.
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 December 31, 1997 was $1,506 million, up $368 million,
or 32%, from a year ago. At December 31, 1997, the Company had borrowings of
$361 million, or 24% of total financial capital, that bear interest at a
weighted-average rate of 6.65%. At December 31, 1997, the Company's
stockholders' equity was $1,145 million, or 76% of total financial capital.
Management currently anticipates that borrowings will remain below 30% of total
financial capital.
SHARE REPURCHASES
The Company repurchased 820,000 shares of its common stock for $18 million
in 1997, 1,621,500 shares for $28 million in 1996 and 1,310,700 shares for
$17 million in 1995. Since the inception of the repurchase plan in 1988, the
Company has repurchased 40,107,300 shares of its common stock for $164 million.
At December 31, 1997, authorization granted by the Company's Board of Directors
allows for future repurchases of 4,986,500 shares. The Company will continue to
monitor opportunities to repurchase common stock in cases where the Company
believes stockholder value would be enhanced. In considering opportunities to
repurchase stock, the Company takes into account the dilutive effects of stock
option exercises and stock grants.
DIVIDEND POLICY
As a result of the Company's continued earnings growth, the Board of
Directors increased the quarterly dividend 20% to $.040 per share in 1997. Since
the initial dividend in 1989, the Company has paid 35 consecutive quarterly
dividends and has increased the dividend 10 times. Since 1989, dividends have
increased by a 41% compounded annual growth rate. The Company paid common stock
dividends of $.139 per share in 1997, $.120 per share in 1996 and $.094 per
share in 1995. While the payment and amount of dividends are at the discretion
of the Company's Board of Directors, the Company has historically targeted its
cash dividend at approximately 10% of net income plus depreciation and
amortization.
(CHART OMITTED)
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. The Company's plan may also be affected by
regulatory changes, changes in industry customs and practices, and changes in
trading systems that would require other significant systems modifications, such
as the potential shift of securities pricing from fractions to decimals and
proposed order audit trail requirements. 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.
Additionally, 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
10
<PAGE>
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 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 development
spending. In accordance with generally accepted accounting principles, Year 2000
expenditures will be recognized as incurred.
MARKET RISK
The Company adopted SEC Release No. 33-7386, issued in 1997, which requires
qualitative disclosures of market risk exposure and management of that exposure,
and quantitative disclosures of the magnitude of market risk. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" note in the Notes to
Consolidated Financial Statements for additional information regarding financial
instruments discussed below.
FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
The Company held government securities with a fair value of approximately
$5 million at December 31, 1997. These securities, and the associated interest
rate risk, are not material to the Company's financial position, results of
operations or cash flows.
Through Schwab and M&S, the Company maintains inventories in exchange-
listed and Nasdaq securities on both a long and short basis. The fair value of
these securities at December 31, 1997, was $52 million in long positions and
$28 million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be approximately $3 million
due to the offset of losses in long positions with gains in short positions. In
addition, the Company generally enters into exchange-traded option contracts to
hedge against potential losses in inventory positions, thus reducing this
potential loss exposure. This hypothetical 10% decline in prices 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 December 31, 1997.
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, 1998 Thereafter 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Resale agreements (1) $5,107 $5,107
Weighted-average interest rate 5.72%
Certificates of deposit $1,499 $1,499
Weighted-average interest rate 5.73%
Commercial paper $ 221 $ 221
Weighted-average interest rate 6.42%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes resale agreements of $4,707 million included in cash and
investments required to be segregated under federal or other regulations
and $400 million included in cash and cash equivalents.
At December 31, 1997, CSC had $361 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates. The Company has no cash flow
exposure regarding these Medium-Term Notes due to the fixed rate of interest.
The fair value of these Medium-Term Notes at December 31, 1997, 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 Ended
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
$32 million at December 31, 1997, to fund obligations under its deferred
compensation plan. These investments match the Company's obligation under its
deferred compensation plan, net of the income tax benefit. Any decrease in the
fair value of these investments would result in a comparable decrease in the
deferred compensation plan obligation and would not affect the Company's
financial position, results of operations or cash flows.
LOOKING AHEAD
Management expects financial services to remain intensely competitive
during 1998, as the industry's financial success and a continued trend of
consolidation have attracted new competitors and strengthened existing ones. The
Company believes that it possesses a number of competitive advantages that will
enable it to pursue its strategy of attracting and retaining customer assets. As
described more fully in the Description of Business section above, these
competitive advantages include: a nationally
11
<PAGE>
recognized brand, a broad line of products and services offered at prices that
management believes represent superior value, multi-channel delivery systems,
and the commitment and skills necessary to invest in technology intended to
empower customers and reduce costs. Additionally, the Company's significant
level of employee ownership aligns the interests of management with those of
stockholders.
While fundamentally cyclical financial markets may adversely impact the
Company's financial results, management believes that the above competitive
advantages, combined with recent trends affecting the characteristics and
behavior of individual investors, will enable the firm to pursue its objective
of long-term profitable growth. These trends include the advent of a new
generation of investors who are currently entering their peak savings years, as
well as the increased desire of many individuals to assume greater control over
their financial affairs.
Capitalizing on and strengthening the Company's competitive advantages
requires significant operating expense outlays and capital expenditures.
Management believes that these ongoing investments are critical to increasing
the Company's market share and achieving its long-term financial objectives,
which include annual growth in revenues of 20%, an after-tax profit margin of
10%, and a return on stockholders' equity of 20%.
12
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $1,174,023 $ 954,129 $ 750,896
Mutual fund service fees 427,673 311,067 218,784
Interest revenue, net of interest expense of $546,483 in 1997,
$425,872 in 1996 and $357,223 in 1995 353,552 254,988 210,897
Principal transactions 257,985 256,902 191,392
Other 85,517 73,836 47,934
- -----------------------------------------------------------------------------------------------------------------------------
Total 2,298,750 1,850,922 1,419,903
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES EXCLUDING INTEREST
Compensation and benefits 961,824 766,377 594,105
Communications 182,739 164,756 128,554
Occupancy and equipment 154,181 130,494 110,977
Advertising and market development 129,550 83,987 52,772
Depreciation and amortization 124,682 98,342 68,793
Commissions, clearance and floor brokerage 91,933 80,674 77,061
Professional services 69,583 52,055 41,304
Other 137,011 80,174 69,233
- -----------------------------------------------------------------------------------------------------------------------------
Total 1,851,503 1,456,859 1,142,799
- -----------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 447,247 394,063 277,104
Taxes on income 176,970 160,260 104,500
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 270,277 $ 233,803 $ 172,604
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common
shares outstanding (1, 2) 272,575 269,101 267,714
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE (1)
Basic $ 1.03 $ .90 $ .67
Diluted $ .99 $ .87 $ .64
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE (1) $ .139 $ .120 $ .094
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 797,447 $ 633,317
Cash and investments required to be segregated under federal or other regulations
(including resale agreements of $4,707,187 in 1997
and $6,069,930 in 1996) 6,774,024 7,235,971
Receivable from brokers, dealers and clearing organizations 267,070 230,943
Receivable from customers -- net 7,751,513 5,012,815
Securities owned -- at market value 282,569 127,866
Equipment, office facilities and property -- net 342,273 315,376
Intangible assets -- net 55,854 68,922
Other assets 210,957 153,558
- -----------------------------------------------------------------------------------------------------------------------------
Total $16,481,707 $13,778,768
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts payable $ 268,644 $ 225,136
Payable to brokers, dealers and clearing organizations 1,122,663 877,742
Payable to customers 13,106,202 11,176,836
Accrued expenses and other liabilities 478,032 360,683
Borrowings 361,049 283,816
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 15,336,590 12,924,213
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock -- 9,940 shares authorized; $.01 par value per share;
none issued
Common stock -- 500,000 shares authorized; $.01 par value per share;
267,689 shares issued in 1997 and 1996 * 2,677 1,785
Additional paid-in capital 241,422 200,857
Retained earnings 955,496 723,085
Treasury stock -- 1,753 shares in 1997 and 5,087
shares in 1996, at cost * (35,401) (60,277)
Unearned ESOP shares (2,769) (5,517)
Unamortized restricted stock compensation (17,228) (8,658)
Foreign currency translation adjustment 920 3,280
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,145,117 854,555
- -----------------------------------------------------------------------------------------------------------------------------
Total $16,481,707 $13,778,768
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects the September 1997 three-for-two common stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 270,277 $ 233,803 $ 172,604
Noncash items included in net income:
Depreciation and amortization 124,682 98,342 68,793
Compensation payable in common stock 24,385 26,693 3,307
Deferred income taxes (29,074) (5,214) (6,975)
Other 3,047 4,526 302
Change in securities owned -- at market value (154,699) (14,344) (53,297)
Change in other assets (25,934) (2,396) (39,610)
Change in accrued expenses and other liabilities 153,234 48,964 141,431
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer- related balances 365,918 390,374 286,555
- -----------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding
the effects of businesses acquired):
Cash and investments required to be segregated under
federal or other regulations 456,662 (1,796,722) (1,157,717)
Receivable from brokers, dealers and clearing organizations (37,449) (81,517) (15,908)
Receivable from customers (2,741,796) (1,066,802) (1,011,008)
Drafts payable 43,908 11,069 89,909
Payable to brokers, dealers and clearing organizations 245,327 292,699 285,363
Payable to customers 1,935,507 2,608,577 1,775,434
- -----------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (97,841) (32,696) (33,927)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 268,077 357,678 252,628
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment, office facilities and property -- net (139,416) (159,812) (165,630)
Cash payments for businesses acquired, net of cash received (1,200) (4,709) (68,244)
Purchase of life insurance policies (39,628)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (140,616) (164,521) (273,502)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 111,000 64,000 70,000
Repayment of borrowings (33,649) (27,459) (2,781)
Dividends paid (37,091) (31,495) (24,249)
Purchase of treasury stock (18,234) (28,171) (17,345)
Proceeds from loans on life insurance policies 38,297
Proceeds from stock options exercised and other 14,530 7,839 11,623
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 36,556 (15,286) 75,545
- -----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 113 450 (706)
- -----------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 164,130 178,321 53,965
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 633,317 454,996 401,031
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 797,447 $ 633,317 $ 454,996
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
THE CHARLES SCHWAB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-In Retained Treasury
Shares* Amount Capital Earnings Stock
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 256,344 $ 595 $166,103 $373,161 $(57,968)
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (1,311) (17,345)
Stock options exercised and restricted stock
compensation awards 6,015 12,809 24,345
Three-for-two stock split effected in the
form of a 50% stock dividend 297 (297)
Two-for-one stock split effected in the
form of a 100% stock dividend 893 (893)
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 1,390 206
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 261,048 1,785 180,302 520,532 (50,968)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (1,621) (28,171)
Stock options exercised and restricted stock
compensation awards 3,175 10,180 18,862
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 10,375 245
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 262,602 1,785 200,857 723,085 (60,277)
- -----------------------------------------------------------------------------------------------------------------------------
Net income 270,277
Dividends declared on common stock (37,091)
Purchase of treasury stock (820) (18,234)
Stock options exercised and restricted stock
compensation awards 4,154 25,830 43,110
Three-for-two stock split effected in the
form of a 50% stock dividend 892 (892)
Amortization of restricted stock
compensation awards
ESOP shares released for allocation 14,735 117
Foreign currency translation adjustment
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 265,936 $2,677 $241,422 $955,496 $(35,401)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Unamortized Foreign
Unearned Restricted Currency
ESOP Stock Translation
Shares Compensation Adjustment Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $(10,174) $ (4,703) $ 467,014
Net income 172,604
Dividends declared on common stock (24,249)
Purchase of treasury stock (17,345)
Stock options exercised and restricted stock
compensation awards (3,511) 33,643
Three-for-two stock split effected in the
form of a 50% stock dividend
Two-for-one stock split effected in the
form of a 100% stock dividend
Amortization of restricted stock
compensation awards 1,140 1,140
ESOP shares released for allocation 777 2,373
Foreign currency translation adjustment $(2,286) (2,286)
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 (9,397) (7,074) (2,286) 632,894
- --------------------------------------------------------------------------------------------------------------
Net income 233,803
Dividends declared on common stock (31,495)
Purchase of treasury stock (28,171)
Stock options exercised and restricted stock
compensation awards (5,068) 23,974
Amortization of restricted stock
compensation awards 3,484 3,484
ESOP shares released for allocation 3,880 14,500
Foreign currency translation adjustment 5,566 5,566
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (5,517) (8,658) 3,280 854,555
- --------------------------------------------------------------------------------------------------------------
Net income 270,277
Dividends declared on common stock (37,091)
Purchase of treasury stock (18,234)
Stock options exercised and restricted stock
compensation awards (14,179) 54,761
Three-for-two stock split effected in the
form of a 50% stock dividend
Amortization of restricted stock
compensation awards 5,609 5,609
ESOP shares released for allocation 2,748 17,600
Foreign currency translation adjustment (2,360) (2,360)
- --------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ (2,769) $(17,228) $ 920 $1,145,117
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Share amounts are presented net of treasury shares and reflect the
September 1997 three-for-two common stock split.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Amounts in Thousands, Except Per Share and Option Price Amounts)
BASIS OF PRESENTATION
The 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 operating
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with 272 domestic branch offices in 47 states, as well as a branch in each of
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.
Certain items in prior years' financial statements have been reclassified
to conform to the 1997 presentation. All material intercompany balances and
transactions have been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS: Customers' securities transactions are recorded on a
settlement date basis with related commission revenues and expenses recorded on
a trade date basis. Principal transactions are recorded on a trade date basis.
USE OF ESTIMATES: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts in the
accompanying financial statements. Such estimates relate to useful lives of
equipment, office facilities, buildings and intangible assets, fair value of
financial instruments, allowance for doubtful accounts, future tax benefits and
legal reserves. Actual results could differ from such estimates.
COSTS associated with internally developed software, and the acquisition of new
customer accounts are expensed as incurred.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company considers the
amounts presented for financial instruments on the consolidated balance sheet to
be reasonable estimates of fair value.
CASH AND INVESTMENTS REQUIRED TO BE SEGREGATED UNDER FEDERAL OR OTHER
REGULATIONS consist primarily of securities purchased under agreements to resell
(resale agreements) and certificates of deposit. Resale agreements are
accounted for as collateralized financing transactions and are recorded at their
contractual amounts. Certificates of deposit are stated at cost, which
approximates market.
RECEIVABLE FROM CUSTOMERS that remain unsecured or partially secured for more
than 30 days are substantially reserved for, and are stated net of allowance for
doubtful accounts of $8 million and $6 million at December 31, 1997 and 1996,
respectively.
EQUIPMENT, OFFICE FACILITIES AND PROPERTY: Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the asset
of three to seven years. Buildings are depreciated on a straight-line basis
over twenty years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the life of
the lease. Equipment, office facilities and property are stated at cost net of
accumulated depreciation and amortization of $366 million and $270 million at
December 31, 1997 and 1996, respectively.
INTANGIBLE ASSETS, including goodwill and customer lists, are amortized on a
straight-line basis over three to fifteen years. Intangible assets are stated
at cost net of accumulated amortization of $186 million and $175 million at
December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date, while
revenues and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate
component of stockholders' equity.
DERIVATIVES: The Company's derivatives activities were limited to exchange-
traded option contracts to reduce market risk on inventories in Nasdaq and
exchange-listed securities. The notional amount of such derivatives was not
material to the Company's consolidated balance sheets at December 31, 1997 and
1996.
INCOME TAXES: The Company files a consolidated U.S. federal income tax return
and uses the asset and liability method in providing for income tax expense.
Under this method, deferred tax assets and liabilities are recorded for
17
<PAGE>
temporary differences between the tax basis of assets and liabilities and their
recorded amounts for financial reporting purposes, using currently enacted tax
law.
COMMON STOCK SPLIT: Share and per share information presented in the financial
statements and related notes have been restated to reflect the September 1997
three-for-two common stock split, effected in the form of a 50% stock dividend.
CASH FLOWS: For purposes of reporting cash flows, the Company considers all
highly liquid investments (including resale agreements) with original maturities
of three months or less that are not required to be segregated under federal or
other regulations to be cash equivalents.
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 has been delayed until
1998 by SFAS No. 127 -- Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities, and its adoption did not have an effect on the Company's financial
position, results of operations, earnings per share or cash flows. The adoption
of SFAS No. 127 will 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, and SFAS No. 131 --
Disclosures about Segments of an Enterprise and Related Information, were issued
in 1997 and are effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 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. SFAS
No. 131 establishes standards for disclosures related to business operating
segments. The adoption of these standards 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.
ACQUISITIONS
During 1995, the Company completed several acquisitions. The largest
acquisition was Charles Schwab Europe for $60 million, net of cash received.
Because the acquisitions were accounted for using the purchase method of
accounting, the operating results of the acquired companies are included in the
consolidated results of the Company since the respective dates of acquisitions.
The historical results of the acquired companies are not included in periods
prior to such acquisitions. During 1997 and 1996, the Company made additional
payments relating to a 1995 acquisition.
SECURITIES OWNED
Securities owned are recorded at market value and consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
SchwabFunds-Registered Trademark- money market funds $161,175 $ 50,405
Equity and bond mutual funds 63,504 38,305
Equity and other securities 57,890 39,156
- --------------------------------------------------------------------------------
Total securities owned $282,569 $127,866
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company's positions in SchwabFunds money market funds arise from
certain overnight funding of customers' redemption and check-writing activities.
Equity and bond mutual funds include investments made by the Company to fund
obligations under its deferred compensation plan. Equity and other securities
include M&S' inventories in Nasdaq securities and Schwab's inventories in
exchange-listed securities relating to its specialist operations.
Securities sold, but not yet purchased of $28 million and $24 million at
December 31, 1997 and 1996, respectively, consist of equity and other
securities, and are recorded at market value in accrued expenses and other
liabilities.
PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Payable to brokers, dealers and clearing organizations consist primarily of
securities loaned of $998 million and $776 million at December 31, 1997 and
1996, respectively. Securities loaned are recorded at the amount of cash
collateral received. The market value of securities pledged under securities
lending transactions approximated amounts due.
PAYABLE TO CUSTOMERS
The principal source of funding for Schwab's margin lending is cash
balances in customer accounts. At December 31, 1997, Schwab was paying interest
at 4.7% on $11,161 million of cash balances in customer brokerage accounts,
which were included in payable to customers. At December 31, 1996, Schwab was
paying interest at 4.5% on $9,392 million of such cash balances.
18
<PAGE>
BORROWINGS
Borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Medium-Term Notes $361,000 $278,000
Other 49 5,816
- --------------------------------------------------------------------------------
Total borrowings $361,049 $283,816
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, CSC had $361 million aggregate principal amount of
Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding, with fixed
interest rates ranging from 5.67% to 7.72% and maturities ranging from 1998 to
2007 as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 40,000
1999 40,000
2000 48,000
2001 39,000
2002 40,000
Thereafter 154,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Medium-Term Notes carry a weighted-average interest rate of 6.65%. The
fair value of the Medium-Term Notes at December 31, 1997 and 1996, based on
estimates of market rates for debt with similar terms and remaining maturities,
approximated their carrying amounts.
As of December 31, 1997, CSC had a prospectus supplement on file with the
Securities and Exchange Commission (SEC) enabling CSC to issue up to
$196 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At
December 31, 1997, $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. This facility was unused in 1997.
For use in its brokerage operations, Schwab maintained uncommitted,
unsecured bank credit lines totaling $595 million and $495 million at
December 31, 1997 and 1996, respectively. There were no borrowings outstanding
under these lines at December 31, 1997 and 1996. In 1997, Schwab entered into
unsecured letter of credit agreements with five banks totaling $450 million to
satisfy the margin requirement of customer option transactions with the Options
Clearing Corporation. Schwab pays a fee to maintain these letter of credit
agreements.
TAXES ON INCOME
Income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $179,110 $138,990 $ 96,742
State 26,934 26,484 14,733
- --------------------------------------------------------------------------------
Total current 206,044 165,474 111,475
- --------------------------------------------------------------------------------
Deferred:
Federal (26,484) (4,881) (6,818)
State (2,590) (333) (157)
- --------------------------------------------------------------------------------
Total deferred (29,074) (5,214) (6,975)
- --------------------------------------------------------------------------------
Total taxes on income $176,970 $160,260 $104,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The above amounts do not include the tax benefit from the exercise of stock
options and the vesting of restricted stock awards, which for accounting
purposes is credited directly to additional paid-in capital. Such tax benefits
reduced income taxes paid by $34 million in 1997, $15 million in 1996 and
$22 million in 1995.
The temporary differences which created deferred tax assets and liabilities,
included in other assets, and accrued expenses and other liabilities, are
detailed below:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserves and allowances $33,456 $12,733
Deferred compensation 33,142 19,872
Depreciation and amortization 735 934
- --------------------------------------------------------------------------------
Total deferred assets 67,333 33,539
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
State and local taxes (2,622) (923)
Asset valuation differences (1,101) (3,289)
Other (4,479) 816
- --------------------------------------------------------------------------------
Total deferred liabilities (8,202) (3,396)
- --------------------------------------------------------------------------------
Net deferred tax asset $59,131 $30,143
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1997 and 1996 was necessary.
The effective income tax rate differs from the amount computed by applying
the federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.5 4.3 3.4
Other 1.1 1.4 (.7)
- --------------------------------------------------------------------------------
Effective income tax rate 39.6% 40.7% 37.7%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company's stock incentive plans provide for granting options to
employees, officers and directors, and restricted stock awards to employees and
officers.
In 1997, the Board of Directors approved a new stock incentive plan for
granting options and restricted stock awards to non-officer employees. In
January 1998, the Company granted over one million options under this plan to
non-officer employees employed as of December 31, 1997. The Company expects to
grant such options annually with the size of the grant based on Company and
individual performance.
Options are granted for the purchase of shares of common stock at not less
than market value on the date of grant, and expire within either eight or ten
years from the date of grant. Options generally vest over a four-year period
from the date of grant. A summary of option activity follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 21,572 $ 7.57 23,164 $ 6.20 26,127 $ 3.72
Granted 4,033 $ 30.03 2,137 $ 16.83 3,943 $ 15.96
Exercised (3,474) $ 4.20 (2,838) $ 2.64 (5,788) $ 1.97
Canceled (417) $ 13.16 (891) $ 9.75 (1,118) $ 4.58
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 21,714 $ 12.17 21,572 $ 7.57 23,164 $ 6.20
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 13,357 $ 6.29 13,871 $ 4.66 10,559 $ 3.05
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Available for future grant at
end of year 15,981 4,422 5,902
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of
options granted during the year $ 13.31 $ 7.36 $ 7.14
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option granted is estimated as of the grant date
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield .75% .75% .75%
Expected volatility 44% 44% 44%
Risk-free interest rate 6.2% 6.0% 6.0%
Expected life (in years) 5 5 5
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about options outstanding and
exercisable:
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Options Life (in years) Price of Options Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to $ 5.00 7,111 2.5 $ 2.81 7,111 $ 2.81
$ 5.01 to $17.00 7,549 6.7 $ 9.45 4,942 $ 8.35
$17.01 to $43.00 7,054 8.8 $ 24.53 1,304 $ 17.46
- -----------------------------------------------------------------------------------------------------------------------------
$ 1.00 to $43.00 21,714 6.0 $ 12.17 13,357 $ 6.29
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 --
Accounting for Stock Issued to Employees, and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for the Company's options. Had compensation expense for the
Company's options been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123 --
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share would have been reduced to the pro forma amounts presented below:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income: As reported $270,277 $233,803 $172,604
Pro forma $255,850 $227,401 $168,296
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic Earnings
Per Share: As reported $ 1.03 $ .90 $ .67
Pro forma $ .97 $ .87 $ .65
Diluted Earnings
Per Share: As reported $ .99 $ .87 $ .64
Pro forma $ .94 $ .85 $ .63
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The pro forma effects on net income may not be representative of the pro
forma effects on net income in future years because SFAS No. 123 is applicable
only to options granted after December 31, 1994. The pro forma effect will not
be fully reflected until 1999.
Restricted stock awards are restricted from sale, and some vest based upon
the Company achieving certain financial measures. The market value of shares
associated with the restricted stock awards is recorded as unamortized
restricted stock compensation and is amortized to compensation expense over the
vesting periods, generally four years.
20
<PAGE>
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and employee stock ownership plan (Profit
Sharing Plan), including a 401(k) salary deferral component, for eligible
employees who have met certain service requirements. The Company matches
certain employee contributions; additional contributions to this plan are at the
discretion of the Company. Total Company contribution expense was $44 million
in 1997, $36 million in 1996 and $32 million in 1995.
In January 1993, the Profit Sharing Plan borrowed $15 million from the
Company to purchase over 3 million shares of the Company's common stock. The
note receivable from the Profit Sharing Plan had a balance of $2 million and
$5 million at December 31, 1997 and 1996, respectively, bears interest at 7.9%
and is due in annual installments through 2007. As the note is repaid, shares
are released for allocation to eligible employees based on the proportion of
debt service paid during the year. In accordance with Statement of Position
No. 93-6 -- Employers' Accounting for Employee Stock Ownership Plans (the
Statement), the Company recognizes as compensation and benefits expense the fair
value of shares released for allocation to employees through the employee stock
ownership plan (ESOP). Only released ESOP shares are considered outstanding for
basic and diluted earnings per share computations. Dividends on allocated
shares and unallocated shares are charged to retained earnings and compensation
and benefits expense, respectively. Compensation and benefits expense related
to shares released for allocation through the ESOP loan repayments was
$17 million in 1997, $14 million in 1996 and $2 million in 1995. The increase
from 1995 to 1997 was primarily due to higher employer ESOP contributions. The
unallocated shares are recorded as unearned ESOP shares on the consolidated
balance sheet. Under the "grandfather" provisions of the Statement, the Company
did not apply the Statement to shares purchased by the ESOP prior to 1993.
The ESOP share information is as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Allocated shares:
Purchased prior to 1993 12,640 15,358
Purchased in 1993 and after 2,949 1,220
Shares released for allocation:
Purchased in 1993 and after 681 1,729
Unreleased shares:
Purchased in 1993 and after 597 1,196
- --------------------------------------------------------------------------------
Total ESOP shares 16,867 19,503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fair value of unreleased shares $25,020 $25,510
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company is the beneficiary of a life insurance program covering the
majority of its employees. Under the program, the cash surrender value of
insurance policies is recorded net of policy loans in other assets. At
December 31, 1997 and 1996, policy loans with an interest rate of 8.0% totaled
$81 million.
EARNINGS PER SHARE
The Company adopted SFAS No. 128 -- Earnings Per Share in 1997. This
standard 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:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $270,277 $233,803 $172,604
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic Shares:
Weighted-average common
shares outstanding 262,545 259,909 257,696
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted Shares:
Weighted-average common
shares outstanding 262,545 259,909 257,696
Common stock equivalent shares
related to stock incentive plans 10,030 9,192 10,018
- --------------------------------------------------------------------------------
Diluted weighted-average
common shares outstanding 272,575 269,101 267,714
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Basic earnings per share $ 1.03 $ .90 $ .67
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Diluted earnings per share $ .99 $ .87 $ .64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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
December 31, 1997, Schwab's net capital was $823 million (11% of aggregate debit
balances), which was $667 million in excess of its minimum required net capital
and $434 million in excess of 5% of aggregate debit balances. At December 31,
1997, M&S' net capital was $5 million (347% of aggregate debit
21
<PAGE>
balances), which was $4 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 December 31, 1997, in
accordance with applicable regulations. M&S had no such cash reserve
requirement at December 31, 1997.
COMMITMENTS AND CONTINGENT LIABILITIES
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at December 31,
1997 are as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
1998 $ 77,556
1999 75,529
2000 63,709
2001 58,938
2002 66,515
Thereafter 335,939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was
$104 million in 1997, $92 million in 1996 and $79 million in 1995.
On December 24, 1997, M&S and 30 of the 31 other remaining defendants
submitted for court approval a settlement agreement in a consolidated class
action, IN RE: NASDAQ MARKET-MAKERS ANTITRUST LITIGATION, which is pending in
the United States District Court for the Southern District of New York. The
settlement 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. Pursuant to the settlement agreement, M&S paid
approximately $1 million on December 31, 1997, and agreed that on September 30,
1998, it would contribute Treasury securities which would mature to a value of
approximately $46 million on or before July 30, 1999. As of December 31, 1997,
the Company has recognized all of the settlement charges for the litigation and
does not expect to incur any charges relating to this settlement beyond 1997.
The court granted preliminary approval of the settlement on December 31, 1997,
and is expected to consider final approval in 1998.
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 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 October 1997, one of the actions was voluntarily dismissed and five were
resolved favorably to Schwab on the grounds that the claims asserted are
preempted by federal law. In addition, on November 20, 1997, the Illinois
Supreme Court ruled that the claims asserted in a case in that state were
preempted by federal law. The remaining four cases are still 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 June 30, 1995, a class was certified in the action in Civil District
Court for the Parish of Orleans in Louisiana 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. The action is currently on
appeal, by order of the Louisiana Supreme Court, from the trial court's denial
of Schwab's motion to dismiss on the grounds of federal preemption. On
August 16, 1995, a class was certified in the action in Civil District Court for
the Parish of Natchitoches in Louisiana 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. On August 26, 1997, the Natchitoches action was stayed pending a
determination of the preemption issue by the Louisiana Court of Appeals.
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 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.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
AND CREDIT RISK
Through Schwab and M&S, the Company loans customer securities temporarily
to other brokers in connection with its securities lending activities. The
Company receives cash as collateral for the securities loaned. Increases in
security prices may cause the market value of the securities loaned to
22
<PAGE>
exceed the amount of cash received as collateral. In the event the counterparty
to these transactions does not return the loaned securities, the Company may be
exposed to the risk of acquiring the securities at prevailing market prices in
order to satisfy its customer obligations. The Company mitigates this risk by
requiring credit approvals for counterparties, by monitoring the market value of
securities loaned on a daily basis and by requiring additional cash as
collateral when necessary.
The Company is obligated to settle transactions with brokers and other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on
settlement date, generally three business days after trade date. If customers
do not fulfill their contractual obligations, the Company may incur losses. The
Company has established procedures to reduce this risk by requiring deposits
from customers in excess of amounts prescribed by regulatory requirements for
certain types of trades.
In the normal course of its margin lending activities, Schwab may be liable
for the margin requirement of customer margin securities transactions. As
customers write option contracts or sell securities short, the Company may incur
losses if the customers do not fulfill their obligations and the collateral in
customer accounts is not sufficient to fully cover losses which customers may
incur from these strategies. To mitigate this risk, the Company monitors
required margin levels daily and customers are required to deposit additional
collateral, or reduce positions, when necessary.
In its capacity as market maker, M&S maintains inventories in Nasdaq
securities on both a long and short basis. While long inventory positions
represent M&S ownership of securities, short inventory positions represent
obligations of M&S to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. Also, Schwab
maintains inventories in exchange-listed securities on both a long and short
basis relating to its specialist operations and could incur losses or gains as a
result of changes in the market value of these securities. To mitigate the risk
of losses, long and short positions are marked to market daily and are
continuously monitored to assure compliance with limits established by the
Company. Additionally, the Company may purchase exchange-traded option
contracts to reduce market risk on these inventories.
Schwab enters into collateralized resale agreements principally with other
broker-dealers which could result in losses in the event the counterparty to the
transaction does not purchase the securities held as collateral for the cash
advanced and the market value of these securities declines. To mitigate this
risk, Schwab requires that the counterparty deliver securities to a custodian,
to be held as collateral, with a market value in excess of the resale price.
Schwab also sets standards for the credit quality of the counterparty, monitors
the market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where
deemed appropriate.
CONCENTRATIONS
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1997. As of
December 31, 1997, approximately 28% of Schwab's total customer accounts were
located in California.
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID:
Income taxes $166,773 $145,113 $ 98,444
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Interest:
Customer cash balances $479,504 $369,960 $ 319,645
Stock-lending activities 36,939 24,302 14,106
Borrowings 18,790 16,931 11,131
Other 10,749 9,670 4,833
- --------------------------------------------------------------------------------
Total interest $545,982 $420,863 $ 349,715
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BUSINESSES ACQUIRED IN 1995 AND
RESIDUAL PAYMENTS:
Assets acquired $ 219,457
Liabilities assumed (138,204)
Other $ 1,200 $ 4,709 (5,484)
- --------------------------------------------------------------------------------
Cash payments 1,200 4,709 75,769
Cash received (7,525)
- --------------------------------------------------------------------------------
Cash payments, net of
cash received $ 1,200 $ 4,709 $ 68,244
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
MANAGEMENT'S REPORT
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and the other financial
information presented in this annual report. To meet these responsibilities we
maintain a system of internal control that is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of Company and customer assets from unauthorized use, and the
execution and recording of transactions in accordance with management's
authorization. The system is augmented by careful selection of our managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring that employees
adhere to the highest standards of personal and professional integrity. The
Company's internal audit function monitors and reports on the adequacy of and
compliance with our internal controls, policies and procedures. Although no
cost-effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal control is adequate
to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Deloitte & Touche LLP,
who were given unrestricted access to the Company's financial records and
related data. We believe that all representations made to Deloitte & Touche LLP
during their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically
meets with Deloitte & Touche LLP, our internal auditors and Company management
to discuss accounting, auditing, internal control over financial reporting and
other matters.
Charles R. Schwab
Chairman of the Board and Co-Chief Executive Officer
David S. Pottruck
President, Co-Chief Executive Officer and Chief Operating Officer
Steven L. Scheid
Executive Vice President and Chief Financial Officer
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Charles Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles
Schwab Corporation and subsidiaries (the Company) as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Charles Schwab Corporation
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 23, 1998
25
<PAGE>
THE CHARLES SCHWAB CORPORATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
Weighted- Basic
Expenses Average Earnings
Excluding Net Common Per
Revenues (a) Interest Income Shares (b) Share
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 BY QUARTER (d)
Fourth DIVIDEND INCREASE $ 620.6 $ 516.3 $ 63.1 274.4 $.24
Third STOCK SPLIT 611.8 484.9 76.5 273.0 .29
Second 530.7 424.9 64.0 271.6 .24
First 535.7 425.4 66.7 271.2 .26
- --------------------------------------------------------------------------------------------------------------------------------
1996 BY QUARTER
Fourth $ 482.3 $ 383.1 $ 59.7 269.8 $.23
Third DIVIDEND INCREASE 430.0 333.4 57.1 269.4 .22
Second 491.8 373.1 70.1 268.9 .27
First 446.8 367.2 46.9 268.3 .18
- --------------------------------------------------------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $ 394.8 $ 332.4 $ 42.6 269.8 $.17
Third DIVIDEND INCREASE/STOCK SPLIT 385.5 307.5 47.2 269.5 .18
Second 342.7 269.4 44.4 267.2 .17
First DIVIDEND INCREASE/STOCK SPLIT 296.9 233.5 38.4 264.2 .15
- --------------------------------------------------------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $ 270.4 $ 214.4 $ 33.8 262.7 $.13
Third 248.1 196.5 31.2 261.3 .12
Second 258.2 205.1 32.1 262.6 .13
First DIVIDEND INCREASE 287.9 224.3 38.2 264.6 .15
- --------------------------------------------------------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $ 257.5 $ 212.3 $ 28.5 269.3 $.11
Third 238.8 191.1 22.2(e) 268.5 .08(e)
Second DIVIDEND INCREASE / STOCK SPLIT 232.4 180.4 31.6 266.9 .12
First 236.3 174.9 35.4 265.4 .14
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Dividends
Diluted Declared Range Range
Earnings Per of Common of Price/
Per Common Stock Price Earnings
Share Share Per Share Ratio (c)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 BY QUARTER (d)
Fourth DIVIDEND INCREASE $.23 $.040 $44.25 - 29.25 45 - 30
Third STOCK SPLIT .28 .033 36.56 - 26.67 37 - 27
Second .23 .033 28.58 - 20.25 31 - 22
First .25 .033 28.00 - 20.25 30 - 22
- --------------------------------------------------------------------------------------------------------------------------------
1996 BY QUARTER
Fourth $.22 $.033 $21.92 - 15.00 25 - 17
Third DIVIDEND INCREASE .21 .033 17.92 - 13.25 22 - 16
Second .26 .027 17.67 - 14.58 23 - 19
First .18 .027 18.25 - 12.42 27 - 18
- --------------------------------------------------------------------------------------------------------------------------------
1995 BY QUARTER
Fourth $.15 $.027 $17.78 - 11.08 28 - 17
Third DIVIDEND INCREASE/STOCK SPLIT .17 .027 19.33 - 13.83 32 - 23
Second .17 .020 15.25 - 9.83 27 - 18
First DIVIDEND INCREASE/STOCK SPLIT .15 .020 11.00 - 7.36 21 - 14
- --------------------------------------------------------------------------------------------------------------------------------
1994 BY QUARTER
Fourth $.13 $.016 $ 8.22 - 6.14 16 - 12
Third .12 .016 6.86 - 5.64 14 - 11
Second .12 .016 7.53 - 5.50 16 - 12
First DIVIDEND INCREASE .14 .016 7.33 - 5.78 16 - 13
- --------------------------------------------------------------------------------------------------------------------------------
1993 BY QUARTER
Fourth $.11 $.011 $ 8.53 - 6.39 19 - 15
Third .08(e) .011 8.25 - 5.94 18 - 13
Second DIVIDEND INCREASE/STOCK SPLIT .12 .011 6.44 - 4.54 17 - 12
First .13 .009 5.52 - 3.69 17 - 11
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALL SHARE AND PER SHARE DATA REFLECT THE SEPTEMBER 1997 THREE-FOR-TWO COMMON
STOCK SPLIT.
(a) REVENUES ARE PRESENTED NET OF INTEREST EXPENSE.
(b) AMOUNTS SHOWN ARE USED TO CALCULATE DILUTED EARNINGS PER SHARE.
(c) PRICE/EARNINGS RATIO IS COMPUTED BY DIVIDING THE HIGH AND LOW MARKET PRICES
BY DILUTED EARNINGS PER SHARE FOR THE 12-MONTH PERIOD ENDED ON THE LAST DAY
OF THE QUARTER PRESENTED. THE EXTRAORDINARY CHARGE IN 1993 (DESCRIBED
BELOW) HAS BEEN EXCLUDED.
(d) 1997 INCLUDES CHARGES FOR A LITIGATION SETTLEMENT OF $23.6 MILLION AFTER-
TAX ($.09 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE).
(e) NET INCOME AND EARNINGS PER SHARE ARE NET OF THE EFFECT OF A $6.7 MILLION
($.03 PER SHARE FOR BOTH BASIC AND DILUTED EARNINGS PER SHARE)
EXTRAORDINARY CHARGE FROM THE EARLY RETIREMENT OF DEBT.
26
<PAGE>
THE CHARLES SCHWAB CORPORATION
CHART APPENDIX LIST
In this appendix, the following descriptions of certain charts in portions
of the Company's 1997 Annual Report to Stockholders that are omitted from the
EDGAR Version are more specific with respect to the actual numbers, amounts and
percentages than is determinable from the charts themselves. The Company
submits such more specific descriptions only for the purpose of complying with
the requirements for transmitting portions of this Annual Report on Form 10-K
electronically via EDGAR; such more specific descriptions are not intended in
any way to provide information that is additional to the information otherwise
provided in portions of the Company's 1997 Annual Report to Stockholders.
EDGAR Chart Description
Version -----------------
Page Number
- -----------
2 Stacked bar chart titled "Assets in Schwab Customer Accounts"
depicting the composition of assets in Schwab customer accounts at
year end 1997, 1996, 1995, 1994 and 1993 (shown on the bottom
axis) as follows (billions of dollars): Cash and Equivalents
$60.9, $50.0, $37.9, $28.6 and $20.1, respectively; Mutual Fund
Marketplace (registered trademark) $112.1, $78.3, $52.0, $32.2 and
$26.2, respectively; Stocks (net of margin loans) $150.8, $98.5,
$71.6, $46.1 and $39.5, respectively; Fixed Income Securities
$29.9, $26.4, $20.2, $15.7 and $10.0, respectively; Assets in
Schwab Customer Accounts (bar labeled) $353.7, $253.2, $181.7,
$122.6 and $95.8, respectively.
3 Bar chart titled "Revenues" depicting the revenues for the fiscal
years 1997, 1996 and 1995 (shown on the bottom axis) as follows
(millions of dollars) (bar labeled): $2,299, $1,851 and $1,420,
respectively.
4 Bar chart titled "Net Income" depicting the net income for the
fiscal years 1997, 1996 and 1995 (shown on the bottom axis) as
follows (millions of dollars) (bar labeled): $270, $234 and $173,
respectively.
4 Stacked bar chart titled "Commissions" depicting the composition
of commissions for the fiscal years 1997, 1996 and 1995 (shown on
the bottom axis) as follows (millions of dollars): Listed $527,
$423 and $348, respectively; Nasdaq $465, $394 and $283,
respectively; Options $103, $66 and $53, respectively; Other $79,
$71 and $67, respectively; Commissions (bar labeled) $1,174, $954
and $751, respectively.
7 Stacked bar chart titled "Compensation and Benefits" depicting the
composition of compensation and benefits for the fiscal years
1997, 1996 and 1995 (shown on the bottom axis) as follows
(millions of dollars): Salaries and Wages $601, $451 and $355,
respectively; Variable Compensation $217, $205 and $144,
respectively; Other Benefits $144, $110 and $95, respectively;
Compensation and Benefits (bar labeled) $962, $766 and $594,
respectively.
9 Bar chart titled "Net Income Plus Depreciation and Amortization"
depicting the net income plus depreciation and amortization for
the fiscal years 1997, 1996 and 1995 (shown on the bottom axis) as
follows (millions of dollars) (bar labeled): $395, $332 and $241,
respectively.
10 Bar chart titled "Dividends Declared Per Common Share" depicting
the dividends declared per common share for the fiscal years 1997,
1996 and 1995 (shown on the bottom axis) as follows (bar labeled):
$.139, $.120 and $.094, respectively.
27
<PAGE>
EXHIBIT 21.1
THE CHARLES SCHWAB CORPORATION
SUBSIDIARIES OF THE REGISTRANT
THE FOLLOWING IS A LISTING OF THE SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT:
SCHWAB HOLDINGS, INC., a Delaware corporation
CHARLES SCHWAB & CO., INC., a California corporation
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation
THE FOLLOWING IS A LISTING OF CERTAIN OTHER SUBSIDIARIES OF THE REGISTRANT:
THE CHARLES SCHWAB TRUST COMPANY, a California corporation
CHARLES SCHWAB EUROPE (FORMERLY KNOWN AS SHARELINK), an England and Wales
corporation
MAYER & SCHWEITZER, INC., a New Jersey corporation
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of The Charles Schwab Corporation of our reports dated February 23,
1998 appearing in and incorporated by reference in this Annual Report on Form
10-K of The Charles Schwab Corporation for the year ended December 31, 1997.
Filed on Form S-8:
<TABLE>
<S> <C>
Registration Statement No. 33-30260 (1987 Stock Option Plan)
Registration Statement No. 33-37485 (Charles Schwab Profit Sharing and
Employee Stock Ownership Plan)
Registration Statement No. 33-45356 (Executive Officer Stock Option
Plan (1987))
Registration Statement No. 33-54701 (1992 Stock Incentive Plan)
Registration Statement No. 333-44793 (Charles Schwab Profit Sharing and
Employee Stock Ownership Plan)
Registration Statement No. 333-48335 (The Charles Schwab Corporation
Employee Stock Incentive Plan)
</TABLE>
Filed on Form S-3:
<TABLE>
<S> <C>
Registration Statement No. 333-12727 (Debt Securities)
</TABLE>
DELOITTE & TOUCHE LLP
San Francisco, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET OF THE COMPANY'S
1997 ANNUAL REPORT TO STOCKHOLDERS, WHICH ARE INCORPORATED HEREIN BY REFERENCE
TO EXHIBIT NO. 13.1 OF THIS REPORT, FOR THE PERIOD ENDED DECEMBER 31, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,864,284
<RECEIVABLES> 8,018,583
<SECURITIES-RESALE> 4,707,187
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 282,569
<PP&E> 342,273
<TOTAL-ASSETS> 16,481,707
<SHORT-TERM> 268,644
<PAYABLES> 14,228,865
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 361,049
0
0
<COMMON> 2,677
<OTHER-SE> 1,142,440
<TOTAL-LIABILITY-AND-EQUITY> 16,481,707
<TRADING-REVENUE> 257,985
<INTEREST-DIVIDENDS> 900,035
<COMMISSIONS> 1,174,023
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 427,673
<INTEREST-EXPENSE> 546,483
<COMPENSATION> 961,824
<INCOME-PRETAX> 447,247
<INCOME-PRE-EXTRAORDINARY> 270,277
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270,277
<EPS-PRIMARY> 1.03<F1>
<EPS-DILUTED> .99<F1>
<FN>
<F1>Reflects the September 1997 three-for-two common stock split and prior
Financial Data Schedules have not been restated for the recapitalization.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET OF THE
COMPANY'S 1996 ANNUAL REPORT TO STOCKHOLDERS (FILED AS EXHIBIT 13.1 TO FORM 10-K
FOR THE PERIOD ENDED DECEMBER 31, 1996), INCORPORATED HEREIN BY REFERENCE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
DEC-31-1995
<CASH> 1,799,358 1,937,315 1,630,531 998,959
1,221,619
<RECEIVABLES> 5,243,758 4,665,963 4,818,860 4,224,494
4,088,211
<SECURITIES-RESALE> 6,069,930 4,946,546 4,153,464 5,275,465
4,634,298
<SECURITIES-BORROWED> 0 0 0 0
0
<INSTRUMENTS-OWNED> 127,866 147,965 135,612 118,446
113,522
<PP&E> 315,376 289,153 279,768 286,695
243,472
<TOTAL-ASSETS> 13,778,768 12,147,205 11,214,000 11,096,973
10,552,008
<SHORT-TERM> 225,136 153,909 157,082 162,435
212,961
<PAYABLES> 12,054,578 10,568,194 9,667,846 9,645,865
9,133,222
<REPOS-SOLD> 0 0 0 0
0
<SECURITIES-LOANED> 0 0 0 0
0
<INSTRUMENTS-SOLD> 0 0 0 0
0
<LONG-TERM> 283,816 293,965 300,084 279,970
246,146
0 0 0 0
0
0 0 0 0
0
<COMMON> 1,785 1,785 1,785 1,785
1,785
<OTHER-SE> 852,770 812,379 755,479 681,779
631,109
<TOTAL-LIABILITY-AND-EQUITY> 13,778,768 12,147,205 11,214,000 11,096,973
10,552,008
<TRADING-REVENUE> 256,902 192,156 134,753 61,634
191,392
<INTEREST-DIVIDENDS> 680,860 492,998 321,510 157,953
568,120
<COMMISSIONS> 954,129 712,172 502,062 240,913
750,896
<INVESTMENT-BANKING-REVENUES> 0 0 0 0
0
<FEE-REVENUE> 311,067 224,514 144,219 68,835
218,784
<INTEREST-EXPENSE> 425,872 307,683 200,161 99,009
357,223
<COMPENSATION> 766,377 567,845 396,189 195,708
594,105
<INCOME-PRETAX> 394,063 294,866 198,369 79,670
277,104
<INCOME-PRE-EXTRAORDINARY> 233,803 174,106 117,038 46,943
172,604
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 233,803 174,106 117,038 46,943
172,604
<EPS-PRIMARY> 0.90<F1> 0.67<F1> 0.45<F1>
0.18<F1> 0.67<F1>
<EPS-DILUTED> 0.87<F1> 0.65<F1> 0.44<F1>
0.18<F1> 0.64<F1>
<FN>
<F1>Reflects the September 1997 three-for-two common stock split and the adoption
of Statement of Financial Accounting Standards No. 128 -- Earnings Per Share.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET OF THE COMPANY'S
1997 ANNUAL REPORT TO STOCKHOLDERS, WHICH ARE INCORPORATED HEREIN BY REFERENCE
TO EXHIBIT NO. 13.1 OF THIS REPORT, FOR THE PERIOD ENDED DECEMBER 31, 1997, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 2,751,824 2,643,076 2,298,901
<RECEIVABLES> 7,477,199 6,207,301 5,749,558
<SECURITIES-RESALE> 4,694,086 5,125,028 5,896,118
<SECURITIES-BORROWED> 0 0 0
<INSTRUMENTS-OWNED> 176,173 189,979 201,919
<PP&E> 335,754 332,664 322,625
<TOTAL-ASSETS> 15,631,483 14,678,298 14,643,061
<SHORT-TERM> 230,892 209,317 190,264
<PAYABLES> 13,547,923 12,821,797 12,874,184
<REPOS-SOLD> 0 0 0
<SECURITIES-LOANED> 0 0 0
<INSTRUMENTS-SOLD> 0 0 0
<LONG-TERM> 319,980 289,180 283,317
0 0 0
0 0 0
<COMMON> 2,677 1,785 1,785
<OTHER-SE> 1,075,292 990,979 936,090
<TOTAL-LIABILITY-AND-EQUITY> 15,631,483 14,678,298 14,643,061
<TRADING-REVENUE> 193,985 132,733 69,135
<INTEREST-DIVIDENDS> 651,815 415,464 199,853
<COMMISSIONS> 858,994 536,315 274,919
<INVESTMENT-BANKING-REVENUES> 0 0 0
<FEE-REVENUE> 308,677 196,522 94,698
<INTEREST-EXPENSE> 398,594 256,256 123,130
<COMPENSATION> 700,061 444,957 220,838
<INCOME-PRETAX> 343,003 216,063 110,320
<INCOME-PRE-EXTRAORDINARY> 207,222 130,697 66,735
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 207,222 130,697 66,735
<EPS-PRIMARY> 0.79<F1> 0.50<F1> 0.26<F1>
<EPS-DILUTED> 0.76<F1> 0.48<F1> 0.25<F1>
<FN>
<F1>Reflects the September 1997 three-for-two common stock split and the adoption
of Statement of Financial Accounting Standards No. 128 -- Earnings Per Share.
</FN>
</TABLE>