UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
120 Kearny Street, San Francisco, CA 94108
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
819,968,787* shares of $.01 par value Common Stock
Outstanding on October 29, 1999
* Reflects the July 1999 two-for-one common stock split.
<PAGE>
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1999
Index
Page
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 22-23
Part II - Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
FORWARD-LOOKING STATEMENTS In addition to historical information, this interim
report contains forward-looking statements that reflect management's
expectations. These statements relate to, among other things, contingent
liabilities, strategy, Internet trade pricing for independent investment
managers, sources of liquidity, capital expenditures, and the Year 2000 project.
Achievement of the expressed expectations is subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expectations. See "Forward-Looking Statements" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in this interim report
for a discussion of important factors that may cause such differences.
<PAGE>
THE CHARLES SCHWAB CORPORATION
Part 1 - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Commissions $ 383,826 $ 337,031 $1,320,695 $ 934,208
Mutual fund service fees 192,903 143,977 541,770 405,719
Interest revenue, net of interest expense (1) 182,325 124,346 499,983 345,214
Principal transactions 92,905 74,823 361,053 186,559
Other 31,728 25,094 93,873 75,937
- -----------------------------------------------------------------------------------------------------------------
Total 883,687 705,271 2,817,374 1,947,637
- -----------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 368,610 290,684 1,162,461 835,370
Communications 60,609 53,449 196,684 153,519
Occupancy and equipment 69,082 50,796 190,877 147,502
Advertising and market development 57,716 34,009 164,790 101,726
Depreciation and amortization 40,014 35,175 111,301 104,625
Professional services 40,259 22,240 108,963 63,720
Commissions, clearance and floor brokerage 21,336 20,379 70,225 60,237
Other 22,212 36,040 122,553 80,224
- -----------------------------------------------------------------------------------------------------------------
Total 679,838 542,772 2,127,854 1,546,923
- -----------------------------------------------------------------------------------------------------------------
Income before taxes on income 203,849 162,499 689,520 400,714
Taxes on income 79,270 64,727 271,083 158,622
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 124,579 $ 97,772 $ 418,437 $ 242,092
=================================================================================================================
Weighted-average common shares outstanding - diluted (2) 844,466 820,379 842,875 821,418
=================================================================================================================
Earnings Per Share (2)
Basic $ .16 $ .13 $ .52 $ .31
Diluted $ .15 $ .12 $ .50 $ .30
=================================================================================================================
Dividends Declared Per Common Share (2) $ .0140 $ .0134 $ .0420 $ .0400
=================================================================================================================
(1) Interest expense for the three months ended September 30, 1999 and 1998 was $193,961 and $166,780, respectively.
Interest expense for the nine months ended September 30, 1999 and 1998 was $543,602 and $483,018, respectively.
(2) Reflects the July 1999 two-for-one common stock split.
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,632,556 $ 1,155,928
Cash and investments required to be segregated under federal or other
regulations (including resale agreements of $7,305,800 in 1999
and $7,608,067 in 1998) 8,406,914 10,242,943
Receivable from brokers, dealers and clearing organizations 409,817 334,334
Receivable from customers - net 13,570,948 9,646,140
Securities owned - at market value 303,980 242,115
Equipment, office facilities and property - net 532,145 396,163
Intangible assets - net 46,097 46,274
Other assets 185,565 200,493
- ---------------------------------------------------------------------------------------------------------------
Total $25,088,022 $22,264,390
===============================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 215,793 $ 324,597
Payable to brokers, dealers and clearing organizations 1,262,107 1,422,300
Payable to customers 20,363,468 18,119,622
Accrued expenses and other liabilities 725,848 618,249
Borrowings 465,012 351,000
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 23,032,228 20,835,768
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value
per share; none issued
Common stock - 2,000,000 and 500,000 shares authorized in 1999
and 1998, respectively; $.01 par value per share; 819,616 and 803,765
shares issued and outstanding in 1999 and 1998, respectively* 8,196 4,019
Additional paid-in capital 488,258 213,312
Retained earnings 1,635,272 1,254,953
Unearned ESOP shares (981) (1,088)
Unamortized restricted stock compensation (76,026) (43,882)
Foreign currency translation adjustment 1,075 1,308
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,055,794 1,428,622
- ---------------------------------------------------------------------------------------------------------------
Total $25,088,022 $22,264,390
===============================================================================================================
* Shares issued and outstanding reflect the July 1999 two-for-one common stock split.
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 418,437 $ 242,092
Noncash items included in net income:
Depreciation and amortization 111,301 104,625
Compensation payable in common stock 21,419 27,797
Deferred income taxes 10,407 16,362
Other 5,742 2,757
Change in securities owned (61,865) 70,031
Change in other assets 4,513 58,488
Change in accrued expenses and other liabilities 283,389 58,463
- ------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 793,343 580,615
- ------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Cash and investments required to be segregated under
federal or other regulations 1,834,530 (979,845)
Receivable from brokers, dealers and clearing organizations (76,671) (60,529)
Receivable from customers (3,930,185) (1,187,221)
Drafts payable (108,183) (83,084)
Payable to brokers, dealers and clearing organizations (161,000) 38,012
Payable to customers 2,247,163 2,227,345
- ------------------------------------------------------------------------------------------------------
Net change in customer-related balances (194,346) (45,322)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 598,997 535,293
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (194,409) (144,842)
Costs of internal-use software (46,440)
Cash payments for business acquired, net of cash received (5,657)
Cash value received on life insurance policies 65,324
- ------------------------------------------------------------------------------------------------------
Net cash used by investing activities (181,182) (144,842)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Repayments of loans on life insurance policies (65,321)
Proceeds from borrowings 144,000 30,000
Repayment from borrowings (30,068) (40,047)
Dividends paid (34,063) (31,925)
Purchase of treasury stock (147,884)
Proceeds from stock options exercised and other 45,175 22,268
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 59,723 (167,588)
- ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (910) 662
- ------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 476,628 223,525
Cash and cash equivalents at beginning of period 1,155,928 797,447
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,632,556 $1,020,972
======================================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company). CSC is a holding company engaged, through its
subsidiaries, in securities brokerage and related financial services. CSC's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 319 domestic branch offices in 47 states, as well as branches
in the Commonwealth of Puerto Rico and the U.S. Virgin Islands. Another
subsidiary, Charles Schwab Europe (CSE) is a retail securities brokerage firm
located in the United Kingdom. Other subsidiaries include Charles Schwab
Investment Management, Inc., the investment advisor for Schwab's proprietary
mutual funds, and Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq and
other securities providing trade execution services to broker-dealers and
institutional customers.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the opinion
of management, reflect all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles. All adjustments were
of a normal recurring nature. All material intercompany balances and
transactions have been eliminated. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report to Stockholders, which are
incorporated by reference in the Company's 1998 Annual Report on Form 10-K and
the Company's Quarterly Reports on Form 10-Q for the periods ended March 31,
1999 and June 30, 1999. The Company's results for any interim period are not
necessarily indicative of results for a full year.
Certain items in prior periods' financial statements have been
reclassified to conform to the 1999 presentation.
2. New Accounting Standard
Statement of Financial Accounting Standards (SFAS) No. 137 - Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An Amendment of FASB Statement No. 133, was issued
in June 1999 and amends the effective date of SFAS No. 133. The Company is
required to adopt SFAS No. 133 by January 1, 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability, measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met and such hedge accounting treatment is elected. While the Company is
currently evaluating the effects of this statement, its adoption is not expected
to have a material impact on the Company's financial position, results of
operations, earnings per share or cash flows.
3. Costs of Internal-Use Software
Statement of Position 98-1 - Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, was adopted by the Company effective
January 1, 1999. This statement requires that certain costs incurred for
purchasing or developing software for internal use be capitalized and amortized
over the software's estimated useful life of three years. In prior periods, the
Company capitalized costs incurred for purchasing internal-use software, but
expensed costs incurred for developing internal-use software. In accordance with
this statement, prior periods' financial statements were not adjusted to reflect
this accounting change. Adoption of this statement resulted in the
capitalization of $19 million of internal-use software development costs during
the third quarter of 1999, which increased net income by $12 million (net of
income taxes of $7 million), or $.01 diluted earnings per share. Adoption of
this statement resulted in the capitalization of $46 million of internal-use
software development costs during the first nine months of 1999, which increased
net income by $28 million (net of income taxes of $18 million), or $.03 diluted
earnings per share.
4. Comprehensive Income
SFAS No. 130 - Reporting Comprehensive Income, establishes standards for
the reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to, stockholders. Comprehensive income is as follows (in thousands):
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net income $124,579 $ 97,772 $418,437 $242,092
Foreign currency translation adjustment 2,119 898 (233) 1,496
- --------------------------------------------------------------------------------
Total comprehensive income $126,698 $ 98,670 $418,204 $243,588
================================================================================
5. Earnings Per Share
SFAS No. 128 - Earnings Per Share, requires a dual presentation of basic
and diluted earnings per share (EPS). Basic EPS excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential reduction in EPS
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Earnings per share under the basic and
diluted computations are as follows (in thousands, except per share amounts):
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net income $124,579 $ 97,772 $418,437 $242,092
================================================================================
Weighted-average common shares
outstanding - basic (1) 812,016 793,687 808,504 793,162
Common stock equivalent shares
related to stock incentive plans (1) 32,450 26,692 34,371 28,256
- --------------------------------------------------------------------------------
Weighted-average common shares
outstanding - diluted (1) 844,466 820,379 842,875 821,418
================================================================================
Basic EPS (1) $ .16 $ .13 $ .52 $ .31
================================================================================
Diluted EPS (1) $ .15 $ .12 $ .50 $ .30
================================================================================
(1) Reflects the July 1999 two-for-one common stock split.
The computation of diluted EPS for the nine months ended September 30,
1999 and 1998, respectively, excludes stock options to purchase 5,040,000 and
20,495,000 shares, respectively, because the exercise prices for those options
were greater than the average market price of the common shares, and therefore
the effect would be antidilutive.
6. Regulatory Requirements
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method permitted by this Rule, which requires the maintenance of
minimum net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar amount, which is
based on the type of business conducted by the broker-dealer. The minimum dollar
amount for both Schwab and M&S is $1 million. Under the alternative method, a
broker-dealer may not repay subordinated borrowings, pay cash dividends, or make
any unsecured advances or loans to its parent or employees if such payment would
result in net capital of less than 5% of aggregate debit balances or less than
120% of its minimum dollar amount requirement. At September 30, 1999, Schwab's
net capital was $1,400 million (10% of aggregate debit balances), which was
$1,130 million in excess of its minimum required net capital and $725 million in
excess of 5% of aggregate debit balances. At September 30, 1999, M&S' net
capital was $12 million, which was $11 million in excess of its minimum required
net capital.
Schwab and CSE had portions of their cash and investments segregated for
the exclusive benefit of customers at September 30, 1999, in accordance with
applicable regulations. M&S had no such cash reserve requirement at September
30, 1999.
7. Commitments and Contingent Liabilities
The nature of the Company's business subjects it to numerous regulatory
investigations, claims, lawsuits and other proceedings in the ordinary course of
its business. The results of these legal proceedings cannot be predicted with
certainty. There can be no assurance that these matters will not have a material
adverse effect on the Company's results of operations in any future period,
depending partly on the results for that period, and a substantial judgment
could have a material adverse impact on the Company's financial condition.
However, it is the opinion of management, after consultation with outside legal
counsel, that the ultimate outcome of the current matters will not have a
material adverse impact on the financial condition or operating results of the
Company.
8. Segment Information
Under SFAS No. 131 - Disclosures about Segments of an Enterprise and
Related Information, the Company structures its segments according to its
various types of customers and the services provided to those customers. These
segments have been aggregated, based on similarities in economic
characteristics, types of customers, services provided, distribution channels
and regulatory environment, into three reportable segments - Individual
Investor, Institutional Investor and Capital Markets.
Financial information for the Company's reportable segments is presented
in the table below (in thousands). Intersegment revenues are immaterial and are
therefore not disclosed. Total revenues and income before taxes on income are
equal to the Company's consolidated amounts as reported in the condensed
consolidated statement of income.
- --------------------------------------------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues
Individual Investor $629,130 $499,133 $1,979,397 $1,401,660
Institutional Investor 148,988 117,324 436,259 322,353
Capital Markets 105,569 88,814 401,718 223,624
- --------------------------------------------------------------------------------
Total $883,687 $705,271 $2,817,374 $1,947,637
================================================================================
Income Before Taxes on Income
Individual Investor $146,166 $124,478 $ 488,185 $ 315,245
Institutional Investor 42,409 32,797 116,376 83,995
Capital Markets 15,274 5,224 84,959 1,474
- --------------------------------------------------------------------------------
Total $203,849 $162,499 $ 689,520 $ 400,714
================================================================================
9. Supplemental Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Income taxes paid $101,860 $ 98,382
================================================================================
Interest paid:
Customer cash balances $486,048 $427,595
Stock-lending activities 23,646 30,039
Borrowings 24,858 24,024
Other 13,049 7,899
- --------------------------------------------------------------------------------
Total interest paid $547,601 $489,557
================================================================================
<PAGE>
THE CHARLES SCHWAB CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Description of Business
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related financial
services for 6.3 million active customer accounts(a). Customer assets in these
accounts totaled $595.0 billion at September 30, 1999. CSC's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with 319 domestic branch offices in 47 states, as well as branches in the
Commonwealth of Puerto Rico and the U.S. Virgin Islands. Another subsidiary,
Charles Schwab Europe (CSE), is a retail securities brokerage firm located in
the United Kingdom. Other subsidiaries include Charles Schwab Investment
Management, Inc., the investment advisor for Schwab's proprietary mutual funds,
and Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq and other
securities providing trade execution services to broker-dealers and
institutional customers.
- --------
(a) Accounts with balances or activity within the preceding eight months.
The Company provides financial services to individuals, institutional
customers and broker-dealers through three segments - Individual Investor,
Institutional Investor and Capital Markets. The Individual Investor segment
includes the Company's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. The Capital Markets segment provides trade execution
services in Nasdaq, exchange-listed and other securities primarily to
broker-dealers and institutional customers. The Company's mutual fund services
are considered a product and not a segment. Mutual fund service fees are
included in both the Individual Investor and Institutional Investor segments.
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,
401(k) defined contribution plans and equity securities market-making.
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 strengthen the Schwab brand, as well as distinguish its products and
services. The Company primarily uses a combination of network, cable and local
television, print media, national and local radio, and athletic event
sponsorship in its advertising to investors. These programs helped the Company
attract $24.6 billion in net new customer assets and open 282,000 new accounts
during the third quarter of 1999.
The Company offers a broad range of value-oriented products and services
to meet customers' varying investment and financial needs, including access to
extensive investment research, news and information. The Company's registered
representatives can assist investors in developing asset allocation strategies
and evaluating their investment choices, and refer investors who desire
additional guidance to independent investment managers through the Schwab
AdvisorSource(TM) service. The Company's Mutual Fund Marketplace(R) provides
customers with the ability to invest in 1,851 mutual funds from 303 fund
families, including 1,127 Mutual Fund OneSource(R) funds. Schwab also provides
custodial, trading and support services to approximately 5,700 independent
investment managers. As of September 30, 1999, these managers were guiding the
investments of 808,000 Schwab customer accounts containing $180.3 billion in
assets.
The Company responds to changing customer needs with continued product,
technology and service innovations. During the third quarter of 1999, Schwab
launched an online trading system, Velocity(TM), to provide enhanced trade
information and order execution for more active customers. Also during the third
quarter of 1999, in an effort to provide all customers with more convenient and
efficient service, Schwab enabled customers to open a new account, update
contact information, sign up for the Schwab MoneyLink(R) service and request a
check entirely through Web-based automated processes. Additionally, customers
can now access multiple Schwab accounts using a single sign-on. Further, during
the third quarter of 1999 the Company signed an agreement with Donaldson, Lufkin
& Jenrette, Inc., Fidelity Global Brokerage Group, Inc., and Spear, Leeds &
Kellogg LP to form a new company which will utilize the existing technology of
REDIBook ECN LLC's electronic communications network (ECN). This new company
intends to rely on the ECN's limit order matching capabilities and the partners'
order flow to provide customers with a separate after-hours trading session for
most Nasdaq and certain exchange-listed stocks.
The Company's multi-channel delivery systems allow customers to choose how
they prefer to do business with the Company. To enable customers to obtain
services in person with a Company representative, the Company maintains a
network of branch offices. The Company's branch office network also provides
investors with access to the Internet. 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
on an automated basis through the Company's automated telephonic and online
channels. Automated telephonic channels include TeleBroker(R), Schwab's
touch-tone telephone quote and trading service, and VoiceBroker(TM), Schwab's
voice recognition quote and trading service. Online channels include the Charles
Schwab Web Site(TM), an information and trading service on the Internet at
www.schwab.com, and PC-based services such as SchwabLink(R), a service for
investment managers. Schwab provides every retail customer access to all
delivery channels and flat-fee pricing for Internet-based trades. During the
third quarter of 1999, Schwab announced a plan to provide independent investment
managers with enhanced services, including a new Schwab Institutional website
and flat-fee pricing for online trades.
The Company's ongoing investment in technology is a key element in
expanding its product and service offerings, enhancing its delivery systems,
providing fast and consistent customer service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in customer
activity without a corresponding rise in staffing levels. The Company uses
technology to empower its customers to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
In July 1999, the Company entered into a joint venture agreement with The
Tokio Marine and Fire Insurance Co., Limited (TMI) and certain of its affiliates
(collectively, the TMI Group). The Company and each member of the TMI Group are
shareholders in a Japanese corporation, Schwab Tokio Marine Securities Co., Ltd.
(STMS), in which the Company has a 50% equity interest. STMS, whose business is
expected to commence in the first quarter of 2000, will provide retail brokerage
and investment services in U.S. dollar-denominated securities to residents of
Japan. STMS is currently expected to offer Japanese Yen-denominated securities
later in 2000. In the fourth quarter of 1999, pursuant to the joint venture
agreement, the Company will make an initial capital contribution of 3.0 billion
Yen, or approximately $27 million. The Company may, under certain circumstances,
be required to make additional capital contributions pursuant to the joint
venture agreements, including contributions to assure that STMS is in compliance
with regulatory requirements regarding capital adequacy.
Risk Management
For discussion on the Company's principal risks and some of the policies
and procedures for risk identification, assessment and mitigation, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Management" in the Company's 1998 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 1998. See Liquidity and Capital Resources of this report
for a discussion on liquidity risk; and see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk for additional information relating to
market risk.
Given the nature of the Company's revenues, expenses and risk profile, the
Company's earnings and common stock price may be subject to significant
volatility from period to period. The Company's results for any interim period
are not necessarily indicative of results for a full year. Risk is inherent in
the Company's business. Consequently, despite the Company's attempts to identify
areas of risk, oversee operational areas involving risk and implement policies
and procedures designed to mitigate risk, there can be no assurance that the
Company will not suffer unexpected losses due to operating or other risks.
Forward-Looking Statements
In addition to historical information, this interim report contains
forward-looking statements that reflect management's expectations as of the date
hereof. These statements relate to, among other things, contingent liabilities
(see note "7 - Commitments and Contingent Liabilities" in the Notes to Condensed
Consolidated Financial Statements), the Company's strategy (see Description of
Business), Internet trade pricing for independent investment managers (see
Revenues-Commissions), sources of liquidity (see Liquidity and Capital
Resources-Liquidity), capital expenditures (see Liquidity and Capital
Resources-Cash Flows and Capital Resources), and the Year 2000 project (see
Liquidity and Capital Resources-Year 2000). Achievement of the expressed
expectations is subject to certain risks and uncertainties that could cause
actual results to differ materially from the expressed expectations described in
these statements. Important factors that may cause such differences are noted in
this interim report, the Company's 1998 Annual Report to Stockholders and the
Company's Form 10-K for the year ended December 31, 1998 and include, but are
not limited to: the effect of customer trading patterns on Company revenues and
earnings; changes in the Company's level of personnel hiring, investment in new
or existing technology, or utilization of public media for advertising; changes
in technology; computer system failures; risks and uncertainties associated with
the Company's, its vendors', and other third parties' Year 2000 computer systems
compliance; the effects of competitors' pricing, product and service decisions
and intensified competition; evolving regulation and changing industry practices
adversely affecting the Company; adverse results of litigation; the availability
of external financing; changes in revenues and profit margin due to cyclical
securities markets and interest rates; the level and volatility of equity
prices; and a significant downturn in the securities markets over a short period
of time or a sustained decline in securities prices and trading volumes.
Three Months Ended September 30, 1999
Compared To Three Months Ended September 30, 1998
Financial Overview
Net income for the third quarter of 1999 was $125 million, up 27% from
third quarter 1998 net income of $98 million. Diluted earnings per share for the
third quarters of 1999 and 1998 were $.15 and $.12 per share, respectively.
Share and per share data throughout this report have been restated to reflect
the effects of the July 1999 two-for-one common stock split.
Revenues increased mainly due to higher customer trading volume and an
increase in customer assets. Revenues of $884 million in the third quarter of
1999 grew $178 million, or 25%, from the third quarter of 1998 due to increases
in revenues of $130 million, or 26%, in the Individual Investor segment, $32
million, or 27%, in the Institutional Investor segment, and $16 million, or 19%,
in the Capital Markets segment. See note "8 - Segment Information" in the Notes
to Condensed Consolidated Financial Statements for financial information by
segment.
The Company's trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
Daily Average Trades 1999 1998 Change
- --------------------------------------------------------------------------------
Revenue Trades
Online 97.7 58.1 68%
TeleBroker(R)and VoiceBroker(TM) 6.5 8.1 (20)
Regional customer telephone
service centers, branch offices
and other 30.9 33.4 (7)
- --------------------------------------------------------------------------------
Total 135.1 99.6 36%
================================================================================
Mutual Fund OneSource(R) Trades
Online 20.1 18.8 7%
TeleBroker and VoiceBroker .9 1.1 (18)
Regional customer telephone
service centers, branch offices
and other 19.3 22.4 (14)
- --------------------------------------------------------------------------------
Total 40.3 42.3 (5%)
================================================================================
Total Daily Average Trades
Online 117.8 76.9 53%
TeleBroker and VoiceBroker 7.4 9.2 (20)
Regional customer telephone
service centers, branch offices
and other 50.2 55.8 (10)
- --------------------------------------------------------------------------------
Total 175.4 141.9 24%
================================================================================
Assets in Schwab customer accounts were $595.0 billion at September 30,
1999, an increase of $186.8 billion, or 46%, from a year ago as shown in the
table below. This increase from September 30, 1998 resulted from net new
customer assets of $96.1 billion and net market gains of $90.7 billion.
- --------------------------------------------------------------------------------
Growth in Schwab Customer
Assets and Accounts
(In billions, at quarter end, September 30, Percent
except as noted) 1999 1998 Change
- --------------------------------------------------------------------------------
Assets in Schwab customer accounts
Schwab One(R) and other cash equivalents $ 20.1 $ 14.7 37%
SchwabFunds(R):
Money market funds 82.3 63.0 31
Equity and bond funds 18.9 11.0 72
- --------------------------------------------------------------------------------
Total SchwabFunds 101.2 74.0 37
- --------------------------------------------------------------------------------
Mutual Fund Marketplace(R)(1):
Mutual Fund OneSource(R)
Retail 41.7 31.5 32
Schwab Institutional(TM)(2) 36.6 27.5 33
- --------------------------------------------------------------------------------
Total Mutual Fund OneSource 78.3 59.0 33
All other 66.1 51.7 28
- --------------------------------------------------------------------------------
Total Mutual Fund Marketplace 144.4 110.7 30
- --------------------------------------------------------------------------------
Total mutual fund assets 245.6 184.7 33
- --------------------------------------------------------------------------------
Equity and other securities (1) 298.8 183.3 63
Fixed income securities 44.0 34.4 28
Margin loans outstanding (13.5) (8.9) 52
- --------------------------------------------------------------------------------
Total $595.0 $408.2 46%
================================================================================
Net growth in assets
in Schwab customer accounts
(for the quarter ended)
Net new customer assets $ 24.6 $ 18.8
Net market losses (21.3) (38.1)
- --------------------------------------------------------------------------------
Net growth (decline) $ 3.3 $(19.3)
================================================================================
New Schwab customer accounts
(in thousands, for the
quarter ended) 282.0 278.4 1%
Active Schwab customer
accounts (in millions) (3) 6.3 5.5 15%
================================================================================
Active online Schwab customer
accounts (in millions) (4) 3.0 2.0 50%
Online Schwab customer
assets $263.6 $130.5 102%
================================================================================
(1) Excludes money market funds and all of Schwab's proprietary money market,
equity and bond funds.
(2) Represents assets invested in Mutual Fund OneSource by independent
investment managers and retirement plans.
(3) Effective with the fourth quarter of 1998, active accounts are defined as
accounts with balances or activity within the preceding eight months
instead of twelve months as previously defined. This change in definition
had the effect of decreasing the number of active accounts by approximately
200,000. Prior quarters have not been restated.
(4) Active online accounts are defined as all active accounts within a
household that has had at least one online session within the past twelve
months.
Total operating expenses excluding interest during the third quarter of
1999 were $680 million, up 25% from $543 million for the third quarter of 1998,
primarily resulting from additional staff and related costs.
The after-tax profit margin for the third quarter of 1999 was 14.1%, up
from 13.9% for the third quarter of 1998. The annualized return on stockholders'
equity for the third quarter of 1999 was 25%, down from 31% for the third
quarter of 1998.
REVENUES
Revenues grew $178 million, or 25%, in the third quarter of 1999, due to a
$58 million, or 47%, increase in interest revenue, net of interest expense
(referred to as net interest revenue), a $49 million, or 34%, increase in mutual
fund service fees, and a $47 million, or 14%, increase in commission revenues,
as well as an $18 million, or 24%, increase in principal transaction revenues.
- --------------------------------------------------------------------------------
Three Months
Ended
September 30,
Composition of Revenues 1999 1998
- --------------------------------------------------------------------------------
Commissions 43% 48%
Principal transactions 11 11
- --------------------------------------------------------------------------------
Total trading revenues 54 59
- --------------------------------------------------------------------------------
Mutual fund service fees 22 20
Net interest revenue 21 18
Other 3 3
- --------------------------------------------------------------------------------
Total non-trading revenues 46 41
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Commissions
The Company earns commission revenues by executing customer trades
primarily through the Individual Investor and Institutional Investor segments.
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 for the Company were $384 million for the third
quarter of 1999, up $47 million, or 14%, from the third quarter of 1998. As
shown in the table below, the total number of revenue trades executed by the
Company has increased 36% as the Company's customer base, as well as customer
trading activity per account, has grown. Average commission per revenue trade
decreased 15%. This decline was mainly due to an increase in the proportion of
trades placed through the Company's online channels, which have lower commission
rates than the Company's other channels.
In the third quarter of 1999, the Company announced a plan to provide
independent investment managers with flat-fee pricing for Internet trades
(effective November 1, 1999). This price reduction is designed to enhance the
Company's competitive position and to align the pricing of Internet trades for
independent investment managers with that offered to most of the Company's
individual customers. While the effect of this price reduction cannot be
predicted with certainty, management expects that the impact of this reduction
on the Company's results of operations will be offset by the lower cost of
processing Internet trades and by expected growth in customer assets and trading
volumes associated with independent investment managers. This price reduction
will only affect the Institutional Investor segment and, based on management's
expectations, it will not have a material impact on that segment's revenues.
- --------------------------------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1999 1998 Change
- --------------------------------------------------------------------------------
Customer accounts that
traded during the quarter
(in thousands) 1,510 1,333 13%
Average customer
revenue trades
per account 5.73 4.78 20
Total revenue
trades (in thousands) 8,648 6,376 36
Average commission
per revenue trade $44.72 $52.83 (15)
Commissions earned
on customer revenue
trades (in millions) (1) $ 387 $ 337 15
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
customer trades totaling $9 million in the third quarter of 1999 and $7
million in the third quarter of 1998. Excludes commissions on trades
relating to specialist operations totaling $6 million in the third quarter
of 1999 and $7 million in the third quarter of 1998.
Mutual Fund Service Fees
The Company earns mutual fund service fees for recordkeeping 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 the daily balances
of customer assets invested in third-party funds and upon the average daily net
assets of Schwab's proprietary funds. Mutual fund service fees are earned
primarily through the Individual Investor and Institutional Investor segments.
Mutual fund service fees were $193 million for the third quarter of 1999,
up $49 million, or 34%, from the third quarter of 1998. This increase was
primarily due to a significant increase in customer assets in Schwab's
proprietary funds, collectively referred to as the SchwabFunds(R), as well as an
increase in customer assets in funds purchased through Schwab's Mutual Fund
OneSource(R) service.
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 through the Individual Investor and Institutional
Investor segments.
Net interest revenue was $182 million for the third quarter of 1999, up $58
million, or 47%, from the third quarter of 1998 as shown in the following table
(in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30, Percent
1999 1998 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to customers $254 $181 40%
Investments, customer-related 99 96 3
Other 24 14 71
- --------------------------------------------------------------------------------
Total 377 291 30
- --------------------------------------------------------------------------------
Interest Expense
Customer cash balances 174 148 18
Stock-lending activities 7 10 (30)
Borrowings 7 7
Other 7 2 250
- --------------------------------------------------------------------------------
Total 195 167 17
- --------------------------------------------------------------------------------
Net interest revenue $182 $124 47%
================================================================================
Customer-related daily average balances, interest rates and average net
interest margin for the third quarters of 1999 and 1998 are summarized in the
following table (dollars in millions):
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $13,405 $ 9,359
Average interest rate 7.50% 7.69%
Investments:
Average balance outstanding $ 8,262 $ 7,195
Average interest rate 4.72% 5.24%
Average yield on interest-earning assets 6.44% 6.63%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $17,596 $13,364
Average interest rate 3.93% 4.40%
Other interest-bearing sources:
Average balance outstanding $ 1,339 $ 1,341
Average interest rate 4.23% 4.32%
Average noninterest-bearing portion $ 2,732 $ 1,849
Average interest rate on funding sources 3.45% 3.90%
Summary:
Average yield on interest-earning assets 6.44% 6.63%
Average interest rate on funding sources 3.45% 3.90%
- --------------------------------------------------------------------------------
Average net interest margin 2.99% 2.73%
================================================================================
The increase in net interest revenue from the third quarter of 1998 was
primarily due to higher levels of margin loans to customers, partially offset by
higher average customer cash balances.
Principal Transactions
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq and other securities transactions effected
through the Capital Markets segment. Factors that influence principal
transaction revenues include the volume of customer trades, market price
volatility, average revenue per share traded, level of underwriting
participation and changes in regulations and industry practices.
Principal transaction revenues were $93 million for the third quarter of
1999, up $18 million, or 24%, from the third quarter of 1998. This increase was
primarily due to greater share volume handled by M&S, partially offset by lower
average revenue per share traded. The remainder of the increase was primarily
due to higher revenues related to Schwab's underwriting activities.
Expenses Excluding Interest
Compensation and benefits expense was $369 million for the third quarter of
1999, up $78 million, or 27%, from the third quarter of 1998 primarily due to a
greater number of employees and higher variable compensation expense resulting
from the Company's financial performance. This change was partially offset by
lower accrued liabilities for deferred compensation and estimated payroll taxes
on stock options resulting from the decline in CSC's stock price during the
quarter, and a decrease in the Company's expected contribution rate to its
employee stock ownership plan. The following table shows a comparison of certain
compensation and benefits components and employee data (in thousands):
- --------------------------------------------------------------------------------
Three Months
Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Compensation and benefits expense as a
% of revenues 42% 41%
Variable compensation as a
% of compensation and benefits expense 22% 25%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 15% 14%
Full-time equivalent employees(1) 17.4 13.0
Revenues per average full-time equivalent
employee $51.9 $54.1
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
Occupancy and equipment expense was $69 million for the third quarter of
1999, up $18 million, or 36%, from the third quarter of 1998. This increase was
primarily due to higher data processing equipment lease and maintenance expenses
resulting from the Company's continued investment in technology. Additionally,
office lease expenses increased reflecting the Company's continued expansion.
Advertising and market development expense was $58 million for the third
quarter of 1999, up $24 million, or 70%, from the third quarter of 1998. This
increase was primarily a result of the Company's increased television and print
media spending.
Professional services expense was $40 million for the third quarter of
1999, up $18 million, or 81%, from the third quarter of 1998. This increase was
primarily due to consulting fees related to various information technology
projects.
Other expenses were $22 million for the third quarter of 1999, down $14
million, or 38%, from the third quarter of 1998. This change was primarily due
to lower accrued liabilities resulting from the decline in CSC's stock price
during the quarter, including estimated local business taxes on stock options
and deferred fees for CSC's Board of Directors. This change in other expenses
was also due to lower trade errors, partially offset by an increase in higher
travel and related costs, and higher volume-related regulatory assessments and
dues.
The Company's effective income tax rate for the third quarters of 1999 and
1998 was 38.9% and 39.8%, respectively.
Nine Months Ended September 30, 1999
Compared To Nine Months Ended September 30, 1998
Financial Overview
Net income for the first nine months of 1999 was a record $418 million, up
73% from the first nine months of 1998 net income of $242 million. Diluted
earnings per share for the first nine months of 1999 and 1998 were $.50 and $.30
per share, respectively.
Revenues increased mainly due to higher customer trading volume. Revenues
of $2,817 million in the first nine months of 1999 grew $870 million, or 45%,
from the first nine months of 1998 due to increases in revenues of $578 million,
or 41%, in the Individual Investor segment, $178 million, or 80%, in the Capital
Markets segment, and $114 million, or 35%, in the Institutional Investor
segment. See note "8 - Segment Information" in the Notes to Condensed
Consolidated Financial Statements for financial information by segment.
The Company's trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Nine Months
Ended
September 30, Percent
Daily Average Trades 1999 1998 Change
- --------------------------------------------------------------------------------
Revenue Trades
Online 108.1 50.0 116%
TeleBroker(R)and VoiceBroker(TM) 8.5 8.4 1
Regional customer telephone
service centers, branch offices
and other 35.9 32.7 10
- --------------------------------------------------------------------------------
Total 152.5 91.1 67%
================================================================================
Mutual Fund OneSource(R) Trades
Online 22.4 17.8 26%
TeleBroker and VoiceBroker 1.0 1.1 (9)
Regional customer telephone
service centers, branch offices
and other 21.1 21.9 (4)
- --------------------------------------------------------------------------------
Total 44.5 40.8 9%
================================================================================
Total Daily Average Trades
Online 130.5 67.8 92%
TeleBroker and VoiceBroker 9.5 9.5
Regional customer telephone
service centers, branch offices
and other 57.0 54.6 4
- --------------------------------------------------------------------------------
Total 197.0 131.9 49%
================================================================================
Assets in Schwab customer accounts were $595.0 billion at September 30,
1999, an increase of $103.9 billion, or 21%, from December 31, 1998. During the
first nine months of 1999, net new customer assets and new accounts increased
from the first nine months of 1998 as shown in the table below.
- --------------------------------------------------------------------------------
Nine Months
Growth in Schwab Customer Ended
Assets and Accounts September 30, Percent
(In billions, except as noted) 1999 1998 Change
- --------------------------------------------------------------------------------
Net growth in assets
in Schwab customer accounts
Net new customer assets $ 73.6 $ 56.6
Net market gains (losses) 30.3 (2.0)
- --------------------------------------------------------------------------------
Net growth $ 103.9 $ 54.6
================================================================================
New Schwab customer accounts
(in thousands) 1,092.1 983.8 11%
================================================================================
Total operating expenses excluding interest during the first nine months
of 1999 were $2,128 million, up 38% from $1,547 million for the first nine
months of 1998, primarily resulting from additional staff and related costs.
The after-tax profit margin for the first nine months of 1999 was 14.9%,
up from 12.4% for the first nine months of 1998. The annualized return on
stockholders' equity for the first nine months of 1999 was 32%, up from 26% for
the first nine months of 1998.
REVENUES
Revenues grew $870 million, or 45%, in the first nine months of 1999, due
to a $386 million, or 41%, increase in commission revenues, a $174 million, or
94%, increase in principal transaction revenues, a $155 million, or 45%,
increase in net interest revenue and a $136 million, or 34%, increase in mutual
fund service fees.
- --------------------------------------------------------------------------------
Nine Months
Ended
September 30,
Composition of Revenues 1999 1998
- --------------------------------------------------------------------------------
Commissions 47% 48%
Principal transactions 13 10
- --------------------------------------------------------------------------------
Total trading revenues 60 58
- --------------------------------------------------------------------------------
Mutual fund service fees 19 21
Net interest revenue 18 18
Other 3 3
- --------------------------------------------------------------------------------
Total non-trading revenues 40 42
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Commissions
Commission revenues for the Company were $1,321 million for the first nine
months of 1999, up $386 million, or 41%, from the first nine months of 1998. As
shown in the table below, the total number of revenue trades executed by the
Company has increased 67% as the Company's customer base, as well as customer
trading activity per account, has grown. Average commission per revenue trade
decreased 15%. This decline was mainly due to an increase in the proportion of
trades placed through the Company's online channels as described in the
comparison between the three-month periods.
- --------------------------------------------------------------------------------
Nine Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1999 1998 Change
- --------------------------------------------------------------------------------
Customer accounts that
traded during the period
(in thousands) 2,822 2,405 17%
Average customer
revenue trades
per account 10.16 7.12 43
Total revenue
trades (in thousands) 28,668 17,131 67
Average commission
per revenue trade $ 46.36 $ 54.48 (15)
Commissions earned
on customer revenue
trades (in millions) (1) $ 1,329 $ 933 42
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
customer trades totaling $28 million in the first nine months of 1999 and
$17 million in the first nine months of 1998. Excludes commissions on
trades relating to specialist operations totaling $20 million in the first
nine months of 1999 and $18 million in the first nine months of 1998.
Mutual Fund Service Fees
Mutual fund service fees were $542 million for the first nine months of
1999, up $136 million, or 34%, from the first nine months of 1998. This increase
was attributable to the factors described in the comparison between the
three-month periods.
Net Interest Revenue
Net interest revenue was $500 million for the first nine months of 1999, up
$155 million, or 45%, from the first nine months of 1998 as shown in the
following table (in millions):
- --------------------------------------------------------------------------------
Nine Months
Ended
September 30, Percent
1999 1998 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 687 $ 499 38%
Investments, customer-related 298 290 3
Other 59 39 51
- --------------------------------------------------------------------------------
Total 1,044 828 26
- --------------------------------------------------------------------------------
Interest Expense
Customer cash balances 486 428 14
Stock-lending activities 23 30 (23)
Borrowings 20 19 5
Other 15 6 150
- --------------------------------------------------------------------------------
Total 544 483 13
- --------------------------------------------------------------------------------
Net interest revenue $ 500 $ 345 45%
================================================================================
Customer-related daily average balances, interest rates and average net
interest margin for the first nine months of 1999 and 1998 are summarized in the
following table (dollars in millions):
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $12,563 $ 8,678
Average interest rate 7.31% 7.69%
Investments:
Average balance outstanding $ 8,602 $ 7,280
Average interest rate 4.63% 5.32%
Average yield on interest-earning assets 6.22% 6.61%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $16,886 $12,838
Average interest rate 3.85% 4.46%
Other interest-bearing sources:
Average balance outstanding $ 1,516 $ 1,295
Average interest rate 3.70% 4.39%
Average noninterest-bearing portion $ 2,763 $ 1,825
Average interest rate on funding sources 3.34% 3.94%
Summary:
Average yield on interest-earning assets 6.22% 6.61%
Average interest rate on funding sources 3.34% 3.94%
- --------------------------------------------------------------------------------
Average net interest margin 2.88% 2.67%
================================================================================
The increase in net interest revenue from the first nine months of 1998
was primarily due to higher levels of margin loans to customers, partially
offset by higher average customer cash balances.
Principal Transactions
Principal transaction revenues were $361 million for the first nine months
of 1999, up $174 million, or 94%, from the first nine months of 1998. This
increase was primarily due to greater share volume handled by M&S, as well as
higher average revenue per share traded.
Expenses Excluding Interest
Compensation and benefits expense was $1,162 million for the first nine
months of 1999, up $327 million, or 39%, from the first nine months of 1998
primarily due to a greater number of employees and higher variable compensation
expense resulting from the Company's financial performance. The following table
shows a comparison of certain compensation and benefits components and employee
data (in thousands):
- --------------------------------------------------------------------------------
Nine Months
Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Compensation and benefits expense as a
% of revenues 41% 43%
Variable compensation as a
% of compensation and benefits expense 29% 22%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 14% 14%
Full-time equivalent employees(1) 17.4 13.0
Revenues per average full-time equivalent
employee $181.4 $148.0
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
Communications expense was $197 million for the first nine months of 1999,
up $43 million, or 28%, from the first nine months of 1998. This increase was
primarily due to higher customer trading volumes and the introduction of certain
online research tools in 1999.
Occupancy and equipment expense was $191 million for the first nine months
of 1999, up $43 million, or 29%, from the first nine months of 1998. This
increase was attributable to the factors described in the comparison between the
three-month periods.
Advertising and market development expense was $165 million for the first
nine months of 1999, up $63 million, or 62%, from the first nine months of 1998.
This increase was attributable to the factors described in the comparison
between the three-month periods.
Professional services expense was $109 million for the first nine months of
1999, up $45 million, or 71%, from the first nine months of 1998. This increase
was attributable to the factors described in the comparison between the
three-month periods.
The Company's effective income tax rate for the first nine months of 1999
and 1998 was 39.3% and 39.6%, respectively.
Liquidity and Capital Resources
Liquidity
Schwab
Liquidity needs relating to customer trading and margin borrowing
activities are met primarily through cash balances in customer accounts, which
were $20.1 billion and $17.5 billion at September 30, 1999 and December 31,
1998, respectively. Management believes that customer cash balances and
operating earnings will continue to be the primary sources of liquidity for
Schwab in the future.
Schwab is subject to regulatory requirements that are intended to ensure
the general financial soundness and liquidity of broker-dealers. These
regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying
cash dividends, or making unsecured advances or loans to its parent or employees
if such payment would result in net capital of less than 5% of aggregate debit
balances or less than 120% of its minimum dollar amount requirement of $1
million. At September 30, 1999, Schwab's net capital was $1,400 million (10% of
aggregate debit balances), which was $1,130 million in excess of its minimum
required net capital and $725 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, an increasing amount
of cash flows have been retained to support aggregate debit balances.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$1,400 million subordinated revolving credit facility maturing in September
2001, of which $615 million was outstanding at September 30, 1999. At quarter
end, Schwab also had outstanding $25 million in fixed-rate subordinated term
loans from CSC maturing in 2001. Borrowings under these subordinated lending
arrangements qualify as regulatory capital for Schwab.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured
bank credit lines totaling $715 million at September 30, 1999 (these lines are
also available for CSC to use). Schwab used such borrowings for 22 days during
the first nine months of 1999, with the daily amounts borrowed averaging $138
million. These lines were unused at September 30, 1999.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with 11 banks in favor of the OCC aggregating $855 million at
September 30, 1999. Schwab pays a fee to maintain these letters of credit. No
funds were drawn under these letters of credit at September 30, 1999.
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 marketable
securities, receivable from brokers, dealers and clearing organizations, and
cash and cash equivalents.
M&S' liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At September 30, 1999, M&S' net capital was
$12 million, which was $11 million in excess of its minimum required net
capital.
M&S may borrow up to $35 million under a subordinated lending arrangement
with CSC maturing in 2000. Borrowings under this arrangement qualify as
regulatory capital for M&S. This facility was unused during the first nine
months of 1999.
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 $465
million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from
the funding of cash dividends, common stock repurchases and acquisitions. The
Medium-Term Notes have maturities ranging from 1999 to 2009 and fixed interest
rates ranging from 5.90% to 7.50% with interest payable semiannually. The
Medium-Term Notes are rated A3 by Moody's Investors Service and A- by Standard &
Poor's Ratings Group.
CSC has a prospectus supplement on file with the Securities and Exchange
Commission enabling CSC to issue up to $395 million in Senior or Senior
Subordinated Medium-Term Notes, Series A. At September 30, 1999, $311 million of
these notes remained unissued.
CSC may borrow under its committed, unsecured credit facilities. CSC
maintains a $600 million facility with a group of fourteen banks which expires
in June 2000 and a $175 million facility with a group of nine banks which
expires in June 2001. The funds under both of these facilities are available for
general corporate purposes and CSC pays a commitment fee on the unused balance
of these facilities. The financial covenants in these facilities require CSC to
maintain minimum levels of stockholders' equity, and Schwab and M&S to maintain
specified levels of net capital, as defined. The Company believes that these
restrictions will not have a material effect on its ability to meet foreseeable
dividend or funding requirements. These facilities were unused during the first
nine months of 1999.
CSC also has access to the $715 million uncommitted, unsecured bank credit
lines that are primarily utilized by Schwab to manage short-term liquidity.
These lines were not used by CSC during the first nine months of 1999.
CSE
CSE's liquidity needs are generally met through earnings generated by its
operations. Most of CSE's assets are liquid, consisting primarily of cash and
investments required to be segregated, receivable from brokers, dealers and
clearing organizations, and receivable from customers and others.
CSE may borrow up to 20 million British pound, equivalent to $33 million at
September 30, 1999, under subordinated lending arrangements with CSC. At
September 30, 1999, CSE had outstanding 15 million British pound under these
arrangements, equivalent to $24 million, with 5 million British pound maturing
in 2001 and 10 million British pound maturing in 2003.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $530 million for the
first nine months of 1999, up 53% from $347 million for the first nine months of
1998, allowing the Company to finance its operations primarily with internally
generated funds. Depreciation and amortization expense related to equipment,
office facilities and property was $105 million for the first nine months of
1999, as compared to $97 million for the first nine months of 1998, or 4% and 5%
of revenues for each period, respectively. Amortization expense related to
intangible assets was $6 million for the first nine months of 1999, as compared
to $8 million for the first nine months of 1998.
The Company's capital expenditures net of proceeds from the sale of fixed
assets were $194 million in the first nine months of 1999 and $145 million in
the first nine months of 1998, or 7% of revenues for each period. Capital
expenditures in the first nine months of 1999 were for equipment relating to the
Company's information technology systems, telecommunications equipment, and
leasehold improvements. The Company opened twenty-eight new domestic branch
offices during the first nine months of 1999, compared to seven domestic branch
offices opened during the first nine months of 1998. Capital expenditures may
vary from period to period as business conditions change.
As reported in the Company's 1998 Annual Report to Stockholders,
management expected 1999 capital expenditures to increase 40% over the $190
million level in 1998, and estimated that approximately 75% of the 1999 planned
expenditures related to capacity and approximately 25% related to facilities
expansion and improvements. Management currently anticipates that full year 1999
capital expenditures will increase approximately 50% to 55% over the 1998 level
primarily due to the Company's enhancements to capacity and information
technology (approximately 65% of the total 1999 capital expenditures), and
facilities expansion and improvements (approximately 35% of the total).
The Company issued $144 million and repaid $30 million in Medium-Term Notes
during the first nine months of 1999.
During the first nine months of 1999, 14,427,100 of the Company's stock
options, with a range of exercise prices from $.97 to $27.50, were exercised
with cash proceeds received by the Company of $45 million and a related tax
benefit of $176 million. The cash proceeds are recorded as an increase in cash
and a corresponding increase in stockholders' equity. The tax benefit is
recorded as a reduction in income taxes payable and a corresponding increase in
stockholders' equity.
During the first nine months of 1999, the Company did not repurchase any
common stock. During the first nine months of 1998, the Company repurchased
12,309,500 shares of its common stock for $148 million. Since the inception of
the repurchase plan in 1988 through September 30, 1999, the Company has
repurchased 132,830,700 shares of its common stock for $314 million. At
September 30, 1999, authorization granted by the Company's Board of Directors
allows for future repurchases of 2,450,600 shares.
In April 1999, the Board of Directors approved a two-for-one split of the
Company's common stock, effected in the form of a 100% stock dividend. The stock
dividend was distributed on July 1, 1999 to stockholders of record June 1, 1999.
Share and per share data throughout this report have been restated to reflect
this transaction.
During the first nine months of 1999, the Company paid common stock cash
dividends totaling $34 million, up from $32 million paid during the first nine
months of 1998.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's total financial capital (borrowings plus
stockholders' equity) at September 30, 1999 was $2,521 million, up $741 million,
or 42% from December 31, 1998. At September 30, 1999, the Company had borrowings
of $465 million, or 18% of total financial capital, that bear interest at a
weighted-average rate of 6.71%. At September 30, 1999, the Company's
stockholders' equity was $2,056 million, or 82% of total financial capital.
Year 2000
Many existing computer programs use only two digits to identify a specific
year and therefore may not accurately recognize the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Due to the Company's dependence on
computer technology to operate its business, and the dependence of the financial
services industry on computer technology, the nature and impact of Year 2000
processing failures on the Company's business, financial position, results of
operations or cash flows could be material. The Company has modified and tested
its computer systems in order to enable its systems to process data and
transactions incorporating year 2000 dates without material errors or
interruptions. Because systems critical to the Company's functioning other than
its computer systems may be affected by the century change, the Company's Year
2000 compliance efforts also encompass facilities and equipment which rely on
date-dependent technology, such as building equipment that contains embedded
technology.
Status of Compliance Efforts
The Company's Year 2000 compliance efforts have been directed towards
defined categories of actions, which include awareness, inventory, assessment,
remediation, testing, installation, contingency planning and vendor management.
Attempting to assure that the Company's mission critical systems achieve Year
2000 compliance, that is, that they will operate without material errors or
interruptions when processing data and transactions incorporating year 2000
dates, has received the highest priority in the Company's Year 2000 compliance
efforts. "Mission critical" systems means systems critical to the ongoing
operation of the business. The remediation and associated required testing of
the Company's mission critical internal systems are complete, including the
systems of the Company's material subsidiaries.
Currently, the primary focus of the Company's efforts is contingency
planning, year-end planning and maintaining Year 2000 compliance as system
changes (including non-Year 2000 related products and enhancements) are
introduced. The Company anticipates that work on these phases of the project
will continue through the century change.
The Company's vendor management initiatives have included creating
inventories of vendors, analyzing the results of the inventories to assess the
criticality of specific vendor relationships in order to formulate plans for
dealing with possible Year 2000 issues, inquiring directly as to the status of
vendors' Year 2000 compliance efforts, and continuing contacts with vendors to
monitor the progress of vendors who may not yet have achieved Year 2000
compliance. All material vendor compliance efforts for mission critical
third-party products and services were completed as of the end of the third
quarter of 1999, except for efforts where completion is dependent on third
parties whose actions are beyond the Company's control, and except for
contingency planning efforts which by their nature will be continuing until the
century change is completed.
The success of the Company's Year 2000 compliance efforts depends in part
on parallel efforts being undertaken by vendors and other third parties with
which the Company's systems interact and therefore, the Company has taken steps
to determine the status of critical third parties' Year 2000 compliance. There
can be no assurance that all such third parties will provide accurate and
complete information or that all their systems in fact will achieve full Year
2000 compliance. Third parties' Year 2000 processing failures might have a
material adverse impact on the Company's systems and operations. The Company's
Year 2000 compliance efforts may also be adversely affected by regulatory
changes, changes in industry practices, the cost and continued availability of
qualified personnel and other resources, and significant systems modifications
unrelated to the Year 2000 project including upgrades and additions to capacity.
The progress of the Company's Year 2000 compliance efforts is managed and
reviewed by senior management and the Company's Year 2000 Corporate Steering
Committee, which is responsible for maintaining awareness of Year 2000 issues
throughout the Company, monitoring overall progress of the project, resolving
issues, and providing strategic direction. The Company's Board of Directors
receives regular status reports on the project.
Contingency Planning and Risks
The Company commenced its contingency planning efforts in 1997. Its
contingency planning process is intended to create, update, and implement, as
necessary, plans in the event of Year 2000 errors or failures of third parties
with whom the Company interacts or who supply critical services or goods to the
Company, or of the Company itself.
In management's opinion, there is not sufficient reliable information
available to enable the Company to determine whether any specific Year 2000
failures are reasonably likely to occur. However, the Company has developed
firm-wide contingency scenarios which take into account multiple simultaneous
failures, and corresponding contingency plans. These scenario-based contingency
plans are in addition to both contingency plans developed on a business-unit
level and the Company's overall business resumption plans. Corresponding
staffing and training plans have been completed. A Corporate Command Center is
being established for contingency plan activation and centralized
communications.
The Company continues to take steps to reduce this uncertainty by
participating in industry conferences, communicating with business alliance
partners, monitoring critical vendors, monitoring national and international
governmental and industry initiatives, and working with professional consultants
and advisors. Given the uncertainty of predicting which, if any, Year 2000
errors or failures are reasonably likely to occur, the Company's contingency
planning process targets systems, transactions, processes, and third parties
that are deemed to be critical to the Company's business, results of operations,
or financial condition.
Compliance Cost Estimates
The Company currently estimates that the cost of completing its Year 2000
project, including mission critical and other core brokerage computer systems,
distributed applications, facilities, and systems in subsidiaries other than
Schwab, is approximately $86 million to $91 million. Additionally, the Company
currently anticipates spending prior to the end of 1999 approximately $8 million
to complete its contingency plans. This amount does not include the costs of
executing such plans if certain contingencies occur.
The Company's cost estimates exclude the time that may be spent by staff
not specifically dedicated to the Year 2000 project. As of September 30, 1999,
the Company had incurred approximately $81 million of the estimated cost of the
project and an additional $2 million on its contingency plans.
The estimated cost and timing of the project are based on the Company's
estimates, which make numerous assumptions about future events. However, there
can be no assurance that these estimates will be correct and actual costs and
timing could differ materially from these estimates. The Company has funded and
expects to fund all Year 2000 related costs through operating cash flows and a
reallocation of the Company's overall developmental spending. This reallocation
did not result in the delay of any critical information technology projects. In
accordance with generally accepted accounting principles, Year 2000 expenditures
are expensed as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial Instruments Held For Trading Purposes
The Company held government securities and certificates of deposit with a
fair value of approximately $26 million and $11 million at September 30, 1999
and 1998, respectively. These securities, and the associated interest rate risk,
are not material to the Company's financial position, results of operations or
cash flows.
Through Schwab and M&S, the Company maintains inventories in
exchange-listed and Nasdaq equity securities on both a long and short basis. The
fair value of these securities at September 30, 1999 was $61 million in long
positions and $39 million in short positions. The fair value of these securities
at September 30, 1998 was $37 million in long positions and $46 million in short
positions. Using a hypothetical 10% increase or decrease in prices, the
potential loss or gain in fair value is estimated to be approximately $2,200,000
and $900,000 at September 30, 1999 and 1998, respectively, due to the offset of
change in fair value in long and short positions. In addition, the Company
generally enters into exchange-traded option contracts to hedge against
potential losses in equity inventory positions, thus reducing this potential
loss exposure. This hypothetical 10% change in fair value of these securities at
September 30, 1999 and 1998 would not be material to the Company's financial
position, results of operations or cash flows. The notional amount and fair
value of option contracts were not material to the Company's consolidated
balance sheets at September 30, 1999 and 1998.
Financial Instruments Held For Purposes Other Than Trading
For its working capital and reserves required to be segregated under
federal or other regulations, the Company invests in money market funds, resale
agreements, certificates of deposit, and commercial paper. Money market funds do
not have maturity dates and do not present a material market risk. The other
financial instruments, as shown in the following table, are fixed rate
investments with short-term maturities and are not subject to material changes
in value due to interest rate movements (dollars in millions):
- --------------------------------------------------------------------------------
Principal Amount
by Maturity Date Fair Value
September 30, 2000 Thereafter 1999 1998
- --------------------------------------------------------------------------------
Resale agreements (1) $7,621 $7,621 $5,680
Weighted-average interest rate 5.14%
Certificates of deposit $ 940 $ 940 $1,559
Weighted-average interest rate 5.31%
Commercial paper $ 240 $ 240 $ 553
Weighted-average interest rate 5.60%
================================================================================
(1) Fair value at September 30, 1999 includes resale agreements of $7,306
million included in cash and investments required to be segregated under
federal or other regulations and $315 million included in cash and cash
equivalents.
At September 30, 1999, CSC had $465 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 5.90% to 7.50%. At
September 30, 1998, CSC had $351 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 5.78% to 7.72%. The
Company has fixed cash flow requirements regarding these Medium-Term Notes due
to the fixed rate of interest. The fair value of these Medium-Term Notes at
September 30, 1999 and 1998, based on estimates of market rates for debt with
similar terms and remaining maturities, approximated their carrying amount. The
table below presents the principal amount of these Medium-Term Notes by year of
maturity (dollars in millions):
- --------------------------------------------------------------------------------
Year Ending Weighted-Average Principal
December 31, Interest Rate Amount
- --------------------------------------------------------------------------------
1999 5.9% $ 10
2000 6.3% 48
2001 7.0% 39
2002 7.0% 53
2003 6.5% 49
Thereafter 6.8% 266
================================================================================
The Company maintains investments in mutual funds, approximately $55
million and $42 million at September 30, 1999 and 1998, respectively, to fund
obligations under its deferred compensation plan, which is available to certain
employees. 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
3.10 Fourth Restated Certificate of Incorporation, effective July 30,
1999, of the Registrant, which includes amendments through May 20,
1999 (supersedes Exhibit 3.7).
10.207 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include Amendments through May 17, 1999 (supersedes Exhibit
10.203).
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
On July 6, 1999, the Registrant filed a Current Report on Form 8-K relating
to up to $395 million aggregate principal amount of debt securities
issuable by the Registrant pursuant to Registration Statement Numbers
333-77381 and 333-54001 declared effective by the Securities and Exchange
Commission on June 25, 1999 and July 8, 1998, respectively. Certain
exhibits relating to the Medium-Term Notes, Series A, which are issuable
pursuant to the Registration Statements, are contained in the Form 8-K.
<PAGE>
THE CHARLES SCHWAB CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: November 10, 1999 /s/ Christopher V. Dodds
----------------- ------------------------------------
Christopher V. Dodds
Executive Vice President and
Chief Financial Officer
Exhibit 3.10
FOURTH RESTATED CERTIFICATE OF INCORPORATION
OF
THE CHARLES SCHWAB CORPORATION
(Originally incorporated on November 25, 1986,
under the name CL Acquisition Corporation)
FIRST. The name of this corporation (hereinafter called
the "Corporation") is THE CHARLES SCHWAB CORPORATION.
SECOND. The address of the registered office of this
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle, and its registered agent at that address is
THE CORPORATION TRUST COMPANY.
THIRD. The purpose of this Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH.
(A) This Corporation is authorized to issue two classes of
stock, preferred stock and common stock. The authorized number of shares of
capital stock is Two Billion, Nine Million, Nine Hundred Forty Thousand
(2,009,940,000) shares, of which the authorized number of shares of preferred
stock is Nine Million, Nine Hundred Forty Thousand (9,940,000) and the
authorized number of shares of common stock is Two Billion (2,000,000,000). The
stock, whether preferred stock or common stock, shall have a par value of one
cent ($0.01) per share.
(B) Shares of preferred stock may be issued from time to time
in one or more series. The Board of Directors of this Corporation is hereby
authorized to fix or alter the voting rights, powers, preferences and
privileges, and the relative, participating, optional or other rights, if any,
and the qualifications, limitations or restrictions thereof, of any wholly
unissued series of preferred stock; and to fix the number of shares constituting
any such series and the designation thereof; and to increase or decrease the
number of shares of any series of preferred stock (but not below the number of
shares thereof then outstanding).
FIFTH. The Bylaws of the Corporation may be made, altered,
amended, or repealed, and new Bylaws may be adopted, by the Board of Directors
at any regular or special meeting by the affirmative vote of a majority of those
directors present at any meeting of the directors; subject, however, to the
right of the stockholders to alter, amend or repeal any Bylaws made or amended
by the directors. Notwithstanding the foregoing, after the 1996 Annual Meeting
of Stockholders, Sections 2.06, 2.10, 3.02, 3.05, 3.06 and 8.04 of the
Corporation's Bylaws may not be amended, altered or repealed, nor may any
provision inconsistent with such Sections be adopted, except by the affirmative
vote of the holders of no less than 80% of the total voting power of all shares
of the Corporation entitled to vote generally in the election of directors,
voting together as a single class.
SIXTH.
(A) Number, Election and Terms. Except as otherwise fixed by
or pursuant to the provisions of Article FOURTH hereof relating to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect, additional directors under
specified circumstances, the number of the directors of the Board of the
Corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies. Commencing with the 1996
annual meeting of stockholders, the directors, other than those who may be
elected by the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as is reasonably possible, one class to be originally
elected for a term expiring at the annual meeting of stockholders to be held in
1997, the second class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1998, and the third class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1999, with each director to hold office until his or her successor is
duly elected and qualified. At each annual meeting of the stockholders of the
Corporation, commencing with the 1997 annual meeting, the successors of the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election, with each director to hold
office until his or her director shall have been duly elected and qualified.
(B) Stockholder nomination of director candidates. Advance
notice of stockholder nominations for the election of directors shall be given
in the manner provided in the Bylaws of the Corporation.
(C) Vacancies. Subject to applicable law and except as
otherwise provided for or fixed by or pursuant to the provisions of Article
FOURTH hereof relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, and unless the
Board of Directors otherwise determines, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
and newly created directorships resulting from any increase in the authorized
number of directors, may be filled only by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the Board of Directors,
and directors so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of office of the class to which they
have been elected expires and until such director's successor shall have been
duly elected and qualified. No decrease in the number of authorized directors
constituting the Board of Directors of the Corporation shall shorten the term of
any incumbent director.
(D) Removal. Subject to the rights of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, any director may
be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of 80% of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
SEVENTH. Elections of directors shall be by written ballot.
EIGHTH. No director of this Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty as a director. Notwithstanding the foregoing sentence,
a director shall be liable to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
General Corporation Law of the State of Delaware, or (iv) for any transaction
from which the director derived an improper personal benefit. No amendment to or
repeal of this Article EIGHTH shall apply to or have any effect on the liability
or alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal.
NINTH. No stockholder shall be entitled to cumulate votes
(i.e., cast for any nominee for election to the Board of Directors of the
Corporation a number of votes greater than the number of the stockholder's
shares).
TENTH.
(A) In addition to any affirmative vote required by law, by
this Restated Certificate of Incorporation, by a certificate filed under Section
151(g) of the General Corporation Law of the State of Delaware, or by the
Bylaws, and except as otherwise expressly permitted in paragraph (B) of this
Article TENTH, a Business Combination (as hereafter defined) with, for, or on
behalf of, any Interested Stockholder (as hereafter defined) or any Affiliate or
Associate (as hereafter defined) of such Interested Stockholder shall require
the affirmative vote of at least 80% of the votes entitled to be cast by the
holders of all the then outstanding Voting Stock (as hereafter defined), voting
together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage of a separate class vote may otherwise be specified, by law or by any
agreement between this Corporation and any national securities exchange or
otherwise.
(B) The provisions of paragraph (A) of this Article TENTH
shall not be applicable to any particular Business Combination, and such
Business Combination shall require only such vote, if any, as is required by
law, or by any other provisions of this Restated Certificate of Incorporation,
or by a certificate filed under Section 151(g) of the General Corporation Laws
of the State of Delaware, or by the Bylaws, or by any agreement between this
Corporation and any national securities exchange if (i) such Business
Combination shall have been specifically approved by a majority of the
Disinterested Directors (as hereafter defined) at the time or (ii) all the
conditions specified in each of the following subparagraphs (1), (2), (3), (4),
(5) and (6) are satisfied.
(1) The aggregate amount of cash and the Fair Market
Value (as hereafter defined)as of the Consummation Date (as hereafter defined)
of any consideration other than cash to be received per share by holders of
Voting Stock in such Business Combination, shall be at least equal to the
highest amount determined under clauses (a) and (b) below:
(a) (if applicable) the highest per share
price (including any brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by or on behalf of such Interested Stockholder for any share
of Voting Stock in connection with the acquisition by the Interested Stockholder
of Beneficial Ownership (as hereafter defined) of shares of Voting Stock (i)
within the five-year period immediately prior to the Announcement Date (as
hereafter defined) or (ii) in the transaction or series of transactions in which
it became an Interested Stockholder, whichever is higher, in either case
adjusted for any subsequent stock split, stock dividend, subdivision or
reclassification with respect to Voting Stock; or
(b) the Fair Market Value per share of
Voting Stock on the Announcement Date or the Determination Date (as hereafter
defined), whichever is higher, as adjusted for any subsequent stock split, stock
dividend, subdivision or reclassification with respect to Voting Stock.
(2) The consideration to be received by holders of a
particular class of series of outstanding Voting Stock shall be in cash or in
the same form as previously has been paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of Beneficial
Ownership of shares of such class or series of Voting Stock. If the
consideration so paid for share of any class or series of Voting Stock varied as
to form, the form of consideration for such class or series of Voting Stock
shall either be cash or the form used to acquire Beneficial Ownership of the
largest number of shares of such class or series of Voting Stock acquired by the
Interested Stockholder during the five-year period prior to the Announcement
Date. If non-cash consideration is to be paid, the Fair Market Value of such
non-cash consideration shall be determined on and as of the Consummation Date.
(3) After the Determination Date and prior to the
Consummation Date there shall have been (a) no failure to declare and pay at the
regular date therefor any full quarterly dividends (whether or not cumulative)
payable in accordance with the terms of any outstanding Voting Stock; (b) no
reduction in the annual rate of dividends paid on the Voting Stock (except as
necessary to reflect any split or subdivision of the Voting Stock), except as
approved by a majority of the Disinterested Directors; (c) an increase in such
annual rate of dividends (as necessary to prevent any such reduction) in the
event of any reclassification (including any reverse stock split or combination
of shares), recapitalization, reorganization or any similar transaction that has
the effect of reducing the number of outstanding shares of the Voting Stock,
unless the failure so to increase such annual rate is approved by a majority of
the Disinterested Directors; and (d) no transaction by which such Interested
Stockholder has become the Beneficial Owner of any additional shares of Voting
Stock except as part of the transaction that results in the Interested
Stockholder becoming an Interested Stockholder and except in a transaction that,
after giving effect thereto, would not result in any increase in the Interested
Stockholder's percentage Beneficial Ownership of any class or series of Voting
Stock.
(4) After the Determination Date, such Interest
Stockholder shall not have received the benefit, directly or indirectly (except
as a stockholder of this Corporation, in proportion to its stockholding), of any
loans, advances, guarantees or similar financial assistance or any tax credits
or tax advantages provided by this Corporation (collectively, "Financial
Assistance"), whether in anticipation of or in connection with such Business
Combination or otherwise.
(5) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be mailed
to stockholders of the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act, rules or regulations, or subsequent
provisions). The proxy or information statement shall contain on the first page
thereof, in a prominent location, any statement as to the advisability or
inadvisability of the Business Combination that the Disinterested Directors, or
any of them, may desire to make, and, if deemed advisable by a majority of the
Disinterested Directors, the proxy or information statement shall contain the
opinion of an independent investment banking firm selected by a majority of the
Disinterested Directors as to the fairness or lack of fairness of the terms of
the Business Combination from a financial point of view to the holders of the
outstanding shares of Voting Stock other than the Interested Stockholder and its
Affiliates or Associates, such investment banking firm to be paid a reasonable
fee for its services by this Corporation.
(6) Such Interested Stockholder shall not have made
any major change in this Corporation's business or equity capital structure
without the approval of a majority of the Disinterested Directors.
(C) The following definitions shall apply with respect to this
Article TENTH:
(1) The terms "Affiliate" and "Associate" shall
have the respective meanings ascribed to those terms in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, and as in effect on the date that
this provision of the Restated Certificate of Incorporation of this Corporation
is approved by the stockholders (the term "registrant" in said Rule 12b-2
meaning in this case the Corporation).
(2) The term "Announcement Date" with respect to any
Business Combination means the date of the first public announcement of the
proposal of such Business Combination.
(3) A person shall be a "Beneficial Owner" of, or
have "Beneficial Ownership" of, or "Beneficially Own," any Voting Stock over
which such person or any of its Affiliates or Associates, directly or
indirectly, through any contract, arrangement, understanding or relationship,
has or shares or, upon the exercise of any conversion right, exchange right,
warrant, option or similar interest (whether or not then exercisable) would have
or share, either (a) voting power (including the power to vote or to direct the
voting) of such security or (b) investment power (including the power to dispose
or direct the disposition) of such security. For the purposes of determining
whether a person is an Interested Stockholder, the number of shares of Voting
Stock deemed to be outstanding shall include any shares Beneficially Owned by
such person even thought not actually outstanding, but shall not include any
other shares of Voting Stock which are not outstanding but which may be issuable
to other persons pursuant to any agreement, arrangement or understanding, or
upon exercise of any conversion right, exchange right, warrant, option or
similar interest.
(4) The term "Business Combination" shall mean:
(a) any merger or consolidation of this
Corporation or any Subsidiary (as hereafter defined) with (i) any Interested
Stockholder (as hereafter defined) or (ii) any other corporation (whether or not
itself an Interested Stockholder) which after such merger or consolidation would
be an Affiliate or Associate of an Interested Stockholder; or
(b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition on or security agreement, investment,
loan, advance, guarantee, agreement to purchase, agreement to pay, extension of
credit, joint venture participation or other arrangement (in one transaction or
a series of related transactions) with or for the benefit of any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder,
involving any assets, securities, or commitments of this Corporation, any
Subsidiary or any Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder which, together with all other such arrangements
(including all contemplated future events) have an aggregate Fair Market Value
as hereafter defined) and/or involve aggregate commitments of $5,000,000 or
more; or
(c) the issuance or transfer by this
Corporation or any Subsidiary (in one transaction or a series of related
transactions) to an Interested Stockholder or Associate or Affiliate of an
Interested Stockholder of any securities of this Corporation or any Subsidiary
in exchange for cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value as of the Announcement Date of $5,000,000
or more, other than the issuance of securities upon the conversion or exchange
of securities of this Corporation or in exchange for securities of any
Subsidiary which were acquired by an Interested Stockholder from this
Corporation or a Subsidiary in a Business Combination which was approved by a
vote of the shareholders pursuant to this Article TENTH; or
(d) the adoption of any plan or proposal
for the liquidation or dissolution of this Corporation; or
(e) any reclassification of any securities
of this Corporation (including any reverse stock split), any recapitalization of
the Voting Stock of this Corporation, any merger or consolidation of this
Corporation with or into any of its Subsidiaries, or any other transaction
(whether or not with or otherwise involving any Interested Stockholder) that has
the effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of Voting Stock or series thereof of the
Corporation or of any Subsidiary Beneficially Owned by any Interested
Stockholder or Associate or Affiliate of any Interested Stockholder or as a
result of which the stockholders of the Corporation would cease to be
stockholders of a corporation having, as part of its certificate of
incorporation, provisions to the same effect as this Article TENTH and the
provisions of Article ELEVENTH of this Restated Certificate of Incorporation
relating to the provisions of this Article TENTH; or
(f) any agreement, contract, or other
arrangement providing for one or more of the actions specified in the foregoing
paragraphs (a) through (e), or any series of transactions which, if taken
together, would constitute one or more of the actions specified in the foregoing
paragraphs (a) through (e).
(5) The term "Consummation Date" means the date of
the consummation of a Business
Combination.
(6) The term "Determination Date" in respect to an
Interested Stockholder means the date on which such Interested Stockholder first
became an Interested Stockholder.
(7) The term "Disinterested Director" with respect to
a Business Combination means any member of the Board of Directors of this
Corporation who (a) is not an Interested Stockholder involved in such Business
Combination; (b) is not an Affiliate or Associate of such Interested
Stockholder; (c) is not a party to any agreement or arrangement with such
Interested Stockholder to act in concert with such Interested Stockholder to
direct the management or policies of this Corporation; and (d) either (i) was a
member of the Board of Directors prior to the time that such Interested
Stockholder became an Interested Stockholder, or (ii) is a successor of a
Disinterested Director and was nominated to succeed a Disinterested Director by
a majority of the Disinterested Directors at the time of his nomination;
provided, however, that any member of the Board of Directors may be a
Disinterested Director with respect to a Business Combination involving an
Interested Stockholder who was an Interested Stockholder on the date that the
second Restated Certificate of Incorporation of this Corporation filed by the
Secretary of State of the State of Delaware was so filed, notwithstanding the
failure of such member to satisfy the conditions set forth in clause (d) above.
Any reference to "Distinterested Directors" shall refer to a single
Disinterested Director if there be but one. Any matter referred to as requiring
approval of, or having been approved by, a majority of the Disinterested
Directors shall mean the matter requires the approval of, or has been approved
by, the Board of Directors of this Corporation without giving effect to the vote
of any Director who is not a Disinterested Director and with the affirmative
vote of a majority of the Disinterested Directors."
(8) The term "Fair Market Value" as of any particular
date means: (a) in the case of cash, the amount of such cash; (b) in the case of
stock (including Voting Stock), the highest closing price per share of such
stock during the thirty-day period immediately preceding the date in question on
the largest United States securities exchange registered under the Securities
Exchange Act of 1934, as amended, on which such stock is listed or, if such
stock is not listed on any such exchange, the highest last sales price as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") during the thirty-day period immediately preceding
the date in question if the stock is a National Market System security or, if
such stock is not a National Market System security, the highest reported
closing bid quotation for a share of such stock during the thirty-day period
preceding the date in question on NASDAQ or any successor quotation reporting
system or, if quotations are not available in such system, as furnished by the
National Quotation Bureau Incorporated or any similar organization furnishing
quotations, or if no such quotations are available, the fair market value on the
date in question of a share of such stock as determined by a majority of the
Disinterested Directors in good faith; and (c) in the case of stock of any class
or series which is not traded on any securities exchange or in the
over-the-counter market, or in the case of property other than cash or stock, or
in the case of Financial Assistance, the fair market value of such stock,
property or Financial Assistance, as the case may be, on the date in question as
determined by a majority of the Disinterested Directors in good faith.
(9) The term "Interested Stockholder" shall mean any
person, other than this Corporation, any Subsidiary or any employee benefit plan
of this Corporation or any Subsidiary, who or which:
(a) is, or has announced or publicly
disclosed a plan or intention to become, the Beneficial Owner, directly or
indirectly, of shares of Voting Stock representing 15% or more of the total
votes which all of the then-outstanding shares of Voting Stock are entitled to
cast in the election of directors; or
(b) is an Affiliate or Associate of any
person described in Subparagraph 9(a) at any time during the five-year period
immediately preceding the date in question; or
(c) acts with any other person as a
partnership, limited partnership, syndicate, or other group for the purpose of
acquiring, holding or disposing of securities of this Corporation, and such
group is the Beneficial Owner, directly or indirectly, of shares of Voting Stock
representing 15% or more of the total votes which all of the then-outstanding
share of Voting Stock are entitled to cast in the election of directors.
Any reference to a particular Interested Stockholder involved
in a Business Combination shall also refer to any Affiliate or Associate
thereof, any predecessor thereto and any other person acting as a member of a
partnership, limited partnership, syndicate group with such particular
Interested Stockholder within the meaning of the foregoing clause (c) of this
subparagraph (9).
(10) A "person" shall mean any individual, firm,
company, corporation, (which shall include a business trust), partnership, joint
venture, trust or estate, association or other entity.
(11) The term "Subsidiary" in respect of this
Corporation means any corporation or partnership of which a majority of any
class of its equity securities is owned, directly or indirectly, by this
Corporation.
(12) The term "Voting Stock" shall mean all shares of
capital stock that entitle the holder to vote for the election of directors,
including, without limitation, this Corporation's common stock.
(D) A majority of the Disinterested Directors shall have the
power and duty to determine, on the basis of information known to them after
reasonably inquiry, all facts necessary to determine compliance with this
Article TENTH, including, without limitation (1) whether a person is an
Interested Stockholder, (2) the number of shares of Voting Stock Beneficially
Owned by any person, (3) whether a person is an Affiliate or Associate of
another person, (4) whether the requirements of paragraph (B) of this Article
TENTH have been met with respect to any Business Combination, (5) whether the
proposed transaction is with, or proposed by, or on behalf of an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder, and (6)
whether the assets which are the subject of any Business Combination have, or
the consideration to be received for the issuance or transfer of securities by
this Corporation or any Subsidiary in any Business Combination has, an aggregate
Fair Market Value of $5,000,000 or more. The good faith determination of a
majority of the Disinterested Directors on such matters shall be conclusive and
binding for all purposes of this Article TENTH.
(E) Nothing contained in this Article TENTH shall be construed
to relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
(F) The fact that any Business Combination complies with
paragraph (B) of this Article TENTH shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or any
member thereof, to approve such Business Combination or recommend its adoption
or approval to the stockholders of this Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board, or any member
thereof, with respect to evaluations of or actions and responses taken with
respect to such Business Combination.
(G) For purposes of this Article TENTH, a Business Combination
or any proposal to amend, repeal or adopt any provision of this Restated
Certificate of Incorporation inconsistent with this Article TENTH (collectively,
"Proposed Action") is presumed to have been proposed by, or on behalf of, an
Interested Stockholder or an Affiliate or Associate of an Interested Stockholder
or a person who thereafter would become such if (1) after the Interested
Stockholder became such, the Proposed Action is proposed following the election
of any director of this Corporation who, with respect to such Interested
Stockholder, would not qualify to serve as a Disinterested Director or (2) such
Interested Stockholder, Affiliate, Associate or person votes for or consents to
the adoption of any such Proposed Action, unless as to such Interested
Stockholder, Affiliate, Associate or person, a majority of the Disinterested
Directors makes a good faith determination that such Proposed Action is not
proposed by or on behalf of such Interested Stockholder, Affiliate, Associate or
person, based on information known to them after reasonably inquiry.
ELEVENTH. Except as otherwise fixed by or pursuant to the
provisions of Article FOURTH hereof relating to the rights of holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation with respect to such class or series of stock, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of such holders and
may not be effected by any consent in writing by such stockholders.
TWELFTH.
(A) This Corporation reserves the right at any time and from
time to time to amend, alter, change or repeal any provisions contained herein,
and other provisions authorized by the laws of the State of Delaware at the time
in force may be added or inserted, in the manner now or hereafter prescribed by
law, and all rights, preferences, and privileges of whatsoever nature conferred
upon shareholders, directors, or any other person whomsoever by or pursuant to
the Restated Certificate of Incorporation in its present form or as hereafter
are granted, subject to the rights reserved in this Article TWELFTH.
(B) In addition to any requirements of law and any other
provisions hereof (and notwithstanding the fact that approval by a lesser vote
may be permitted by law or any other provision hereof), the affirmative vote of
the holders of 80% or more of the combined voting power of the then-outstanding
shares of Voting Stock, voting together as a single class, shall be required to
amend, alter or repeal, or adopt any provision inconsistent with, this Article
TWELFTH or Articles FIFTH, SIXTH, NINTH, TENTH and ELEVENTH hereof.
This Fourth Restated Certificate of Incorporation of The
Charles Schwab Corporation was duly adopted in accordance with Section 245 of
the Delaware General Corporation Law. This Restated Certificate restates and
integrates and does not further amend the provisions of the Certificate of
Incorporation of The Charles Schwab Corporation as heretofore amended. No
discrepancy exists between the provisions of the Certificate of Incorporation as
amended and the provisions of this Restated Certificate.
Executed this 29th day of July, 1999.
/s/ Willie C. Bogan
-------------------------------------
Willie C. Bogan
Assistant Corporate Secretary
Acknowledged:
/s/ Jane E. Fry
- -----------------
Jane E. Fry
Assistant Corporate Secretary
Exhibit 10.207
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
(Restated to include Amendments through May 17, 1999)
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. Limitations 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.
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 subject to an Option to any one Participant in any one
fiscal year shall be 2,250,000; 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 900,000. The limitations set forth in the preceding
sentence shall be subject to adjustment pursuant to Article 10; and
The limitations of this Article 3 shall each be subject to adjustment
pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares.
Article 4. Eligibility.
4.1 General Rule. Key Employees 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 3,500 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 2,500 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 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.
4.6 Options Issued To Non-Employee Directors In Lieu of Fee Deferrals.
In addition to any awards pursuant to Sections 4.1 and 4.2, a Non-Employee
Director who elects to defer the receipt of amounts pursuant to Section 5.1 of
The Charles Schwab Corporation Directors' Deferred Compensation Plan (the
"Directors Deferred Compensation Plan") and elects to receive stock options in
lieu of a Deferral Account balance pursuant to Section 5.4(2) of the Directors
Deferred Compensation Plan, shall be entitled to receive a grant of NSOs
hereunder on the date the amounts would have been payable to the Non-Employee
Director if the Non-Employee Director had not made such deferral election. Any
NSOs issued pursuant to this Section shall be issued pursuant to the terms set
forth in subsections (c), (d) and (e) of Section 4.2 hereof.
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 (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.
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 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. Upon the exercise of the Underlying Options, the Replacement
Options shall be evidenced by an amendment to the Underlying Option Agreement.
Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement
Option is not intended to qualify as an ISO. The Exercise Price of a Replacement
Option shall be no less than the Fair Market Value of a Common Share on the date
the grant of the Replacement Option becomes effective. The term of each
Replacement Option shall be equal to the remaining term of the Underlying
Option. No Replacement Options shall be granted to Optionees when Underlying
Options are exercised pursuant to the terms of the Plan and the Underlying
Option Agreement following termination of the Optionee's employment. The
Committee, in its sole discretion, may establish such other terms and conditions
for Replacement Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees. In the case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock
Option Agreement. However, the Committee may specify in the Stock
Option Agreement that payment may be made pursuant to Section 6.2 or
6.3.
(b) In the case of an NSO, the Committee may at any time accept
payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NSOs
are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be issued
pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other criteria as the Committee may adopt;
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 decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as
the Company's other stockholders.
(b) During the period of restriction, Named Executive Officers
holding Restricted Shares granted hereunder shall be credited with
all regular cash dividends paid with respect to all Restricted Shares
while they are so held. If a dividend is paid in the form of cash,
such cash dividend shall be credited to Named Executive Officers
subject to the same restrictions on transferability and
forfeitability as the Restricted Shares with respect to which they
were paid. If any dividends or distributions are paid in shares of
Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted
Shares with respect to which they were paid. Subject to the
succeeding paragraph, and to the restrictions on vesting and the
forfeiture provisions, all dividends credited to a Named Executive
Officer shall be paid to the Named Executive Officer within
forty-five (45) days following the full vesting of the Restricted
Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative
security" or an "equity security" pursuant to Rule 16(a) under the
Exchange Act, such dividend shall be subject to a vesting period
equal to the longer of: (i) the remaining vesting period of the
Restricted Shares with respect to which the dividend is paid; or (ii)
six (6) months. The Committee shall establish procedures for the
application of this provision.
Named Executive Officers holding Restricted Shares shall have
the same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the maximum number of
Common Shares which may be granted under Article 3 to any one Participant in any
one fiscal year either subject to an Option or as Restricted Shares or
Performance Share Awards, (c) the number of Performance Share Awards included in
any prior Award which has not yet been settled, (d) the number of Common Shares
covered by each outstanding Option or (e) 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 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
(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 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 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;
(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 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.
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.
<PAGE>
ADDENDUM A
The provisions of the Plan, as amended by the terms of this Addendum A,
shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions shall apply
in addition to those set out in section 16 of the Plan:
Approved Option Means a stock option designed to qualify as an approved
executive share option under the Taxes Act;
Inland Revenue means the Board of the Inland Revenue in the United Kingdom.
Key U.K. Employee means a designated employee of Sharelink Investment
Services plc or any subsidiary (as that term is defined in the Companies
Act 1985 of the United Kingdom, as amended) of which Sharelink Investment
Services plc has control for the purposes of section 840 of the Taxes Act;
Taxes Act means the Income and Corporation Taxes Act 1988 of the United
Kingdom.
2. An Approved Option may only be granted to a Key U.K. Employee who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of paragraph 8 of Schedule 9
to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time" shall mean an
employee who is required to work 20 hours per week, excluding meal breaks.
3. No Approved Option may be granted to a Key U.K. Employee if it would
cause the aggregate of the exercise price of all subsisting Approved Options
granted to such employee under the Plan, or any other subsisting options granted
to such employee under any other share option scheme approved under Schedule 9
of the Taxes Act and established by the Company or an associated company, to
exceed the higher of (a) one hundred thousand pounds sterling and (b) four times
such employee's relevant emoluments for the current or preceding year of
assessment (whichever is greater); but where there were no relevant emoluments
for the previous year of assessment, the limit shall be the higher of one
hundred thousand pounds sterling or four times such employee's relevant
emoluments for the period of twelve months beginning with the first day during
the current year of assessment in respect of which there are relevant
emoluments. For the purpose of this section 3 of Addendum A, "associated
company" means an associated company within the meaning of section 416 of the
Taxes Act; "relevant emoluments" has the meaning given by paragraph 28(4) of
Schedule 9 to the Taxes Act and "year of assessment" means a year beginning on
any April 6 and ending on the following April 5.
4. Common Shares issued pursuant to the exercise of Approved Options must
satisfy the conditions specified in paragraphs 10 to 14 of Schedule 9 to the
Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan, the exercise
price of an Approved Option shall not be less than 100 percent of the closing
price of a Common Share as reported in the New York Stock Exchange Composite
Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key U.K. Employee
when that Key U.K. Employee falls within the provisions of paragraph 8 of
Schedule 9 to the Taxes Act. If at any time the shares under an Approved Option
cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9 to the
Taxes Act, then all Approved Options then outstanding shall lapse and cease to
be exercisable from the date of the shares ceasing so to comply, and no optionee
shall have any cause of action against the Company, Sharelink Investment
Services plc or any subsidiary of the Company or any other person in respect
thereof.
7. An Approved Option may contain such other terms, provisions and
conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements for
approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the terms of section
10.1 of the Plan, no adjustment shall be made pursuant to section 10.1 of the
Plan to any outstanding Approved Options without the prior approval of the
Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee shall make
arrangements satisfactory to the Company for the satisfaction of any tax
withholding or deduction -- at -- source obligations that arise by reason of the
grant to him or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in addition to the provisions set
out in section 15.2 of the Plan, no amendment which affects any of the
provisions of the Plan relating to Approved Options shall be effective until
approved by the Inland Revenue, except for such amendment as are required to
obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to the
Taxes Act.
<TABLE>
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings before taxes on income $203,849 $162,499 $ 689,520 $400,714
- ---------------------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 174,269 148,286 486,286 427,975
Interest expense - other 19,692 18,494 57,316 55,043
Interest portion of rental expense 11,521 8,259 30,186 23,628
- ---------------------------------------------------------------------------------------------------------------------
Total fixed charges (A) 205,482 175,039 573,788 506,646
- ---------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (B) $409,331 $337,538 $1,263,308 $907,360
=====================================================================================================================
Ratio of earnings to fixed charges (B) divided by (A)* 2.0 1.9 2.2 1.8
=====================================================================================================================
Ratio of earnings to fixed charges excluding
customer interest expense** 7.5 7.1 8.9 6.1
=====================================================================================================================
* The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements.
For such purposes, "earnings" consist of earnings before taxes on income and fixed charges.
"Fixed charges" consist of interest expense incurred on payable to customers, borrowings
and one-third of rental expense, which is estimated to be representative of the interest factor.
** Because interest expense incurred in connection with payable to customers is completely offset by
interest revenue on related investments and margin loans, the Company considers such interest to be
an operating expense. Accordingly, the ratio of earnings to fixed charges excluding customer interest
expense reflects the elimination of such interest expense as a fixed charge.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Income and Condensed Consolidated Balance
Sheet of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Sep-30-1999
<CASH> 2,733,670
<RECEIVABLES> 13,980,765
<SECURITIES-RESALE> 7,305,800
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 303,980
<PP&E> 532,145
<TOTAL-ASSETS> 25,088,022
<SHORT-TERM> 215,793
<PAYABLES> 21,625,575
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 465,012
0
0
<COMMON> 8,196
<OTHER-SE> 2,047,598
<TOTAL-LIABILITY-AND-EQUITY> 25,088,022
<TRADING-REVENUE> 361,053
<INTEREST-DIVIDENDS> 1,043,585
<COMMISSIONS> 1,320,695
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 541,770
<INTEREST-EXPENSE> 543,602
<COMPENSATION> 1,162,461
<INCOME-PRETAX> 689,520
<INCOME-PRE-EXTRAORDINARY> 418,437
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418,437
<EPS-BASIC> .52<F1>
<EPS-DILUTED> .50<F1>
<FN>
<F1> The information has been prepared in accordance with SFAS No. 128.
Basic and diluted EPS have been entered in place of primary and fully
diluted, respectively.
Reflects the July 1999 two-for-one common stock split.
</FN>
</TABLE>
