<PAGE>
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(2)
(To Prospectus dated June 25, 1999) File No. 333-77381
$395,000,000
The Charles Schwab Corporation
MEDIUM-TERM NOTES, SERIES A
----------------
We, The Charles Schwab Corporation, may offer medium-term notes from time to
time. The specific terms of any notes that we offer will be included in a
pricing supplement. The notes will have the following general terms:
. The notes will mature more than nine months from the date of issue.
. The notes will bear interest at either a fixed rate, which may be zero, or
a floating rate. Floating rates will be based on:
. CD rate
. commercial paper rate
. federal funds rate
. LIBOR
. prime rate
. Treasury rate
. CMT rate
. any other rate specified in the applicable pricing supplement.
. The notes will be either senior or senior subordinated.
. Unless otherwise specified in the applicable pricing supplement, the fixed
rate notes will pay interest each March 1 and September 1 and at maturity
and the amortizing notes will pay principal and interest semiannually each
March 1 and September 1 or quarterly each March 1, June 1, September 1 and
December 1 and at maturity. Please see "Description of Notes--Floating Rate
Notes--When Interest Is Paid" for when floating rate notes will pay
interest.
. Payments on the notes may be linked to currency prices, commodity prices,
single securities, baskets of securities or indices, as specified in the
applicable pricing supplement.
. The notes may be either callable by us or puttable by you, if specified as
such in the applicable pricing supplement.
----------------
<TABLE>
<CAPTION>
Price to Agent's Proceeds to
Public Commissions Company
-------- ----------- -----------
<S> <C> <C> <C>
Per Note.......... 100% .125%--.875% 99.875%--99.125%
Total............. $395,000,000 $493,750--$3,456,250 $394,506,250--$391,543,750
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and Charles Schwab & Co., Inc. have agreed to use
reasonable efforts to solicit offers to purchase these securities as our
agents. The agents may also purchase these securities as principal at prices
to be agreed upon at the time of sale. The agents may resell any securities
they purchase as principal at prevailing market prices, or at other prices, as
the agents determine.
Charles Schwab & Co., Inc., which is our wholly-owned subsidiary, may use this
prospectus supplement and the accompanying prospectus in connection with
offers and sales of the securities in market-making transactions.
----------------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
CHARLES SCHWAB & CO., INC.
June 29, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Prospectus Supplement
<S> <C>
Summary......................... S-3
Description of Notes............ S-4
The Depositary.................. S-17
United States Federal Taxation.. S-18
Plan of Distribution............ S-23
Legal Matters................... S-24
</TABLE>
<TABLE>
<CAPTION>
Page
Prospectus
<S> <C>
The Charles Schwab Corporation...... 4
Consolidated Ratios of Earnings to
Fixed Charges...................... 4
Use of Proceeds..................... 4
Description of Debt Securities...... 5
Plan of Distribution................ 12
Legal Matters....................... 13
Experts............................. 13
</TABLE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement, the prospectus and any pricing
supplement. We have not authorized anyone else to provide you with different or
additional information. We are offering to sell these securities and seeking
offers to buy these securities only in jurisdictions where offers and sales are
permitted.
<PAGE>
SUMMARY
The following summary describes the notes we are offering under this program
in general terms only. You should read the summary together with the more
detailed information contained in this prospectus supplement, in the
accompanying prospectus and in the applicable pricing supplement.
We, The Charles Schwab Corporation, may offer up to U.S. $395,000,000 of the
medium-term notes described in this prospectus supplement from time to time. We
refer to the notes offered under this prospectus supplement as our Series A
medium-term notes. We refer to the offering of the Series A medium-term notes
as our "Series A program."
General terms of the
notes....................... . The notes will mature more than nine
months from the date of issuance and will
pay interest, if any, on the dates
specified in the applicable pricing
supplement.
. The notes will bear interest at either a
fixed rate, which may be zero, or a
floating rate.
. The notes will be issued in U.S. dollars.
. The notes will be either senior or senior
subordinated.
. The notes may be either callable by us or
puttable by you.
. Payments of principal and/or interest on
the notes may be linked to currency
prices, commodity prices, single
securities, baskets of securities or
indices.
. We may issue amortizing notes that pay a
level amount in respect of both interest
and principal amortized over the life of
the note.
. The notes will either be held in global
form by The Depository Trust Company or be
issued in the form of certificates.
. The notes will not be listed on any
securities exchange, unless we specify
otherwise in the applicable pricing
supplement.
Forms of securities......... The notes that we offer under our Series A
program will be issued in fully registered
form and will be represented either by a
global security registered in the name of a
nominee of The Depository Trust Company, as
depositary, or by certificates issued in
definitive form, as set forth in the
applicable pricing supplement. We will not
issue book-entry securities as certificated
securities except under the circumstances
described in "Description of Debt
Securities-- Global Securities" in the
prospectus. For information on The
Depository Trust Company's book-entry
system, see "The Depositary" in this
prospectus supplement.
How to reach us............. You may contact us at our principal
executive offices at 120 Kearny Street, San
Francisco, California 94104 (telephone
number 415/627-7000). Our website is
www.schwab.com.
S-3
<PAGE>
DESCRIPTION OF NOTES
Investors should carefully read the general terms and provisions of our debt
securities in "Description of Debt Securities" in the prospectus. This section
supplements that description. The pricing supplement will add specific terms
for each issuance of notes and may modify or replace any of the information in
this section and in "Description of Debt Securities" in the prospectus.
General Terms of Notes
We may issue notes under the senior debt indenture or the senior
subordinated debt indenture. The Series A medium-term notes issued under each
indenture will constitute a single series under that indenture, together with
any medium-term notes we issue in the future under that indenture that we
designate as being part of that series and with notes which we have issued in
the past under that indenture and designated as being part of that series.
Neither indenture limits the amount of additional indebtedness that we may
incur.
Ranking. Notes issued under the senior debt indenture will rank on a parity
with all of our other senior indebtedness and with all of our other unsecured
and unsubordinated indebtedness, subject to statutory exceptions in the event
of liquidation upon insolvency. Notes issued under the senior subordinated debt
indenture will rank on a parity with all of our other subordinated indebtedness
and, together with all other subordinated indebtedness, will be subordinated in
right of payment to the prior payment in full of our senior indebtedness. See
"Description of Debt Securities -- Senior Subordinated Debt" in the prospectus.
As of May 31, 1999, we had outstanding approximately $411 million of senior
indebtedness and no subordinated indebtedness.
Terms Specified in Pricing Supplements. A pricing supplement will specify
the following terms of any issuance of our Series A medium-term notes to the
extent applicable:
. the issue price;
. the aggregate principal amount;
. the denominations or minimum denominations;
. the original issue date;
. whether the notes are senior or senior subordinated;
. the stated maturity date and any terms related to any extension of the
maturity date;
. whether the notes are fixed rate notes or floating rate notes, and
whether they are notes with original issue discount and/or amortizing
notes;
. for fixed rate notes, the annual rate at which the notes will bear
interest, if any, or the method of calculating that rate and the dates on
which interest will be payable;
. for floating rate notes, the base rate, the index maturity, the spread,
the spread multiplier, the initial interest rate, the interest reset
periods, the interest payment dates, the maximum interest rate, the
minimum interest rate and any other terms relating to the particular
method of calculating the interest rate for the note;
. if the note is an amortizing note, the amortization schedule;
. whether the notes may be redeemed, in whole or in part, at our option or
repaid at your option, prior to the stated maturity date, and the terms
of any redemption or repayment;
. whether the notes are linked to commodity prices, single securities,
baskets of securities or indices;
. whether the notes will be issued in book-entry or certificated form; and
. any other terms on which we will issue the notes.
S-4
<PAGE>
Some Definitions. We have defined some of the terms that we use frequently
in this prospectus supplement below:
A "business day" means any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law or regulation to close in The City of New York and, with
respect to LIBOR notes, is also a London banking day.
"Depositary" means The Depository Trust Company, New York, New York.
An "interest payment date" for any note means a date on which, under the
terms of that note, regularly scheduled interest is payable.
"London banking day" means any day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
The "record date" for any interest payment date is the date 15 calendar days
prior to that interest payment date, whether or not that date is a business
day.
Interest and Principal Payments
Payments, Exchanges and Transfers. Holders may:
. present notes for payment of principal, premium, if any, and interest, if
any;
. register the transfer of the notes; and
. exchange the notes at the agency in the Borough of Manhattan, The City of
New York, maintained by us for that purpose.
However, holders of global notes may transfer and exchange global notes only in
the manner and to the extent set forth under "Description of Debt Securities --
Global Securities" in the prospectus. On the date of this prospectus
supplement, the agent for the payment, transfer and exchange of the notes is
The Chase Manhattan Bank (formerly Chemical Bank), acting through its corporate
trust office at 450 West 33rd Street, New York, New York 10001. We refer to The
Chase Manhattan Bank, acting in this capacity, as the paying agent.
We will not be required to:
. register the transfer of or exchange notes to be redeemed for a period of
fifteen calendar days preceding the mailing of the relevant notice of
redemption; or
. register the transfer of or exchange any registered note selected for
redemption in whole or in part, except the unredeemed or unpaid portion
of that registered note being redeemed in part.
No service charge will be made for any registration or transfer or exchange
of notes, but we may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection with the registration of
transfer or exchange of notes.
Recipients of Payments. The paying agent will pay interest to the person in
whose name the note is registered at the close of business on the applicable
record date. However, upon maturity, redemption or repayment, the paying agent
will pay any interest due to the person to whom it pays the principal of the
note. The paying agent will make the payment of interest on the date of
maturity, redemption or repayment, whether or not that date is an interest
payment date. The paying agent will make the initial interest payment on a note
on the first interest payment date falling after the date of issuance, unless
the date of issuance is less than 15 calendar days before an interest payment
date. In that case, the paying agent will pay interest or, in the case of an
amortizing note, principal and interest, on the next succeeding interest
payment date to the holder of record on the record date corresponding to the
succeeding interest payment date.
S-5
<PAGE>
Book-Entry Notes. The paying agent will make payments of principal, premium,
if any, and interest, if any, to the account of the Depositary, as holder of
book-entry notes, by wire transfer of immediately available funds. We expect
that the Depositary, upon receipt of any payment, will immediately credit its
participants' accounts in amounts proportionate to their respective beneficial
interests in the book-entry notes as shown on the records of the Depositary. We
also expect that payments by the Depositary's participants to owners of
beneficial interests in the book-entry notes will be governed by standing
customer instructions and customary practices and will be the responsibility of
those participants.
Certificated Notes. Except as indicated below for payments of interest at
maturity, redemption or repayment, the paying agent will make U.S. dollar
payments of interest either:
. by check mailed to the address of the person entitled to payment as shown
on the note register; or
. for a holder of at least $10,000,000 in aggregate principal amount of
certificated notes having the same interest payment date, by wire
transfer of immediately available funds, if the holder has given written
notice to the paying agent not later than 15 calendar days prior to the
applicable interest payment date.
Payments of principal, premium, if any, and interest, if any, upon maturity,
redemption or repayment on a note will be made in immediately available funds
against presentation and surrender of the note.
Fixed Rate Notes
Each fixed rate note will bear interest from the date of issuance at the
annual rate stated on its face until the principal is paid or made available
for payment.
How Interest Is Calculated. Interest on fixed rate notes will be computed on
the basis of a 360-day year of twelve 30-day months.
How Interest Accrues. Interest on fixed rate notes will accrue from and
including the most recent interest payment date to which interest has been paid
or duly provided for, or, if no interest has been paid or duly provided for,
from and including the issue date or any other date specified in a pricing
supplement on which interest begins to accrue. Interest will accrue to but
excluding the next interest payment date, or, if earlier, the date on which the
principal has been paid or duly made available for payment, except as described
below under "If a Payment Date is Not a Business Day."
When Interest Is Paid. Unless otherwise specified in the applicable pricing
supplement, payments of interest on fixed rate notes will be made each March 1
and September 1 and at maturity or upon any earlier redemption or repayment.
However, if the first interest payment date is less than 15 days after the date
of issuance, interest will not be paid on the first interest payment date, but
will be paid on the second interest payment date.
Amount of Interest Payable. Interest payments for fixed rate notes will
include accrued interest from and including the date of issue or from and
including the last date in respect of which interest has been paid, as the case
may be, to but excluding the relevant interest payment date or date of maturity
or earlier redemption or repayment, as the case may be.
If a Payment Date is Not a Business Day. If any scheduled interest payment
date is not a business day, we will pay interest on the next business day, but
interest on that payment will not accrue during the period from and after the
scheduled interest payment date. If the scheduled maturity date or date of
redemption or repayment is not a business day, we may pay interest and
principal and premium, if any, on the next succeeding business day, but
interest on that payment will not accrue during the period from and after the
scheduled maturity date or date of redemption or repayment.
S-6
<PAGE>
Amortizing Notes. A fixed rate note may pay a level amount in respect of
both interest and principal amortized over the life of the note. Payments of
principal and interest on amortizing notes will be made either quarterly on
each March 1, June 1, September 1 and December 1 or semiannually on each March
1 and September 1, as set forth in the applicable pricing supplement, and at
maturity or upon any earlier redemption or repayment. Payments on amortizing
notes will be applied first to interest due and payable and then to the
reduction of the unpaid principal amount. We will provide to the original
purchaser, and will furnish to subsequent holders upon request to us, a table
setting forth repayment information for each amortizing note.
Floating Rate Notes
Each floating rate note will mature on the date specified in the applicable
pricing supplement.
Each floating rate note will bear interest at a floating rate determined by
reference to an interest rate or interest rate formula, which we refer to as
the "base rate." The base rate may be one or more of the following:
. the certificate of deposit, or CD, rate;
. the commercial paper rate;
. the federal funds rate;
. the London interbank offered rate, or LIBOR;
. the prime rate;
. the Treasury rate;
. the constant maturity Treasury, or CMT, rate; or
. any other rate or interest rate formula specified in the applicable
pricing supplement and in the floating rate note.
Formula for Interest Rates. The interest rate on each floating rate note
will be calculated by reference to:
. the specified base rate based on the index maturity;
. plus or minus the spread, if any; and/or
. multiplied by the spread multiplier, if any.
For any floating rate note, "index maturity" means the period of maturity
of the instrument or obligation from which the base rate is calculated and
will be specified in the applicable pricing supplement. The "spread" is the
number of basis points (one one-hundredth of a percentage point) specified in
the applicable pricing supplement to be added to or subtracted from the base
rate for a floating rate note. The "spread multiplier" is the percentage
specified in the applicable pricing supplement to be multiplied by the base
rate for a floating rate note.
Limitations on Interest Rate. A floating rate note may also have either or
both of the following limitations on the interest rate:
. a maximum limitation, or ceiling, on the rate of interest which may
accrue during any interest period, which we refer to as the "maximum
interest rate;"
. a minimum limitation, or floor, on the rate of interest that may accrue
during any interest period, which we refer to as the "minimum interest
rate. "
Any applicable maximum interest rate or minimum interest rate will be set
forth in the pricing supplement.
S-7
<PAGE>
How Floating Interest Rates Are Reset. The interest rate in effect from the
date of issue to the first interest reset date for a floating rate note will be
the initial interest rate specified in the applicable pricing supplement. We
refer to this rate as the "initial interest rate." The interest rate on each
floating rate note may be reset daily, weekly, monthly, quarterly, semiannually
or annually. This period is the "interest reset period" and the first day of
each interest reset period is the "interest reset date." The interest reset
date will be as follows:
. for notes which reset daily, each business day;
. for notes, other than Treasury rate notes, which reset weekly, the
Wednesday of each week;
. for Treasury notes which reset weekly, the Tuesday of each week;
. for notes which reset monthly, the third Wednesday of each month;
. for notes which reset quarterly, the third Wednesday of March, June,
September and December;
. for notes which reset semiannually, the third Wednesday of two months
each year as specified in the applicable pricing supplement;
. for notes which reset annually, the third Wednesday of one month each
year as specified in the applicable pricing supplement;
. the interest rate in effect from the date of issue to the first interest
reset date will be the initial interest rate set forth in the applicable
pricing supplement; and
. unless the applicable pricing supplement specifies otherwise, the
interest rate in effect for the ten days immediately before maturity,
redemption or repayment will be that in effect on the tenth day preceding
such maturity, redemption or repayment date.
If an interest reset date for any floating rate note falls on a day that is
not a business day, it will be postponed to the following business day, except
that, in the case of a LIBOR note, if that business day is in the next calendar
month, the interest reset date will be the immediately preceding business day.
The "interest determination date" for any interest reset date is the day the
calculation agent will refer to when determining the new interest rate at which
a floating rate will reset, and is applicable as follows:
. for CD rate notes, commercial paper rate notes, federal funds rate notes,
prime rate notes and CMT rate notes, the interest determination date will
be the second business day prior to the interest reset date;
. for LIBOR notes, the interest determination date will be the second
London banking day prior to the interest reset date; and
. for Treasury rate notes, the interest determination date will be the day
of the week in which the interest reset date falls on which Treasury
bills would normally be auctioned.
Treasury bills are normally sold at auction on Monday of each week, unless
that day is a legal holiday, in which case the auction is normally held on the
following Tuesday, but the auction may be held on the preceding Friday. If, as
the result of a legal holiday, the auction is held on the preceding Friday,
that Friday will be the interest determination date pertaining to the interest
reset date occurring in the next succeeding week. If an auction falls on a day
that is an interest reset date, that interest reset date will be the next
following business day.
In the detailed descriptions of the various base rates which follow, the
"calculation date" pertaining to an interest determination date means the
earlier of (1) the tenth calendar day after that interest determination date,
or, if that day is not a business day, the next succeeding business day, and
(2) the business day preceding the applicable interest payment date or maturity
date or, for any principal amount to be redeemed or repaid, any redemption or
repayment date.
S-8
<PAGE>
When Interest Is Paid. Unless the applicable pricing supplement specifies
otherwise, we will pay interest on floating rate notes on the interest payment
dates as follows.
. for notes with a daily, weekly or monthly interest reset date, on the
third Wednesday of each month or on the third Wednesday of March, June,
September and December, as the applicable pricing supplement specifies;
. for notes with a quarterly reset date, on the third Wednesday of March,
June, September and December;
. for notes with a semiannual interest reset date, on the third Wednesday
of two months specified in the applicable pricing supplement;
. for notes with an annual interest reset date, on the third Wednesday of a
month specified in the applicable pricing supplement; and
. for all notes, at maturity or upon any earlier redemption or repayment.
However, if the first interest payment date is less than 15 days after the
date of issuance, interest will not be paid on the first interest payment date,
but will be paid on the second interest payment date.
If a Payment Date is Not a Business Day. If any scheduled interest payment
date, other than the maturity date or any earlier redemption or repayment date,
for any floating rate note falls on a day that is not a business day, it will
be postponed to the following business day, except that, in the case of a LIBOR
note, if that business day would fall in the next calendar month, the interest
payment date will be the immediately preceding business day. If the scheduled
maturity date or any earlier redemption or repayment date of a floating rate
note falls on a day that is not a business day, the payment of principal,
premium, if any, and interest, if any, will be made on the next succeeding
business day, but interest on that payment will not accrue during the period
from and after the maturity, redemption or repayment date.
How Interest Is Calculated. Interest on floating rate notes will accrue from
and including the most recent interest payment date to which interest has been
paid or duly provided for, or, if no interest has been paid or duly provided
for, from and including the issue date or any other date specified in a pricing
supplement on which interest begins to accrue. Interest will accrue to but
excluding the next interest payment date or, if earlier, the date on which the
principal has been paid or duly made available for payment, except as described
above under "If a Payment Date is Not a Business Day."
The applicable pricing supplement will specify a calculation agent for any
issue of floating rate notes. Upon the request of the holder of any floating
rate note, the calculation agent will provide the interest rate then in effect
and, if determined, the interest rate that will become effective on the next
interest reset date for that floating rate note.
For a floating rate note, accrued interest will be calculated by multiplying
the principal amount of the floating rate note by an accrued interest factor.
This accrued interest factor will be computed by adding the interest factors
calculated for each day in the period for which interest is being paid. The
interest factor for each day is computed by dividing the interest rate
applicable to that day:
. by 360, in the case of CD rate notes, commercial paper rate notes,
federal funds rate notes, LIBOR notes and prime rate notes; or
. by the actual number of days in the year, in the case of Treasury rate
notes and CMT rate notes.
For these calculations, the interest rate in effect on any interest reset
date will be the applicable rate as reset on that date. The interest rate
applicable to any other day is the interest rate from the immediately preceding
interest reset date or, if none, the initial interest rate.
All percentages used in or resulting from any calculation of the rate of
interest on a floating rate note will be rounded, if necessary, to the nearest
one hundred-thousandth of a percentage point (.0000001), with five one-
millionths of a percentage point rounded upward, and all dollar amounts used in
or resulting from these calculations on floating rate notes will be rounded to
the nearest cent, with one-half cent rounded upward.
S-9
<PAGE>
Base Rates
CD Rate Notes
CD rate notes will bear interest at the interest rates specified in the CD
rate notes and in the applicable pricing supplement. Those interest rates will
be based on the CD rate and any spread and/or spread multiplier and will be
subject to the minimum interest rate and the maximum interest rate, if any.
"CD rate" means, for any interest determination date, the rate on that date
for negotiable certificates of deposit having the index maturity specified in
the applicable pricing supplement as published by the Board of Governors of the
Federal Reserve System in "Statistical Release H.15(519), Selected Interest
Rates," or any successor publication of the Board of Governors of the Federal
Reserve System ("H.15(519)") under the heading "CDs (Secondary Market)."
The following procedures will be followed if the CD rate cannot be
determined as described above:
. If the above rate is not published in H.15(519) by 9:00 a.m., New York
City time, on the calculation date, the CD rate will be the rate on that
interest determination date set forth in the daily update of H.15(519),
available through the world wide website of the Board of Governors of the
Federal Reserve System at http://www.bog.frb.fed.us/releases/h15/update,
or any successor site or publication, which is commonly referred to as
the "H.15 Daily Update," for the interest determination date for
certificates of deposit having the index maturity specified in the
applicable pricing supplement, under the caption "CDs (Secondary
Market)."
. If the above rate is not yet published in either H.15(519) or the H.15
Daily Update by 3:00 p.m., New York City time, on the calculation date,
the calculation agent will determine the CD rate to be the arithmetic
mean of the secondary market offered rates as of 10:00 a.m., New York
City time, on that interest determination date of three leading nonbank
dealers in negotiable U.S. dollar certificates of deposit in The City of
New York selected by the calculation agent, after consultation with us,
for negotiable certificates of deposit of major United States money
center banks of the highest credit standing in the market for negotiable
certificates of deposit with a remaining maturity closest to the index
maturity specified in the applicable pricing supplement in an amount that
is representative for a single transaction in that market at that time.
. If the dealers selected by the calculation agent are not quoting as set
forth above, the CD rate will remain the CD rate for the immediately
preceding interest reset period, or, if there was no interest reset
period, the rate of interest payable will be the initial interest rate.
Commercial Paper Rate Notes
Commercial paper rate notes will bear interest at the interest rates
specified in the commercial paper rate notes and in the applicable pricing
supplement. Those interest rates will be based on the commercial paper rate and
any spread and/or spread multiplier and will be subject to the minimum interest
rate and the maximum interest rate, if any.
The "commercial paper rate" means, for any interest determination date, the
money market yield, calculated as described below, of the rate on that date for
commercial paper having the index maturity specified in the applicable pricing
supplement, as that rate is published in H.15(519), under the heading
"Commercial Paper -- Nonfinancial."
The following procedures will be followed if the commercial paper rate
cannot be determined as described above:
. If the above rate is not published by 9:00 a.m., New York City time, on
the calculation date, then the commercial paper rate will be the money
market yield of the rate on that interest determination date for
commercial paper of the index maturity specified in the applicable
pricing supplement as published in the H.15 Daily Update under the
heading "Commercial Paper -- Nonfinancial."
S-10
<PAGE>
. If by 3:00 p.m., New York City time, on that calculation date the rate is
not yet published in either H.15(519) or the H.15 Daily Update, then the
calculation agent will determine the commercial paper rate to be the
money market yield of the arithmetic mean of the offered rates as of
11:00 a.m., New York City time, on that interest determination date of
three leading dealers of commercial paper in The City of New York
selected by the calculation agent, after consultation with us, for
commercial paper of the index maturity specified in the applicable
pricing supplement, placed for an industrial issuer whose bond rating is
"AA," or the equivalent, from a nationally recognized statistical rating
agency.
. If the dealers selected by the calculation agent are not quoting as
mentioned above, the commercial paper rate for that interest
determination date will remain the commercial paper rate for the
immediately preceding interest reset period, or, if there was no interest
reset period, the rate of interest payable will be the initial interest
rate.
The "money market yield" will be a yield calculated in accordance with the
following formula:
money market yield = D X 360 X 100
-------------
360 - (D X M)
where "D" refers to the applicable per year rate for commercial paper quoted on
a bank discount basis and expressed as a decimal and "M" refers to the actual
number of days in the interest period for which interest is being calculated.
Federal Funds Rate Notes
Federal funds rate notes will bear interest at the interest rates specified
in the federal funds rate notes and in the applicable pricing supplement. Those
interest rates will be based on the federal funds rate and any spread and/or
spread multiplier and will be subject to the minimum interest rate and the
maximum interest rate, if any.
The "federal funds rate" means, for any interest determination date, the
rate on that date for federal funds as published in H.15(519) under the heading
"Federal Funds (Effective)" as displayed on Bridge Telerate, Inc., or any
successor service, on page 120 or any other page as may replace the applicable
page on that service, which is commonly referred to as "Telerate Page 120."
The following procedures will be followed if the federal funds rate cannot
be determined as described above:
. If the above rate is not published by 9:00 a.m., New York City time, on
the calculation date, the federal funds rate will be the rate on that
interest determination date as published in the H.15 Daily Update under
the heading "Federal Funds/Effective Rate."
. If that rate is not yet published in either H.15(519) or the H.15 Daily
Update by 3:00 p.m., New York City time, on the calculation date, the
calculation agent will determine the federal funds rate to be the
arithmetic mean of the rates for the last transaction in overnight
federal funds by each of three leading brokers of federal funds
transactions in The City of New York selected by the calculation agent,
after consultation with us, prior to 9:00 a.m., New York City time, on
that interest determination date.
. If the brokers selected by the calculation agent are not quoting as
mentioned above, the federal funds rate relating to that interest
determination date will remain the federal funds rate for the immediately
preceding interest reset period, or, if there was no interest reset
period, the rate of interest payable will be the initial interest rate.
LIBOR Notes
LIBOR notes will bear interest at the interest rates specified in the LIBOR
notes and in the applicable pricing supplement. That interest rate will be
based on LIBOR and any spread and/or spread multiplier and will be subject to
the minimum interest rate and the maximum interest rate, if any.
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The calculation agent will determine "LIBOR" for each interest determination
date as follows:
. As of the interest determination date, LIBOR will be either:
. if "LIBOR Reuters" is specified in the applicable pricing supplement,
the arithmetic mean of the offered rates for deposits in U.S. dollars
having the index maturity designated in the applicable pricing
supplement, commencing on the second London banking day immediately
following that interest determination date, that appear on the
Designated LIBOR Page, as defined below, as of 11:00 a.m., London
time, on that interest determination date, if at least two offered
rates appear on the Designated LIBOR Page; except that if the
specified Designated LIBOR Page, by its terms provides only for a
single rate, that single rate will be used; or
. if "LIBOR Telerate" is specified in the applicable pricing
supplement, the rate for deposits in U.S. dollars having the index
maturity designated in the applicable pricing supplement, commencing
on the second London banking day immediately following that interest
determination date that appears on the Designated LIBOR Page at
approximately 11:00 a.m., London time, on that interest determination
date.
. If (1) fewer than two offered rates appear and "LIBOR Reuters" is
specified in the applicable pricing supplement, or (2) no rate appears
and the applicable pricing supplement specifies either (x) "LIBOR
Telerate" or (y) "LIBOR Reuters" and the Designated LIBOR Page by its
terms provides only for a single rate, then the calculation agent will
request the principal London offices of each of four major reference
banks in the London interbank market, as selected by the calculation
agent after consultation with us, to provide the calculation agent with
its offered quotation for deposits in U.S. dollars for the period of the
index maturity specified in the applicable pricing supplement commencing
on the second London banking day immediately following the interest
determination date, to prime banks in the London interbank market at
approximately 11:00 a.m., London time, on that interest determination
date and in a principal amount that is representative of a single
transaction in U.S. dollars in that market at that time.
. If at least two quotations are provided, LIBOR determined on that
interest determination date will be the arithmetic mean of those
quotations. If fewer than two quotations are provided, LIBOR will be
determined for the applicable interest reset date as the arithmetic mean
of the rates quoted at approximately 11:00 a.m., London time, in the
London interbank market on that interest reset date, by three major banks
in that principal financial center selected by the calculation agent,
after consultation with us, for loans in U.S. dollars to leading European
banks, having the index maturity specified in the applicable pricing
supplement and in a principal amount that is representative of a single
transaction in U.S. dollars in that market at that time.
. If the banks so selected by the calculation agent are not quoting as
mentioned in the previous bullet point, LIBOR in effect for the
applicable period will be the same as LIBOR for the immediately preceding
interest reset period, or, if there was no interest reset period, the
rate of interest payable will be the initial interest rate.
"Designated LIBOR Page" means either (a) if "LIBOR Reuters" is designated in
the applicable pricing supplement, the display on the Reuters Monitor Money
Rates Service for the purpose of displaying the London interbank rates of major
banks for U.S. dollars or its designated successor, or (b) if "LIBOR Telerate"
is designated in the applicable pricing supplement, the display on Bridge
Telerate Inc., or any successor service, on page 3750, or any other page as may
replace that page on that service, for the purpose of displaying the London
interbank offered rates for U.S. dollar deposits.
If neither LIBOR Reuters nor LIBOR Telerate is specified in the applicable
pricing supplement, LIBOR will be determined as if LIBOR Telerate were
specified.
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Prime Rate Notes
Prime rate notes will bear interest at the interest rates specified in the
prime rate notes and in the applicable pricing supplement. That interest rate
will be based on the prime rate and any spread and/or spread multiplier and
will be subject to the minimum interest rate and the maximum interest rate, if
any.
The "prime rate" means, for any interest determination date, the rate on
that date as published in H.15(519) under the heading "Bank Prime Loan."
The following procedures will be followed if the prime rate cannot be
determined as described above:
. If the rate is not published prior to 9:00 a.m., New York City time, on
the calculation date, then the prime rate will be the rate on that
interest determination date as published in H.15 Daily Update under the
heading "Bank Prime Loan."
. If the rate is not published prior to 3:00 p.m., New York City time, on
the calculation date in either H.15(519) or the H.15 Daily Update, then
the calculation agent will determine the prime rate to be the arithmetic
mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME 1 Page, as defined below, as that
bank's prime rate or base lending rate as in effect for that interest
determination date.
. If fewer than four rates appear on the Reuters Screen USPRIME 1 Page for
that interest determination date, the calculation agent will determine
the prime rate to be the arithmetic mean of the prime rates quoted on the
basis of the actual number of days in the year divided by 360 as of the
close of business on that interest determination date by at least three
major banks in The City of New York selected by the calculation agent,
after consultation with us.
. If the banks selected are not quoting as mentioned above, the prime rate
will remain the prime rate for the immediately preceding interest reset
period, or, if there was no interest reset period, the rate of interest
payable will be the initial interest rate.
"Reuters Screen USPRIME 1 Page" means the display designated as page
"USPRIME 1" on the Reuters Monitor Money Rates Service, or any successor
service, or any other page as may replace the USPRIME 1 Page on that service
for the purpose of displaying prime rates or base lending rates of major
United States banks.
Treasury Rate Notes
Treasury rate notes will bear interest at the interest rates specified in
the Treasury rate notes and in the applicable pricing supplement. That
interest rate will be based on the Treasury rate and any spread and/or spread
multiplier and will be subject to the minimum interest rate and the maximum
interest rate, if any.
"Treasury rate" means the rate from the auction held on the applicable
interest determination date, which we refer to as the "auction," of direct
obligations of the United States, which are commonly referred to as "Treasury
Bills," having the index maturity specified in the applicable pricing
supplement as that rate appears under the caption "INVESTMENT RATE" on the
display on Bridge Telerate, Inc., or any successor service, on page 56 or any
other page as may replace page 56 on that service, which we refer to as
"Telerate Page 56," or page 57 or any other page as may replace page 57 on
that service, which we refer to as "Telerate Page 57."
The following procedures will be followed if the Treasury rate cannot be
determined as described above:
. If the rate described above is not published by 3:00 p.m., New York City
time, on the calculation date, the bond equivalent yield of the rate for
the applicable Treasury Bills as published in the H.15 Daily Update, or
other recognized electronic source used for the purpose of displaying the
applicable rate, under the caption "U.S. Government Securities/Treasury
Bills/Auction High."
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<PAGE>
. If the rate described in the previous bullet point is not published by
3:00 p.m., New York City time, on the related calculation date, the bond
equivalent yield of the auction rate of the applicable Treasury Bills,
announced by the United States Department of the Treasury.
. In the event that the rate referred to in the immediately preceding
bullet point is not announced by the United States Department of the
Treasury, or if the auction is not held, the bond equivalent yield of the
rate on the applicable interest determination date of Treasury Bills
having the index maturity specified in the applicable pricing supplement
published in H.15(519) under the caption "U.S. Government
Securities/Treasury Bills/Secondary Market."
. If the rate referred to in the immediately preceding bullet point is not
so published by 3:00 p.m., New York City time, on the related calculation
date, the rate on the applicable interest determination date of the
applicable Treasury Bills as published in H.15 Daily Update, or other
recognized electronic source used for the purpose of displaying the
applicable rate, under the caption "U.S. Government Securities/Treasury
Bills/Secondary Market."
. If the rate referred to in the immediately preceding bullet point is not
so published by 3:00 p.m., New York City time, on the related calculation
date, the rate on the applicable interest determination date calculated
by the calculation agent as the bond equivalent yield of the arithmetic
mean of the secondary market bid rates, as of approximately 3:30 p.m.,
New York City time, on the applicable interest determination date, of
three primary United States government securities dealers, which may
include the agent or its affiliates, selected by the calculation agent,
for the issue of Treasury Bills with a remaining maturity closest to the
index maturity specified in the applicable pricing supplement.
. If the dealers selected by the calculation agent are not quoting as
mentioned in the immediately preceding bullet point, the Treasury rate
for the immediately preceding interest reset period, or, if there was no
interest reset period, the rate of interest payable will be the initial
interest rate.
The "bond equivalent yield" means a yield calculated in accordance with the
following formula and expressed as a percentage:
Bond Equivalent Yield = D X N
-------------
360 - (D X M)
where "D" refers to the applicable per annum rate for Treasury Bills quoted on
a bank discount basis, "N" refers to 365 or 366, as the case may be, and "M"
refers to the actual number of days in the interest period for which interest
is being calculated.
CMT Rate Notes
CMT rate notes will bear interest at the interest rates specified in the CMT
rate notes and in the applicable pricing supplement. That interest rate will be
based on the CMT rate and any spread and/or spread multiplier and will be
subject to the minimum interest rate and the maximum interest rate, if any.
The "CMT rate" means, for any interest determination date, the rate
displayed on the Designated CMT Telerate Page, as defined below, under the
caption " . . . Treasury Constant Maturities . . . Federal Reserve Board
Release H.15 . . . Mondays Approximately 3:45 p.m.," under the column for the
Designated CMT Maturity Index, as defined below, for:
(1) the rate on that interest determination date, if the Designated CMT
Telerate Page is 7051; and
(2) the week or the month, as applicable, ended immediately preceding the
week in which the related interest determination date occurs, if the Designated
CMT Telerate Page is 7052. The following procedures will be followed if the CMT
rate cannot be determined as described above:
. If that rate is no longer displayed on the relevant page, or if not
displayed by 3:00 p.m., New York City time, on the related calculation
date, then the CMT rate will be the Treasury Constant Maturity rate for
the Designated CMT Maturity Index as published in the relevant H.15(519).
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<PAGE>
. If the rate described in the immediately preceding point is no longer
published, or if not published by 3:00 p.m., New York City time, on the
related calculation date, then the CMT rate will be the Treasury Constant
Maturity rate for the Designated CMT Maturity Index or other United
States Treasury rate for the Designated CMT Maturity Index on the
interest determination date as may then be published by either the Board
of Governors of the Federal Reserve System or the United States
Department of the Treasury that the calculation agent determines to be
comparable to the rate formerly displayed on the Designated CMT Telerate
Page and published in the relevant H.15(519).
. If the information described in the immediately preceding point is not
provided by 3:00 p.m., New York City time, on the related calculation
date, then the calculation agent will determine the CMT rate to be a
yield to maturity, based on the arithmetic mean of the secondary market
closing offer side prices as of approximately 3:30 p.m., New York City
time, on the interest determination date, reported, according to their
written records, by three leading primary United States government
securities dealers, which we refer to as a "reference dealer," in The
City of New York, which may include an agent or other affiliates of ours,
selected by the calculation agent as described in the following sentence.
The calculation agent will select five reference dealers, after
consultation with us, and will eliminate the highest quotation or, in the
event of equality, one of the highest, and the lowest quotation or, in
the event of equality, one of the lowest, for the most recently issued
direct noncallable fixed rate obligations of the United States, which are
commonly referred to as "Treasury notes," with an original maturity of
approximately the Designated CMT Maturity Index and a remaining term to
maturity of not less than that Designated CMT Maturity Index minus one
year. If two Treasury notes with an original maturity as described above
have remaining terms to maturity equally close to the Designated CMT
Maturity Index, the quotes for the Treasury note with the shorter
remaining term to maturity will be used.
. If the calculation agent cannot obtain three Treasury notes quotations as
described in the immediately preceding sentence, the calculation agent
will determine the CMT rate to be a yield to maturity based on the
arithmetic mean of the secondary market offer side prices as of
approximately 3:30 p.m., New York City time, on the interest
determination date of three reference dealers in The City of New York,
selected using the same method described in the immediately preceding
sentence, for Treasury notes with an original maturity equal to the
number of years closest to but not less than the Designated CMT Maturity
Index and a remaining term to maturity closest to the Designated CMT
Maturity Index and in an amount of at least $100,000,000.
. If three or four (and not five) of the reference dealers are quoting as
described above, then the CMT rate will be based on the arithmetic mean
of the offer prices obtained and neither the highest nor the lowest of
those quotes will be eliminated.
. If fewer than three reference dealers selected by the calculation agent
are quoting as described above, the CMT rate will be the CMT rate for the
immediately preceding interest reset period, or, if there was no interest
reset period, the rate of interest payable will be the initial interest
rate.
"Designated CMT Telerate Page" means the display on Bridge Telerate, Inc.,
or any successor service, on the page designated in the applicable pricing
supplement or any other page as may replace that page on that service for the
purpose of displaying Treasury Constant Maturities as reported in H.15(519). If
no page is specified in the applicable pricing supplement, the Designated CMT
Telerate Page will be 7052, for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the
U.S. Treasury securities, which is either 1, 2, 3, 5, 7, 10, 20 or 30 years,
specified in an applicable pricing supplement for which the CMT rate will be
calculated. If no maturity is specified in the applicable pricing supplement,
the Designated CMT Maturity Index will be two years.
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Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or
Indices
We may issue notes with the principal amount payable on any principal
payment date and/or the amount of interest payable on any interest payment date
determined by reference to one or more commodity prices, securities of entities
not affiliated with us, a basket of those securities or an index or indices of
those securities. These notes may include other terms, which will be specified
in the relevant pricing supplement.
Redemption and Repurchase of Notes
Optional Redemption. The pricing supplement will indicate either that the
notes cannot be redeemed prior to maturity or the terms of our option to redeem
the notes. We will mail a notice of redemption to each holder by first-class
mail, postage prepaid, at least 30 days and not more than 60 days prior to the
date fixed for redemption, or within the redemption notice period designated in
the applicable pricing supplement, to the address of each holder as that
address appears upon the books maintained by the paying agent. The notes,
except for amortizing notes, will not be subject to any sinking fund.
Repayment at Option of Holder. If applicable, the pricing supplement
relating to each note will indicate that the holder has the option to have us
repay the note on a date or dates specified prior to its maturity date. The
repayment price will be equal to 100% of the principal amount of the note,
together with accrued interest to the date of repayment. For notes issued with
original issue discount, the pricing supplement will specify the amount payable
upon repayment.
For us to repay a note, the paying agent must receive at least 15 days but
not more than 30 days prior to the repayment date:
. the note with the form entitled "Option to Elect Repayment" on the
reverse of the note duly completed; or
. a telegram, telex, facsimile transmission or a letter from a member of a
national securities exchange, or the National Association of Securities
Dealers, Inc. or a commercial bank or trust company in the United States,
setting forth the name of the holder of the note, the principal amount of
the note, the principal amount of the note to be repaid, the certificate
number or a description of the tenor and terms of the note, a statement
that the option to elect repayment is being exercised and a guarantee
that the note to be repaid, together with the duly completed form
entitled "Option to Elect Repayment" on the reverse of the note, will be
received by the paying agent not later than the fifth business day after
the date of that telegram, telex, facsimile transmission or letter.
However, the telegram, telex, facsimile transmission or letter will only
be effective if that note and form duly completed are received by the
paying agent by the fifth business day after the date of that telegram,
telex, facsimile transmission or letter.
Exercise of the repayment option by the holder of a note will be
irrevocable. The holder may exercise the repayment option for less than the
entire principal amount of the note but, in that event, the principal amount of
the note remaining outstanding after repayment must be an authorized
denomination.
Special Requirements for Optional Repayment of Global Notes. If a note is
represented by a global note, the Depositary or the Depositary's nominee will
be the holder of the note and therefore will be the only entity that can
exercise a right to repayment. In order to ensure that the Depositary's nominee
will timely exercise a right to repayment of a particular note, the beneficial
owner of the note must instruct the broker or other direct or indirect
participant through which it holds an interest in the note to notify the
Depositary of its desire to exercise a right to repayment. Different firms have
different cut-off times for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other direct or
indirect participant through which it holds an interest in a note in order to
ascertain the cut-off time by which an instruction must be given in order for
timely notice to be delivered to the Depositary.
S-16
<PAGE>
Open Market Purchases. We may purchase notes at any price in the open market
or otherwise. Notes so purchased by us may, at our discretion, be held or
resold or surrendered to the relevant trustee for cancellation.
Replacement of Notes
At the expense of the holder, we will replace any notes that become
mutilated, destroyed, lost or stolen or are apparently destroyed, lost or
stolen. The mutilated notes must be delivered to the applicable trustee, the
paying agent and the registrar, in the case of registered notes, or
satisfactory evidence of the destruction, loss or theft of the notes must be
delivered to us, the paying agent, the registrar, in the case of registered
notes, and the applicable trustee. At the expense of the holder, an indemnity
that is satisfactory to us, the principal paying agent, the registrar, in the
case of registered notes, and the applicable trustee may be required before a
replacement note will be issued.
THE DEPOSITARY
The Depository Trust Company, New York, New York will be designated as the
depositary for any registered global security. Each registered global security
will be registered in the name of Cede & Co., the Depositary's nominee.
The Depositary has advised us as follows: the Depositary is a limited-
purpose trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Securities Exchange Act of 1934, as
amended. The Depositary holds securities deposited with it by its participants,
and it facilitates the settlement of transactions among its participants in
those securities through electronic computerized book-entry changes in
participants' accounts, eliminating the need for physical movement of
securities certificates. The Depositary's participants include securities
brokers and dealers, including the agents, banks, trust companies, clearing
corporations and other organizations, some of whom and/or their representatives
own the Depositary. Access to the Depositary's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
The Depositary's management is aware that some computer applications,
systems, and the like for processing data that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." The Depositary has informed participants and other
members of the financial community that it has developed and is implementing a
program so that its computer applications and other systems, in ensuring the
timely payment of distributions, including principal and income payments, to
security holders, book-entry deliveries, and settlement of trades within the
Depositary, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, the Depositary's plan includes a testing phase, which is expected
to be completed within appropriate time frames. However, the Depositary's
ability to perform its services properly is also dependent upon other parties,
including but not limited to issuers and their agents, as well as third party
vendors from whom the Depositary licenses software and hardware, and third
party vendors on whom the Depositary relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. The Depositary has informed the financial community that it is
contacting, and will continue to contact, third party vendors from whom the
Depositary acquires services to impress upon them the importance of those
services being Year 2000 compliant, and to determine the extent of their
efforts for Year 2000 remediation and, as appropriate, testing of their
services. In addition, the Depositary is in the process of developing
contingency plans as it deems appropriate.
According to the Depositary, the foregoing information relating to the
Depositary has been provided to the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
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UNITED STATES FEDERAL TAXATION
The following summary describes the principal United States federal income
tax consequences of ownership and disposition of the notes. This summary is
based on the Internal Revenue Code of 1986, which we refer to as the "Code,"
and existing and proposed Treasury regulations, revenue rulings,
administrative interpretations and judicial decisions, all as currently in
effect and all of which are subject to change, possibly with retroactive
effect. Except as specifically set forth in this section, this summary deals
only with notes purchased by a United States holder, as defined below, and
held as capital assets within the meaning of Section 1221 of the Code. It does
not discuss all of the tax consequences that may be relevant to you in light
of your particular circumstances or to holders subject to special rules, such
as persons other than United States holders, insurance companies, dealers in
securities or foreign currencies, persons holding the notes as part of a
hedging transaction, "straddle," conversion transaction, or other integrated
transaction, or United States holders whose functional currency, as defined in
Section 985 of the Code, is not the U.S. dollar. Persons considering the
purchase of the notes should consult with their own tax advisors concerning
the application of the United States federal income tax laws to their
particular situations as well as any tax consequences arising under the laws
of any state, local or foreign jurisdiction.
As used in this section, the term "United States holder" means a beneficial
owner of a note who or that is:
. a citizen or resident of the United States for United States federal
income tax purposes;
. a corporation or partnership, including an entity (such as a limited
liability company) treated as a corporation or partnership for United
States federal income tax purposes, created or organized in or under the
laws of the United States, any state of the United States or the District
of Columbia;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust if both:
. a United States court is able to exercise primary supervision over the
administration of the trust, and
. one or more United States persons have the authority to control all
substantial decisions of the trust.
Alternatively, a United States holder may be the beneficial holder of a
note whose income from that note is treated as effectively connected with his
conduct of a United States trade or business. The term "United States holder"
also includes certain former citizens and certain former long-term residents
of the United States whose interest and gain on the notes will be subject to
United States federal income taxation. In addition, some trusts treated as
United States persons before August 20, 1996 may elect to continue to be so
treated to the extent provided in Treasury regulations.
Payments of Interest on Non-Discount Notes
Interest paid on a note that is not a discount note, as defined below in "
- -- Discount Notes," will generally be taxable to a United States holder as
ordinary interest income at the time it accrues or is received, in accordance
with the United States holder's normal method of tax accounting.
Special rules governing the treatment of interest paid with respect to
discount notes, including notes that mature one year or less from their date
of issuance and notes issued for an amount less than their stated redemption
price at maturity, are described under "Discount Notes" below.
Discount Notes
A note that has an "issue price" that is less than its "stated redemption
price at maturity" will generally be considered to have been issued bearing
original issue discount for United States federal income tax
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<PAGE>
purposes. We refer to such discount as "OID" and such a note as a "discount
note," unless the discount is less than a specified de minimis amount.
Generally, the discount is de minimis if it is less than 0.0025 multiplied by
the product of the stated redemption price at maturity and the number of
complete years to maturity of the note. The issue price of each note in an
issue of notes issued for cash generally will equal the first price at which a
substantial amount of those notes is sold to the public, ignoring sales to bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The issue price of a note does
not change even if part of the issue is subsequently sold at a different price.
The stated redemption price at maturity of a note is the total of all payments
required to be made under the note other than "qualified stated interest"
payments. "Qualified stated interest" is stated interest that is
unconditionally payable in cash or property, other than debt instruments of the
issuer, at least annually at a single fixed rate of interest. In addition,
qualified stated interest generally includes, among other things, stated
interest on a variable rate debt instrument that is unconditionally payable at
least annually at a single qualified floating rate or a rate that is determined
using a single fixed formula that is based on objective financial or economic
information. A rate is a qualified floating rate if variations in the rate can
reasonably be expected to measure contemporaneous fluctuations in the cost of
newly borrowed funds in the currency in which the note is denominated.
No payment of interest on a note that matures one year or less from its date
of issuance will be considered qualified stated interest, and accordingly that
note will be treated as a discount note.
A United States holder of a discount note is required to include qualified
stated interest with respect to the note in income at the time it is received
or accrued, in accordance with the holder's normal method of accounting.
In addition, United States holders of discount notes that mature more than
one year from the date of issuance will be required to include OID in income
for United States federal income tax purposes as it accrues, in accordance with
a constant yield method based on a compounding of interest, before the receipt
of cash payments attributable to that income, but those holders will not be
required to include separately in income cash payments received on those notes,
even if denominated as interest, to the extent they do not constitute qualified
stated interest. The amount of OID includable in income for a taxable year by a
United States holder of a discount note will generally equal the sum of the
"daily portions" of the total OID on the discount note for each day during the
taxable year in which that holder held the discount note, which we refer to as
"accrued OID." Generally, the daily portion of OID is determined by allocating
to each day in any "accrual period" a ratable portion of the OID allocable to
that accrual period. The term "accrual period" means an interval of time of one
year or less, and generally will correspond to the intervals between scheduled
payments of principal or interest. The amount of OID allocable to an accrual
period is generally equal to the excess of the product of the "adjusted issue
price" of the discount note at the beginning of that accrual period and its
"yield to maturity" adjusted to reflect the length of the accrual period over
the amount of any qualified stated interest allocable to the accrual period.
The "adjusted issue price" of a discount note at the beginning of an accrual
period will equal the issue price of the discount note plus the amount of OID
previously includable in the gross income of any United States holder, less any
prior payments made on the discount note that were not qualified stated
interest payments. The "yield to maturity" of the discount note will be
computed on the basis of a constant annual interest rate compounded at the end
of each accrual period. Under the foregoing rules, United States holders of
discount notes will generally be required to include in income increasingly
greater amounts of OID in successive accrual periods.
Discount notes may be redeemable prior to maturity at our option, which we
refer to as a "call option," and/or repayable prior to maturity at the option
of the holder, which we refer to as a "put option." Discount notes containing
either or both of these features may be subject to rules that differ from the
general rules discussed above. Holders intending to purchase discount notes
with either or both of these features should carefully examine the applicable
pricing supplement and should consult with their own tax advisors with
S-19
<PAGE>
respect to either or both of these features since the tax consequences with
respect to OID will depend, in part, on the particular terms and the particular
features of the purchased note.
In general, a United States holder who uses the cash method of tax
accounting and who holds a discount note that matures one year or less from the
date of its issuance, which we refer to as a "short-term discount note," is not
required to accrue OID for United States federal income tax purposes unless the
holder elects to do so. United States holders who report income for United
States federal income tax purposes on the accrual method and other holders,
including banks and dealers in securities, are required to include OID, or
alternatively acquisition discount, on those short-term discount notes on a
straight-line basis, unless an election is made to accrue the OID according to
a constant yield method based on daily compounding. In the case of a United
States holder who is not required, and does not elect, to include OID in income
currently, any gain realized on the sale, exchange or retirement of a short-
term discount note will be ordinary interest income to the extent of the OID
accrued on a straight-line basis or, if elected by the holder, under the
constant yield method through the date of sale, exchange or retirement. In
addition, non-electing United States holders who are not subject to the current
inclusion requirement described in the second sentence of this paragraph may be
required to defer the deduction of all or a portion of any interest paid on
indebtedness incurred to purchase short-term discount notes until OID is
included in the holder's income.
United States holders are permitted to elect to include all interest on a
note using the constant yield method. For this purpose, interest includes
stated interest, acquisition discount, OID, de minimis OID, market discount, de
minimis market discount, and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium. Special rules apply to elections made with
respect to notes with amortizable bond premium or market discount and United
States holders considering this election should consult their own tax advisors.
The election cannot be revoked without the approval of the Internal Revenue
Service.
Market Discount and Premium
If a United States holder purchases a note, other than a discount note, for
an amount that is less than its issue price or, with respect to a subsequent
purchaser, its stated redemption price at maturity or, in the case of a
discount note, its adjusted issue price, the amount of the difference will be
treated as "market discount" for United States federal income tax purposes,
unless this difference is less than a specified de minimis amount.
Under the market discount rules of the Code, a United States holder will be
required to treat any partial principal payment or, in the case of a discount
note, any payment that does not constitute qualified stated interest, on, or
any gain realized on the sale, exchange, retirement or other disposition of, a
note as ordinary income to the extent of the lesser of:
. the amount of the payment or realized gain, or
. the market discount that has not previously been included in income and
is treated as having accrued on the note at the time of payment or
disposition.
If the note is disposed of in a nontaxable transaction, other than a
nonrecognition transaction described in Code Section 1276(c), the amount of
gain realized on the disposition for purposes of the market discount rules will
be determined as if the holder had sold the note at its then fair market value.
Market discount will be considered to accrue ratably during the period from the
date of acquisition to the maturity date of the note, unless the United States
holder elects to accrue on the basis of a constant interest rate.
A United States holder may be required to defer the deduction of all or a
portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a note until the maturity of the note or its
earlier disposition, except for certain nonrecognition transactions. A United
States holder may elect to include market discount in income currently as it
accrues, on either a ratable or a constant interest rate basis, in which case
the rules described above regarding the treatment as ordinary income of gain
upon the disposition of the note and upon the receipt of cash payments on the
note and regarding the deferral of interest deductions
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will not apply. Generally, this currently included market discount is treated
as ordinary interest. The election will apply to all debt instruments acquired
by the United States holder on or after the first day of the first taxable year
to which that election applies and may be revoked only with the consent of the
Internal Revenue Service.
A United States holder who purchases a discount note for an amount that is
greater than its adjusted issue price, but less than or equal to the sum of all
amounts payable on the note after the purchase date, other than payments of
qualified stated interest, will be considered to have purchased the note at an
"acquisition premium" within the meaning of the Code. Under the acquisition
premium rules, the amount of OID which the holder must include in its gross
income with respect to the note for any taxable year, or for the part of a
taxable year in which the United States holder holds the discount note, will be
reduced by a fraction the numerator of which is the excess of the cost of the
note over its adjusted issue price and the denominator of which is the excess
of the sum of all amounts payable on the note after the purchase date, other
than qualified stated interest, over the note's adjusted issue price.
A United States holder who purchases a discount note for an amount that is
greater than the sum of all amounts payable on the note after the purchase
date, other than qualified stated interest, will be considered to have
purchased that note at a "premium" within the meaning of the OID regulations.
In that case, the holder is not required to include any OID in gross income.
If a United States holder purchases a note for an amount that is greater
than the amount payable at maturity, or on the earlier call date, in the case
of a note that is redeemable at our option, that holder will be considered to
have purchased the note with "amortizable bond premium" equal in amount to that
excess, and may elect, in accordance with applicable Code provisions, to
amortize this premium, using a constant yield method over the remaining term of
the note and to offset interest otherwise required to be included in income in
respect of the note during any taxable year by the amortized amount of that
excess for the taxable year. However, if the note may be optionally redeemed
after the United States holder acquires it at a price in excess of its stated
redemption price at maturity, special rules would apply that could result in a
deferral of the amortization of some bond premium until later in the term of
the note. Any election to amortize bond premium applies to all debt instruments
acquired by the United States holder on or after the first day of the first
taxable year to which the election applies and may be revoked only with the
consent of the Internal Revenue Service.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of a note, a United States holder will
generally recognize taxable gain or loss equal to the difference between the
amount realized on the sale, exchange or retirement and the United States
holder's adjusted tax basis in the note. For these purposes, the amount
realized on the sale, exchange or retirement of a note does not include any
amount attributable to accrued interest or, in the case of a discount note,
accrued qualified stated interest, which will be taxable as interest unless
previously taken into account. A United States holder's adjusted tax basis in a
note generally will equal the cost of the note to that holder, increased by the
amounts of any market discount, OID and de minimis OID previously included in
income by the holder with respect to the note and reduced by any amortized bond
premium and any principal payments received by the United States holder and, in
the case of a discount note, by the amounts of any other payments that do not
constitute qualified stated interest.
Gain or loss recognized on the sale, exchange or retirement of a note will
be capital gain or loss, except to the extent of any accrued market discount
or, in the case of a short-term discount note, any accrued OID which the United
States holder has not previously included in income. For these purposes,
holders of amortizing notes will be treated upon receiving each principal
payment as though they had sold a proportionate amount of the related
amortizing note. Generally, capital gain which certain noncorporate holders
realize may be taxable at lower maximum rates than ordinary income if the
holder has held the note for more than one year. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations on the deductibility of capital losses.
S-21
<PAGE>
A United States holder generally will not recognize gain or loss upon the
election or revocation of the election or failure to elect to terminate the
automatic extension of maturity of a renewable note.
Backup Withholding
Certain "backup" withholding and information reporting requirements may
apply to payments on, and to proceeds of the sale before maturity of, the
notes. We, our agent, a broker, the relevant trustee or any paying agent, as
the case may be, will generally withhold tax at a rate of 31% from any payments
to a United States holder who:
. fails to furnish his taxpayer identification number, i.e. social security
number or employer identification number;
. furnishes an incorrect taxpayer identification number;
. is notified by the Internal Revenue Service that it has not properly
reported interest and dividend payments; or
. fails to certify that the holder has furnished a correct taxpayer
identification number and has not been notified that it is subject to
backup withholding.
Some holders, including, among others, corporations, are generally not
subject to the backup withholding and information reporting requirements. You
should consult with a tax advisor as to whether you qualify for exemption from
backup withholding and the procedure for obtaining such an exemption if you do
qualify.
Any amounts withheld under the backup withholding rules from a payment to a
United States holder would be allowed as a refund or a credit against the
holder's United States federal income tax as long as the required information
is furnished to the Internal Revenue Service.
On October 6, 1997, the Treasury Department issued new regulations which
make modifications to the withholding, backup withholding and information
reporting rules described above. The new regulations attempt to unify
certification requirements and modify reliance standards. The new regulations
will generally be effective for payments made after December 31, 2000, subject
to transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
The federal income tax discussion set forth above is included for general
information only and may not be applicable depending upon a holder's particular
situation. Holders should consult their own tax advisors with respect to the
tax consequences to them of the ownership and disposition of the notes,
including the tax consequences under state, local, foreign and other tax laws
and the possible effects of changes in federal or other tax laws.
S-22
<PAGE>
PLAN OF DISTRIBUTION
We are offering the notes on a continuing basis through Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co., Credit Suisse First Boston Corporation and
Charles Schwab & Co., Inc., which we refer to individually as an "agent" and,
together, as the "agents," who have agreed to use reasonable efforts to solicit
offers to purchase these securities. We may appoint additional agents to
solicit sales of the notes. Any such solicitation and sale of the notes will be
on the same terms and conditions to which the current agents have agreed. We
will have the sole right to accept offers to purchase these securities and may
reject any offer in whole or in part. Each agent may reject, in whole or in
part, any offer it solicited to purchase securities. Unless otherwise specified
in the applicable pricing supplement, we will pay an agent, in connection with
sales of these securities resulting from a solicitation that agent made or an
offer to purchase that agent received, a commission ranging from .125% to .875%
of the initial offering price of the securities to be sold, depending upon the
maturity of the securities. We may also sell notes directly to investors. In
that case, we will pay no commission.
We may also sell the notes to an agent as principal for its own account at a
discount equal to the commission which applies to an agent's sale of a note
with the same maturity, unless the applicable pricing supplement specifies
otherwise. That agent may resell these securities to investors and other
purchasers at a fixed offering price or at prevailing market prices, or prices
related thereto at the time of resale or otherwise, as that agent determines
and as we will specify in the applicable pricing supplement. An agent may offer
the notes it has purchased as principal to other dealers. That agent may sell
the securities to any dealer at a discount and, unless otherwise specified in
the applicable pricing supplement, the discount allowed to any dealer will not
be in excess of the discount that agent will receive from us. After the initial
public offering of securities that an agent is to resell on a fixed public
offering price basis, the agent may change the public offering price,
concession and discount.
Each of the agents may be deemed to be an "underwriter" within the meaning
of the Securities Act of 1933. We and the agents have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments made in respect of those liabilities. We have
also agreed to reimburse the agents for specified expenses.
Unless otherwise provided in the applicable pricing supplement, we do not
intend to apply for the listing of these securities on a national securities
exchange, but we have been advised by the agents that they intend to make a
market in these notes, as applicable laws and regulations permit. The agents
are not obligated to do so, however, and the agents may discontinue making a
market at any time without notice. No assurance can be given as to the
liquidity of any trading market for these securities.
Charles Schwab & Co., Inc. is our wholly-owned subsidiary. Charles Schwab &
Co., Inc. will conduct each offering of these securities in compliance with the
requirements of Rule 2720 of the NASD regarding an NASD member firm's
distributing the securities of an affiliate. Following the initial distribution
of these securities, Charles Schwab & Co., Inc. may offer and sell those
securities in the course of its business as a broker-dealer. Charles Schwab &
Co., Inc. may act as principal or agent in those transactions and will make any
sales at varying prices related to prevailing market prices at the time of sale
or otherwise. Charles Schwab & Co., Inc. may use this prospectus supplement in
connection with any of those transactions. Charles Schwab & Co., Inc. is not
obligated to make a market in any of these securities and may discontinue any
market-making activities at any time without notice.
Neither the agents nor any dealer used in the initial offering of these
securities will confirm sales to accounts over which it exercises discretionary
authority without the prior specific written approval of its customer.
S-23
<PAGE>
In order to facilitate the offering of these securities, the agents may
engage in transactions that stabilize, maintain or otherwise affect the price
of these securities or of any other securities the prices of which may be used
to determine payments on these securities. Specifically, the agents may
overallot in connection with any offering of these securities, creating a short
position in these securities for their own accounts. In addition, to cover
overallotments or to stabilize the price of these securities or of any other
securities, the agents may bid for, and purchase, these securities or any other
securities in the open market. Finally, in any offering of these securities
through a syndicate of underwriters, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing
these securities in the offering if the syndicate repurchases previously
distributed securities in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of these securities above independent market
levels. The agents are not required to engage in these activities, and may end
any of these activities at any time.
Concurrently with the offering of these securities through the agents, we
may issue other debt securities under the indentures referred to in this
prospectus supplement.
LEGAL MATTERS
The validity of the notes will be passed upon for us by Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation. Certain
directors of that firm beneficially own an aggregate of less than 1% of our
common stock. Davis Polk & Wardwell will pass upon some legal matters relating
to the notes.
S-24
<PAGE>
PROSPECTUS
Dated June 25, 1999
$395,000,000
THE CHARLES SCHWAB CORPORATION
DEBT SECURITIES
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you invest.
Unless we state otherwise in a prospectus supplement, we will not list any
of these securities on any securities exchange.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
Our wholly-owned subsidiary, Charles Schwab & Co., Inc., may use this
prospectus in connection with offers and sales of our debt securities that
Charles Schwab & Co., Inc. may make from time to time in market making
transactions at negotiated prices related to prevailing market prices at the
time of sale or otherwise. Charles Schwab & Co., Inc. has advised us that they
intend to make a market in our debt securities; however, they are not obligated
to do so. Charles Schwab & Co., Inc. may discontinue such market making
activity at any time, and we can give no assurance as to the liquidity of, or
trading market for, our debt securities. Charles Schwab & Co., Inc. may act as
principal or agent in such transactions, as discussed below in "Plan of
Distribution." We will not use this prospectus to confirm sales of any debt
securities unless it is attached to a prospectus supplement.
June 25, 1999
<PAGE>
Table of Contents
<TABLE>
<S> <C>
The Charles Schwab Corporation........ 4
Consolidated Ratio of Earnings to
Fixed Charges........................ 4
Use of Proceeds....................... 4
</TABLE>
<TABLE>
<S> <C>
Description of Debt Securities........ 5
Plan of Distribution.................. 12
Legal Opinions........................ 13
Experts............................... 13
</TABLE>
----------------
About This Prospectus
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this shelf process, we may sell any combination of the securities
described in this prospectus in one or more offerings up to a total dollar
amount of $395,000,000. This prospectus provides you with a general description
of the securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information
described under the heading "Where You Can Find More Information."
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until the later of the date we sell all of the securities
or the date that our subsidiary Charles Schwab & Co., Inc. ceases offering
and/or selling previously issued debt securities:
Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-
9700)
Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-9700)
You may request a copy of these filings, at no cost, by writing or
telephoning us at our principal executive offices at the following address:
The Charles Schwab Corporation
Investor Relations Department
120 Kearny Street
San Francisco, California 94104
415/627-8786
Our Common Stock, par value $.01 per share (the "Common Stock"), is listed
on the New York Stock Exchange and the Pacific Stock Exchange. Our reports,
proxy statements and other information can be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005 and the Pacific Stock Exchange,
301 Pine Street, San Francisco, California 94104 or 618 South Spring Street,
Los Angeles, California 90014.
2
<PAGE>
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of these documents.
We have filed or incorporated by reference exhibits with this registration
statement that include the form of proposed underwriting agreement and
indenture. You should read the exhibits carefully for provisions that may be
important to you.
3
<PAGE>
THE CHARLES SCHWAB CORPORATION
The Charles Schwab Corporation engages, through its subsidiaries, in
securities brokerage and related financial services, including retail
brokerage, mutual funds, support services for independent investment managers,
equity securities market-making and 401(k) defined contribution plans. Charles
Schwab & Co., Inc., our principal operating subsidiary, provides brokerage and
related investment services to approximately 5.9 million active investor
accounts through 298 offices nationwide. We provide similar services to
British investors through our subsidiary in the United Kingdom, Charles Schwab
Europe (formerly known as ShareLink). Our subsidiary Mayer & Schweitzer, Inc.,
a market maker in Nasdaq and other securities, provides trade execution
services to broker-dealers and institutional customers. Charles Schwab
Investment Management, Inc. is the investment adviser for Charles Schwab &
Co., Inc.'s proprietary mutual funds.
We were incorporated in Delaware in November 1986. Charles Schwab & Co.,
Inc. was incorporated in California in 1971 and merged in 1983 with a
subsidiary of BankAmerica Corporation. We acquired Charles Schwab & Co., Inc.
in a management-led leveraged buyout in March 1987 and became a publicly held
company in September 1987. Our principal executive offices are located at 120
Kearny Street, San Francisco, CA 94104 (telephone number 415/627-7000). Our
website is www.schwab.com.
All references to "we," "us," "our" or to "Charles Schwab" in this
prospectus are to The Charles Schwab Corporation.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratio of earnings to fixed
charges for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended March
31, Year Ended December 31,
-------------- ------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(unaudited)......................... 2.3 1.7 1.8 1.8 1.9 1.7 2.0
Ratio of earnings to fixed charges as
adjusted (unaudited)................ 9.5 5.4 6.5 5.9 5.9 5.9 7.0
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges:
. earnings consist of earnings before taxes on income and fixed charges;
and
. fixed charges consist of interest expense incurred on payable to
customers, borrowings and one-third of rental expense, which we estimate
is representative of the interest factor.
For the purpose of calculating the ratio of earnings to fixed charges as
adjusted, interest expense incurred on payables to customers is eliminated as
a fixed charge. We consider interest expense incurred in connection with
payables to customers to be an operating expense, because such interest is
completely offset by interest revenue on related investments and margin loans.
USE OF PROCEEDS
We will use the net proceeds from the sale of the debt securities for
general corporate purposes, which may include additions to working capital,
investing in or extending credit to subsidiaries, capital expenditures, stock
repurchases, repayment of indebtedness or acquisitions. We may set forth
further details relating to the use of net proceeds in the applicable
prospectus supplement.
4
<PAGE>
DESCRIPTION OF DEBT SECURITIES
We may issue either senior debt securities or senior subordinated debt
securities. Senior debt securities and senior subordinated debt securities will
be issued in one or more series under either the senior indenture or the
subordinated indenture between us and The Chase Manhattan Bank (formerly
Chemical Bank), as Trustee. In the following discussion we sometimes refer to
the senior indenture and the senior subordinated indenture as the "indentures."
We are a holding company and we are thus dependent upon the earnings and
cash flow of our subsidiaries to meet our obligations under the debt
securities. Because the creditors of any of our subsidiaries would generally
have a right to receive payment that is superior to our right to receive
payment from the assets of that subsidiary, holders of our debt securities will
be effectively subordinated to creditors of our subsidiaries. In addition, the
Securities Exchange Act and the rules of certain exchanges and regulatory
bodies impose net capital requirements on some of our subsidiaries that limit
their ability to pay dividends and make loans and advances to us.
This prospectus briefly outlines the provisions of the indentures. The
indentures have been filed as exhibits to the registration statement and you
should read the indentures for provisions that may be important to you. The
indentures are substantially identical except for the subordination and
negative pledge provisions described below.
In the summary below, we have included references to section numbers of the
indentures so that you can easily locate these provisions.
General
The indentures do not limit the amount of additional indebtedness that we
may incur. The indentures provide that we may issue debt securities from time
to time in one or more series with the same or various maturities. The debt
securities will not be secured by any of our property or assets.
The prospectus supplement relating to any series of debt securities being
offered will contain the specific terms relating to the offering. These terms
will include some or all of the following:
. whether the debt securities are senior or senior subordinated;
. the total principal amount of the debt securities;
. the authorized denominations;
. the percentage of the principal amount at which we will issue the debt
securities and whether the debt securities will be "original issue
discount" securities for U.S. federal income tax purposes. If we issue
original issue discount debt securities (securities that are issued at a
substantial discount below their principal amount because they pay no
interest or pay interest that is below market rates at the time of
issuance), we will describe the special United States federal income tax
and other considerations of a purchase of original issue discount debt
securities in the prospectus supplement;
. the date on which principal will be payable and whether the debt
securities will be payable on demand by the holders on any date;
. interest rate or rates (or the method by which we will determine such
rate or rates) and whether the interest rate or rates are fixed or
floating;
. the interest payment dates;
. the place or places where we will pay the principal of, premium, if any,
and interest on the debt securities;
5
<PAGE>
. any applicable redemption, repayment or sinking fund provisions;
. any applicable United States federal income tax consequences; and
. any other specific terms of the debt securities, including any additional
events of default or covenants provided for with respect to such debt
securities, and any terms that may be required by or be advisable under
applicable laws or regulations.
Debt securities may be presented for exchange and registration of transfer
in the manner, at the places and subject to the restrictions set forth in the
debt securities and the applicable prospectus supplement. Subject to the
limitations provided in the applicable indenture, such services will be
provided without charge, other than any tax or other governmental charge
payable in connection therewith.
Global Securities
We may issue debt securities under a book-entry system in the form of one or
more global securities. We will describe the specific terms of the depositary
arrangement with respect to any portion of a series of debt securities
represented by a global security in the prospectus supplement relating to such
series. We anticipate that the following description will apply to all
depositary arrangements.
We will register the global securities in the name of a depositary or its
nominee and deposit the global securities with that depositary. Following the
issuance of a global security in registered form, the depositary will credit
the accounts of its participants with the debt securities upon our
instructions. Only persons who hold directly or indirectly through financial
institutions that are participants in the depositary can hold beneficial
interests in the global securities. Because the laws of some jurisdictions
require certain types of purchasers to take physical delivery of such
securities in definitive form, you may encounter difficulties in your ability
to own, transfer or pledge beneficial interests in a global security.
So long as the depositary or its nominee is the registered owner of a global
security, Charles Schwab and the Trustee will treat the depositary as the sole
owner or holder of the debt securities for purposes of the applicable
indenture. Therefore, except as set forth below, you will not be entitled to
have debt securities registered in your name or to receive physical delivery of
certificates representing the debt securities. Accordingly, you will have to
rely on the procedures of the depositary and the participant in the depositary
through whom you hold your beneficial interest in order to exercise any rights
of a holder under the indenture. We understand that under existing practices,
the depositary would act upon the instructions of a participant or authorize
that participant to take any action that a holder is entitled to take.
We will make all payments of principal, premium and interest on the debt
securities to the depositary. We expect that the depositary will then credit
participants' accounts proportionately with these payments on the payment date
and that the participants will in turn credit their customers in accordance
with their customary practices. Neither Charles Schwab nor the Trustee will be
responsible for making any payments to participants or customers of
participants or for maintaining any records relating to the holdings of
participants and their customers and you will have to rely on the procedures of
the depositary and its participants.
Global securities are generally not transferable. We will issue physical
certificates to beneficial owners of a global security if:
. the depositary notifies us that it is unwilling or unable to continue as
depositary and we do not appoint a successor within 90 days;
. the depositary ceases to be a clearing agency registered under the
Securities Exchange Act and we do not appoint a successor within 90 days;
or
. we decide in our sole discretion that we do not want to have the debt
securities of that series represented by global securities.
6
<PAGE>
Senior Debt
The debt securities that will constitute part of our senior debt will be
issued under the senior debt indenture and will rank equally with all of our
other unsecured and unsubordinated debt.
Senior Subordinated Debt
We will issue senior subordinated debt securities under the senior
subordinated debt indenture. Senior subordinated debt securities will be
subordinate and junior in right of payment, as described in the senior
subordinated debt indenture, to all of our "Senior Indebtedness."
In the event:
. of any insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings in respect of
Charles Schwab or a substantial part of its property;
. that Charles Schwab defaults with respect to the payment of principal of
(and premium, if any) or any interest on or other monetary amounts due
and payable on any Senior Indebtedness;
. that an event of default exists (other than a default in the payment of
principal, premium, if any, or interest, or other monetary amount due and
payable) with respect to any Senior Indebtedness that permits the holder
or holders of that Senior Indebtedness to accelerate the maturity thereof
(with notice or lapse of time, or both), and such event of default shall
have continued beyond the period of grace, if any, in respect thereof,
and such default or event of default shall not have been cured or waived
or shall not have ceased to exist; or
. that the principal of and accrued interest on the senior subordinated
debt securities shall have been declared due and payable upon an "Event
of Default" pursuant of Section 5.1 of the senior subordinated debt
indenture and such declaration shall not have been rescinded and annulled
as provided therein;
then the holders of all Senior Indebtedness shall first be entitled to be paid
in full, or we shall make provision for such payment in money or money's worth,
before the holders of any of the senior subordinated debt securities are
entitled to receive a payment on account of the principal of (and premium, if
any) or any interest on the senior subordinated debt securities. Holders of
senior subordinated debt would, however, have the right, even if we have not
paid or provided for the Senior Indebtedness, to accept a payment in shares of
our stock, as we may be reorganized or readjusted, or securities of the
corporation provided for by a plan of reorganization or readjustment, in each
case the payment of which is subordinated to the payment of the Senior
Indebtedness that may at the time be outstanding. (Senior subordinated debt
indenture, Section 13.1).
The senior subordinated debt indenture defines "Senior Indebtedness" as the
principal of and premium, if any, and interest on:
. our indebtedness, whether outstanding on the date of the senior
subordinated debt indenture or thereafter created, that is:
. for money that we borrowed (including, without limitation, capitalized
lease obligations);
. for money borrowed by others and guaranteed, directly or indirectly, by
us; or
. purchase money indebtedness (whether or not secured by any lien or
other security interest), or indebtedness secured by property at the
time of our acquisition of such property, for the payment of which we
are directly or contingently liable; and
. all deferrals, renewals, extensions and refundings of, and amendments,
modifications and supplements to (whether outstanding on the date of
the senior subordinated debt indenture or thereafter created), any such
indebtedness, unless the terms of the instrument creating or evidencing
any such indebtedness expressly provide that such indebtedness is not
superior in right of payment to the senior subordinated debt securities
and/or that such indebtedness is itself subordinated to any other
indebtedness of Charles Schwab. (Senior subordinated debt indenture,
Section 1.1).
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Senior Indebtedness does not include:
. Charles Schwab's indebtedness to a subsidiary for money borrowed or
advances from that subsidiary; or
. the senior subordinated debt securities. (Senior subordinated debt
indenture, Section 1.1).
Certain Covenants
The following restrictions apply to each series of debt securities unless
the terms of such series of debt securities provide otherwise.
Negative Pledge. The senior debt indenture provides that we will not, and
will not permit any subsidiary to, create, assume, incur or guarantee any
indebtedness for borrowed money secured by a pledge, lien or other encumbrance
on the voting securities of Charles Schwab & Co., Inc., Mayer & Schweitzer,
Inc. or Schwab Holdings, Inc. (our wholly-owned subsidiary that owns all of the
common stock of Charles Schwab & Co., Inc.) without securing the senior debt
securities to the same extent as that indebtedness. (Senior debt indenture,
Section 3.6). However, the senior debt indenture permits liens on the voting
stock of Charles Schwab & Co., Inc., Mayer & Schweitzer, Inc. or Schwab
Holdings, Inc. without securing the senior debt securities if the liens arise
because of:
. claims against us for taxes or other governmental charges that we are
contesting in good faith or that are for less than $1 million;
. legal proceedings that we are contesting in good faith or that involve
claims against us for less than $1 million;
. deposits to secure (or in place of any) surety, appeals or customs bonds;
or
. any other reason if our Board of Directors determines that the lien will
not materially detract from or interfere with the present value or
control by us of the voting stock subject to the lien.
Merger, Consolidation, Sale, Lease or Conveyance. Each indenture provides
that we will not merge or consolidate with any other corporation and will not
sell, lease or convey all or substantially all our assets to any person,
unless:
. we are the continuing corporation; or
. the successor corporation in any such merger or consolidation (if other
than us) or the person that acquires or leases all or substantially all
of our assets is a corporation organized under the laws of the United
States or a State thereof or the District of Columbia and that successor
corporation expressly assumes all of our obligations under the applicable
indenture and the debt securities issued under the applicable indenture.
In either case, immediately after such merger, consolidation, sale, lease or
conveyance, we or any such successor corporation shall not be in default in the
performance or observance of the covenants and conditions of the applicable
indenture that we are required to perform or observe. (Senior and senior
subordinated debt indentures, Section 9.1).
This covenant would not apply to a recapitalization transaction, a change of
control of Charles Schwab or a highly leveraged transaction unless such
transactions or change of control are structured to include a merger or
consolidation or a sale, lease or conveyance of all or substantially all of the
assets of Charles Schwab. Except as may be described in the prospectus
supplement applicable to a particular series of debt securities, there are no
covenants or other provisions in the indentures providing for a put (the right
to require us to repurchase the debt securities) or increased interest or
otherwise that would afford holders of debt securities additional protection in
the event of a recapitalization transaction, a change of control of Charles
Schwab or a highly leveraged transaction.
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Events of Default
Unless otherwise specified in the applicable prospectus supplement, Section
5.1 of each indenture provides that an Event of Default occurs with respect to
any series of debt securities issued thereunder if:
. we fail to pay when due any principal of the debt securities of that
series;
. we fail to pay when due any interest on any debt securities of that
series for 30 days;
. we fail for 60 days after written notice to cure our default in the
observance or performance of any other covenant or agreement in the debt
securities of such series or such indenture other than a covenant
included in such indenture solely for the benefit of a series of debt
securities other than that series;
. certain events of bankruptcy, insolvency or reorganization occur;
. we fail to make any payment at maturity, including any applicable grace
period, in respect of our Indebtedness and our failure continues for more
than 30 days after we get written notice from the Trustee or from the
holders of not less than 25% in principal amount of the outstanding debt
securities (treated as one class) issued under such indenture; or
. we default with respect to any Indebtedness, which default results in the
acceleration of Indebtedness in an amount in excess of $10,000,000, and
we fail to discharge such Indebtedness or cure such acceleration (through
waiver, rescission, or annulment or other means) for more than 30 days
after we get written notice from the Trustee or from the holders of not
less than 25% in principal amount of the outstanding debt securities
(treated as one class) issued under such indenture.
"Indebtedness" is defined in each indenture as obligations (other than non-
recourse obligations or the debt securities of that series issued under the
applicable indenture) of, or guaranteed or assumed by, Charles Schwab for
borrowed money (including, without limitation, capitalized lease obligations)
or evidenced by bonds, debentures, notes or other similar instruments in an
amount due and payable at maturity in excess of $10,000,000.
If an Event of Default occurs and continues, the Trustee or the holders of
25% of the aggregate principal amount of each affected series of debt
securities (voting together as a single class) may require us to repay
immediately (or "accelerate") the entire principal of the debt securities of
each affected series and any accrued interest. For example, if an Event of
Default relates to our failure to pay interest on two series of senior debt
securities, and we have issued ten series of outstanding senior debt securities
under the senior debt indenture, the holders of 25% of the two affected series
(voting together as a single class) would have the right to accelerate the
senior debt securities that are part of those two series. However, if the Event
of Default relates to our failure to pay Indebtedness in excess of $10,000,000
and the subsequent acceleration of that Indebtedness (thus affecting all ten
series of senior debt securities in the prior example), 25% of all senior debt
securities outstanding under the senior debt indenture (voting together as a
single class) would have the right to accelerate all senior debt securities
outstanding under the senior debt indenture.
The holders of a majority of the aggregate principal amount of the debt
securities of all affected series, voting as one class, can rescind any
acceleration or waive any past default or Event of Default or allow us to not
comply with any provision of the indenture. However, they cannot waive a
default in payment of principal of, premium, if any, or interest on, any of the
debt securities.
Other than its duties in case of a default, the Trustee is not obligated to
exercise any of its rights or powers under the indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. (Senior and senior subordinated debt indentures, Section 6.2). If
they provide this reasonable indemnity, the holders of a majority in principal
amount of all affected series of debt securities, voting as one class, may
direct the time, method and place of conducting any proceeding or any remedy
available to the Trustee, or exercising any power conferred upon the Trustee,
for any series of debt securities. (Senior and senior subordinated debt
indentures, Section 5.9).
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A holder of a debt security may not institute any action against us under
the indenture governing that security unless:
. the holder gives the Trustee written notice that a default has occurred
and is continuing;
. the holders of at least 25% in principal amount of each affected series
issued under the indenture and outstanding request the Trustee to
institute the action while offering the Trustee reasonable indemnity; and
. the Trustee fails to institute the action within 60 days after receiving
that request.
Even if these three conditions are met, the holder may not institute an
action if holders of a majority in principal amount of each affected series
direct the Trustee to take action inconsistent with the request of the holder
desiring to institute action against us. Holders need not meet these
conditions to institute an action for payment of overdue principal or
interest.
In each Indenture we promise to file annually with the Trustee a
certificate of no default or a certificate specifying any default that exists.
(Senior and senior subordinated debt indentures, Section 3.5).
Discharge, Defeasance and Covenant Defeasance
When we use the term defeasance, we mean discharge from some or all of our
obligations under the indenture. If we deposit with the Trustee sufficient
cash or U.S. government securities to pay the principal, interest, any premium
and any other sums due to the stated maturity date or a redemption date of the
debt securities of a particular series, then at our option:
. we will be discharged from our obligations with respect to the debt
securities of such series; or
. we will no longer be under any obligation to comply with the restrictive
covenants contained in the indenture, and the Events of Default relating
to failures to comply with covenants will no longer apply to us.
If this happens, the holders of the debt securities of the affected series
will not be entitled to the benefits of the indenture except for registration
of transfer and exchange of debt securities and replacement of lost, stolen or
mutilated debt securities. Instead the holders will only be able to rely on
the deposited funds or obligations for payment.
We must deliver to the Trustee an opinion of counsel to the effect that the
deposit and related defeasance would not cause the holders of the debt
securities to recognize income, gain or loss for federal income tax purposes.
We must also deliver a ruling to such effect received from or published by the
United States Internal Revenue Service if we are discharged from our
obligations with respect to the debt securities.
For the senior subordinated debt, we must also deliver to the Trustee an
opinion of counsel to the effect that:
. other holders of senior indebtedness will have no rights to the funds
deposited with the Trustee; and
. after the 91st day following the deposit, none of our other creditors
would have claims on the funds deposited with the Trustee under
bankruptcy or similar laws affecting creditors' rights. However, if a
court rules that the funds deposited with the Trustee remain our
property, then the Trustee and holders of the senior subordinated debt
securities would have some rights over the funds deposited with the
Trustee as secured creditors.
For the senior subordinated debt, we may not discharge our obligations in
the ways described in this section if something may prevent us from making
payments of principal, interest and premium, if any, on the securities from
the date we make the deposit establishing the trust fund to the 91st day after
that date.
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Modification of the Indentures
Without the consent of the holders of debt securities we and the Trustee may
enter into supplemental indentures to:
. secure any debt securities;
. document that a successor corporation has assumed our obligations;
. add covenants for the protection of the holders of debt securities;
. cure any ambiguity or correct any inconsistency in the indentures;
. establish the forms or terms of debt securities of any series; or
. document the appointment of a successor trustee. (Senior and senior
subordinated debt indentures, Section 8.1).
If the holders of a majority in principal amount of all affected series
consent, we and the Trustee may add to, change or eliminate any of the
provisions of an indenture or modify in any way the rights of holders of the
affected series. However, each affected holder must consent before we can:
. extend the stated maturity of the principal;
. reduce the amount of the principal;
. reduce the rate or extend the time of payment of interest;
. reduce any amount payable on redemption;
. impair the right to sue to enforce any payment on any debt security when
due; or
. reduce the percentage in principal amount required to consent to any of
the foregoing actions. (Senior and senior subordinated debt indentures,
Section 8.2).
We may not amend the senior subordinated debt indenture to alter the
subordination of any outstanding senior subordinated debt securities without
the consent of each holder of Senior Indebtedness then outstanding that would
be negatively affected. (Senior subordinated debt indenture, Section 8.6).
Governing Law
The laws of the State of California will govern the indentures and the
securities. (Senior and Senior subordinated debt indentures, Section 11.8).
Concerning the Trustee
Under the Trust Indenture Act of 1939, if a default occurs under the debt
securities issued under the senior debt indenture or the debt securities issued
under the senior subordinated debt indenture, The Chase Manhattan Bank would be
required to resign as Trustee with respect to one of the indentures within 90
days after such default unless we cure the default or the default is duly
waived or otherwise eliminated.
The Chase Manhattan Bank has loaned money to us and provided other services
to us in the past and may do so in the future as a part of its regular
business.
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PLAN OF DISTRIBUTION
We may sell our debt securities through agents, underwriters, dealers or
directly to purchasers. Agents who we designate may solicit offers to purchase
our debt securities.
. We will name any agent involved in offering or selling our debt
securities, and any commissions that we will pay to the agent, in our
prospectus supplement.
. Unless we indicate otherwise in our prospectus supplement, our agents
will act on a reasonable efforts basis for the period of their
appointment.
. Our agents may be deemed to be underwriters under the Securities Act of
any of our debt securities that they offer or sell.
We may use an underwriter or underwriters in the offer or sale of our debt
securities.
. If we use an underwriter or underwriters, we will execute an underwriting
agreement with the underwriter or underwriters at the time that we reach
an agreement for the sale of our debt securities.
. We will include the names of the specific managing underwriter or
underwriters, as well as any other underwriters, and the terms of the
transactions, including the compensation the underwriters and dealers
will receive, in our prospectus supplement.
. The underwriters will use our prospectus supplement to sell our debt
securities.
We may use a dealer to sell our debt securities.
. If we use a dealer, we, as principal, will sell our debt securities to
the dealer.
. The dealer will then sell our debt securities to the public at varying
prices that the dealer will determine at the time it sells our debt
securities.
. We will include the name of the dealer and the terms of our transactions
with the dealer in our prospectus supplement.
We may indemnify agents, underwriters and dealers against some liabilities.
Agents, underwriters and dealers may be our customers, perform services for us
or do business with us in other ways.
We may authorize our agents and underwriters to solicit offers by certain
institutions to purchase our debt securities at the public offering price under
delayed delivery contracts.
. If we use delayed delivery contracts, we will disclose that we are using
them in the prospectus supplement and will tell you when we will demand
payment and delivery of the debt securities under the delayed delivery
contracts.
. These delayed delivery contracts will be subject only to the conditions
that we set forth in the prospectus supplement.
. We will indicate in our prospectus supplement the commission that
underwriters and agents soliciting purchases of our debt securities under
delayed contracts will be entitled to receive.
In order to facilitate the offering of the debt securities, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect their
price.
. They may overallot in connection with the offering, creating a short
position in the debt securities for their own accounts.
. To cover overallotments or to stabilize the price of the debt securities,
they may bid for, and purchase, the debt securities in the open market.
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. In any offering of the debt securities through a syndicate of
underwriters, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the debt
securities in the offering if the syndicate repurchases previously
distributed debt securities in transactions to cover syndicate short
positions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the debt
securities above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any
time.
One or more firms may offer and sell debt securities in connection with a
remarketing upon their purchase.
. The firms may include Morgan Stanley & Co., Incorporated, Goldman, Sachs
& Co., Credit Suisse First Boston Corporation and Charles Schwab & Co.,
Inc., acting as principals for their own accounts or as our agents.
. We will include the name of any remarketing firm, the terms of its
agreement with us and its compensation in the prospectus supplement.
. We may indemnify remarketing firms against some liabilities. Remarketing
firms may be our customers, perform services for us or do business with
us in other ways.
Any underwriter, agent or dealer we use in the initial offering of debt
securities will not confirm sales to accounts over which it exercises
discretionary authority without the prior specific written approval of its
customer.
Charles Schwab & Co., Inc. is a wholly owned subsidiary of The Charles
Schwab Corporation. If Charles Schwab & Co., Inc. participates in the
distribution of our securities, we will conduct the offering in accordance
with Section 2720 of the NASD Conduct Rules.
LEGAL OPINIONS
The legality of the debt securities will be passed upon for us by Howard,
Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation. Certain
directors of that firm beneficially own an aggregate of less than 1% of our
common stock.
Certain legal matters relating to the debt securities will be passed upon
on behalf of dealers, underwriters or agents by Davis Polk & Wardwell.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedules incorporated by reference in this prospectus
from our annual report on Form 10-K for the year ended December 31, 1998, have
been audited by Deloitte & Touche llp, independent auditors, as stated in
their reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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