SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
120 Kearny Street, San Francisco, CA 94108
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock - $.01 par value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 6, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $30,973,147,178. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant, and certain investment companies managed
by Charles Schwab Investment Management, Inc. were deemed to be shares of the
voting stock held by affiliates.
The number of shares of Common Stock outstanding as of March 6, 2000 was
837,201,644* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1999 Annual Report to Stockholders by reference to portions of that
document. Part III of this Form 10-K incorporates certain information contained
in the registrant's definitive proxy statement for its annual meeting of
stockholders to be held May 3, 2000 by reference to portions of that document.
* Restated for the July 1999 two-for-one common stock split.
<PAGE>
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
<TABLE>
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Part I
<S> <C>
Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 11
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 11
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 12
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 13
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 13
Part III
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 13
Item 11. Executive Compensation ------------------------------------------------------------------------------- 16
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 16
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 16
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 17
Exhibit Index ---------------------------------------------------------------------------------- 18
Signatures ------------------------------------------------------------------------------------- 24
Index to Financial Statement Schedules --------------------------------------------------------- F-1
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FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K, including the
information incorporated by reference, contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may"
and other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. These forward-looking statements,
which reflect management's beliefs, objectives and expectations as of the date
hereof, are necessarily estimates based on the best judgment of our senior
management. These statements relate to, among other things, the impact on the
Company's results of operations of the reduced pricing on equity online trades
for certain customers, the impact on the Company's results of operations of the
fee adjustments related to minimum account balances, the ability of the Company
to realize the expected benefits of acquisitions, the Company's potential status
under the Bank Holding Company Act, the ability to pursue the Company's strategy
to attract and retain customer assets, the impact on the Company's results of
operations of the Internet trade pricing for independent investment managers,
the availability of the Company's information systems, the effects of increased
competition, and the declines in average commission per revenue trade and
average revenue per share traded. Achievement of the expressed beliefs,
objectives and expectations is subject to certain risks and uncertainties that
could cause actual results to differ materially from those beliefs, objectives
and expectations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K or, in the case of documents incorporated by reference, as
of the date of those documents.
<PAGE>
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. In this report, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Schwab Capital Markets L.P.
(SCM) (prior to March 1, 2000, this subsidiary was known as Mayer & Schweitzer,
Inc.), a subsidiary acquired in 1991, is a market maker in Nasdaq and other
securities that provides trade execution services primarily to broker-dealers
and institutional customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and Charles Schwab Europe
(CSE). CSIM, incorporated in 1989, acts as the investment advisor for Schwab's
proprietary mutual funds. The Company refers to certain funds for which CSIM is
the investment advisor as the SchwabFunds(R). CSTC, incorporated in 1992, serves
as trustee for employee benefit plans, primarily 401(k) plans. CSE, acquired in
1995 to expand the Company's international operations, is a retail securities
brokerage firm located in the United Kingdom.
The Company continues to enhance the ways it helps investors develop,
evaluate and access their investment choices. In 1999, Schwab introduced a
number of new Internet-based investment services, including Schwab Signature
Services(TM), which provides enhanced personal and online services for customers
with higher asset balances or trading volumes with Schwab, and Velocity(TM), an
online trading system which provides enhanced trade information and order
execution for certain of Schwab's customers who trade frequently. Also in 1999,
Schwab introduced MyResearch(TM) report, which enables customers to design their
own research reports, and MySchwab(TM), which allows users to customize a
personal Schwab home page with content provided by Excite@Home. In addition,
Schwab introduced SchwabAlerts(TM), which delivers investment and market
activity news to customers via both wireless and regular e-mail, and
eConfirms(TM), which delivers trade confirmations electronically. Further,
Schwab enabled customers to open a new account, update contact information, sign
up for the Schwab MoneyLink(R) service and request a check through automated
Web-based processes.
There were several new developments in the Company's business during 1999.
The Company and several major financial services firms formed a new electronic
communications network (ECN), REDIBook ECN LLC, which utilizes technology
developed by Spear, Leeds & Kellogg LP. Participation in this ECN has enabled
Schwab to launch an extended-hours trading session for certain Nasdaq and
selected exchange-listed stocks. Also in 1999, the Company entered into an
agreement with TD Waterhouse Group, Inc., Ameritrade Holding Corporation, KPCB
Holdings, Inc., Trident Capital Management, LLC and Benchmark Capital Partners
to form Epoch Partners, Inc., a new online investment bank that intends to focus
on information technology and Internet companies. This new company plans to
commence operations in 2000. In addition, a precedent-setting no-action letter
from the Securities and Exchange Commission (SEC) will enable Schwab to be the
first brokerage firm to provide individual investors with access to Web-based
presentations by companies in the process of going public. Other new
developments during 1999 include the formation of alliances with Financial
Engines, Inc. and mPower.com, Inc. to provide participants in SchwabPlan(R), a
bundled 401(k) offering, with access to online investment guidance services; and
with OffRoad Capital to provide certain customers with access to private equity
investment opportunities.
The Company moved to expand its international presence through several
transactions during 1999, including entering into a joint venture agreement with
The Tokio Marine and Fire Insurance Co., Limited (TMI) and certain of its
related companies (collectively, the TMI Group). The Company and each member of
the TMI Group are shareholders in a Japanese corporation, Charles Schwab Tokio
Marine Securities Co., Ltd. (CSTMS), in which the Company has a 50% equity
interest. CSTMS, whose business is expected to commence in the first half of
2000, will initially provide retail brokerage and investment services in U.S.
dollar-denominated securities to residents of Japan. CSTMS is currently expected
to offer Japanese Yen-denominated securities later in 2000. Also in 1999, the
Company completed the acquisitions of Canadian-based Priority Brokerage Inc. and
Porthmeor Securities Inc. These two companies were combined to create Charles
Schwab Canada, Co. (CS Canada), a subsidiary of CSC. Additionally in 1999, the
Company signed a definitive agreement to form a joint venture with ecorp Limited
to provide financial services to Australian and New Zealand investors. This
transaction closed in February 2000. Further, during 1999 CSE extended online
and telephonic services to Swiss investors.
In February 2000, the Company announced a plan to provide customers who
meet certain online equity trading criteria with reduced pricing. This price
reduction is designed to enhance the Company's competitive position with
actively trading investors. Also in February 2000, the Company announced a plan
to increase fees related to minimum account balances (effective April 1, 2000).
This fee adjustment is designed to more effectively align account fees with the
expanded and improved services currently available to Schwab customers. See also
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Revenues -- Commissions and Other Revenues" in the Company's 1999
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
During 1999, CSC's Board of Directors declared a two-for-one common stock
split, distributed July 1999, effected in the form of a 100% stock dividend.
Share and per share information throughout this report have been restated.
Subsequent Events
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust), a leading wealth management
firm serving affluent individuals and families. This transaction is intended to
combine the Company's experience in technology, operations, advertising and
distribution with U.S. Trust's highly personalized service model, research
capabilities, trust and estate services, money management skills and reputation
in wealth management services. Management believes that, upon the consummation
of this transaction, the combined organization can create a comprehensive,
integrated, value-priced, wealth management offering for affluent households,
including both individual investors and customers of independent investment
managers.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, Inc. (CyBerCorp), a closely-held electronic
trading technology and brokerage firm providing Internet-based services to
highly active, online investors. The Company intends to utilize CyBerCorp's
order entry, routing and management technology to attract and retain actively
trading individual investors. The Company expects that the technology will also
benefit Schwab's independent investment advisors' customers and other
institutional and international investors. This acquisition closed on March 1,
2000.
See also both "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Subsequent Events" and note "16 -
Subsequent Events" in the Notes to Consolidated Financial Statements in the
Company's 1999 Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
(b) Financial Information About Segments. The Company provides financial
services to individuals, institutional customers and broker-dealers through
three segments -- Individual Investor, Institutional Investor and Capital
Markets. The Individual Investor segment includes the Company's domestic and
international retail operations. The Institutional Investor segment provides
custodial, trading and support services to independent investment managers, and
serves company 401(k) plan sponsors and third-party administrators. The Capital
Markets segment provides trade execution services in Nasdaq, exchange-listed and
other securities primarily to broker-dealers and institutional customers. The
Company's mutual fund services are considered a product and not a segment.
Mutual fund service fees are included in both the Individual Investor and
Institutional Investor segments. For financial information by segment and
geographic area, and for revenues by major customer for the three years ended
December 31, 1999, see note "14 - Segment Information" in the Notes to
Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
(c) Narrative Description of Business. The Company's primary focus is
serving retail investors in the U.S., either directly or through independent
investment managers, who want access to a broad selection of products and
services, as well as investment news and information, tailored to meet their
financial needs. The Company, through Schwab, serves 6.6 million active customer
accounts(a). Customer assets in these accounts totaled $725.2 billion at
December 31, 1999.
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry -- retail brokerage,
mutual funds, support services for independent investment managers, 401(k)
defined contribution plans and equity securities market-making. To pursue its
strategy and its objective of long-term profitable growth, the Company plans to
continue to leverage its competitive advantages. These advantages include a
nationally recognized brand, a broad range of products and services,
multi-channel delivery systems and an ongoing investment in technology. While
the Company's business continues to be predominantly conducted in the U.S., in
1999 the Company continued to selectively expand its international presence.
The table below shows the Company's revenues on a comparative basis for the
three years ended December 31, 1999.
- ----------------
(a) Accounts with balances or activity within the preceding eight months.
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Sources of Revenue
(Dollar amounts in thousands)
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------------------- ------------------------- -------------------------
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Revenues
Commissions
Nasdaq $ 977,851 25% $ 604,712 22% $ 465,137 20%
Exchange-listed securities 606,039 15% 485,343 18% 527,321 23%
Options 174,542 4% 122,409 5% 103,372 5%
Mutual funds 104,874 3% 96,919 3% 78,193 3%
- -----------------------------------------------------------------------------------------------------------------------------
Commissions 1,863,306 47% 1,309,383 48% 1,174,023 51%
- -----------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees
SchwabFunds(R) 507,149 13% 372,870 14% 283,280 13%
Mutual Fund OneSource(R) 229,237 6% 174,980 6% 135,040 6%
Other 13,755 11,391 9,353
- -----------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees 750,141 19% 559,241 20% 427,673 19%
- -----------------------------------------------------------------------------------------------------------------------------
Interest revenue
Margin loans to customers 982,683 25% 670,965 24% 489,197 21%
Investments, customer-related 404,003 10% 400,453 15% 376,243 16%
Other 84,394 2% 56,080 2% 34,595 2%
Interest expense (768,403) (19%) (651,881) (24%) (546,483) (24%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest revenue, net of
interest expense 702,677 18% 475,617 17% 353,552 15%
- -----------------------------------------------------------------------------------------------------------------------------
Principal transactions
Nasdaq 411,366 10% 231,336 8% 221,427 9%
Other 89,130 3% 55,418 2% 36,558 2%
- -----------------------------------------------------------------------------------------------------------------------------
Principal transactions 500,496 13% 286,754 10% 257,985 11%
- -----------------------------------------------------------------------------------------------------------------------------
Other 128,202 3% 105,226 5% 85,517 4%
- -----------------------------------------------------------------------------------------------------------------------------
Total $3,944,822 100% $2,736,221 100% $2,298,750 100%
=============================================================================================================================
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This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report. Certain prior years' revenues and expenses have been reclassified
to conform to the 1999 presentation.
Advertising and Marketing Programs
The Company's nationwide advertising and marketing programs support its
strategy by continually reinforcing the strengths and key attributes of Schwab's
full-service offering. By maintaining a consistent level of visibility in the
marketplace, the Company seeks to establish a leading and lasting financial
services brand in a focused and cost-effective manner. The Company's advertising
and market development expense was $242 million in 1999, compared to $155
million in 1998 and $130 million in 1997. Expenditures for these programs helped
Schwab attract $106.9 billion in net new customer assets in 1999, compared to
$79.1 billion in 1998 and $68.9 billion in 1997. New accounts opened totaled
1,481,000 in 1999, compared to 1,380,000 in 1998 and 1,164,000 in 1997. Customer
assets from new accounts represented approximately 50% of net new customer
assets in each of the three years ended December 31, 1999.
The Company primarily uses a combination of network, cable and local
television, print media, national and local radio, and athletic event
sponsorship in its advertising to investors. Schwab also engages extensively in
targeted direct mail advertising through monthly statement "inserts" and special
mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers a broad range of products and services to meet
customers' varying investment and financial needs, including help and advice and
access to investment research, news and information.
Services for Retail Investors. Retail investors, through the Individual
Investor segment or indirectly through the Institutional Investor segment, have
access to the accounts, help and advice, investment education, research and
analysis tools, financing and mutual funds described below.
Accounts and Features. The Company offers the purchase and sale of
securities which include Nasdaq, exchange-listed and other equity securities,
options, mutual funds, unit investment trusts, variable annuities and fixed
income investments, including U.S. Treasuries, zero-coupon bonds,
exchange-listed and over-the-counter corporate bonds, municipal bonds,
Government National Mortgage Association securities and certificates of deposit.
The Company also offers certain of its customers initial and secondary public
stock offerings, debt underwritings, and access to futures and commodities
trading. Customers approved for margin transactions may borrow a portion of the
price of certain securities purchased through Schwab, or may sell securities
short. Customers must have specific approval to trade options; as of December
31, 1999, 324,000 accounts had such approval. To write uncovered options,
customers must go through an additional approval process and must maintain a
significantly higher level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept, on a weekly basis, into certain taxable or
state-specific municipal tax-exempt SchwabFunds(R) money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One(R) brokerage account. A customer may access available funds in his or
her Schwab One account either with a personal check or a VISA(R) debit card, in
addition to the Schwab MoneyLink(R) and Schwab BillPay(TM) services offered with
all brokerage accounts. When a Schwab One customer is approved for margin
trading, the checks and debit card also provide access to margin cash available.
For cash balances awaiting investment, Schwab pays interest to Schwab One
customers. Alternatively, qualifying Schwab One customers seeking tax-exempt
income may elect to have cash balances swept daily into state-specific municipal
tax-exempt SchwabFunds money market funds.
Schwab offers the Signature Services(TM) program to customers that either
have $100,000 in assets at Schwab or make at least 12 revenue trades per year.
This program provides such benefits as access to a dedicated team of registered
representatives, free research, and other services. Within the program,
customers have access to three additional levels of services that are based on
asset and trading levels. As part of the Signature Services program, Schwab
introduced the Schwab Access(TM) account. Designed to complement the Schwab One
account, Schwab Access is an account allowing customers to conduct everyday
payment activities at Schwab via the Internet. The Schwab Access account
features include online bill payment, unlimited checking, Gold VISA debit card,
returned check copies, unlimited money transfers within Schwab accounts and
no-fee ATM access. Cash balances in a Schwab Access account are swept daily into
a SchwabFunds money market fund.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three
SchwabFunds money market funds. During 1999, active IRAs increased 19% to
2,500,000 accounts and customer assets in all IRAs increased 45% to $168.6
billion. Schwab also acts as custodian and broker for Keogh accounts.
Help and Advice. The Company's approach to advice is based on long-term
investment strategies and guidance on portfolio diversification and asset
allocation. The Company strives to demystify investing by educating and
assisting customers in the development of investment plans. This approach is
designed to be offered consistently across all of the Company's delivery
channels and provides customers with a wide selection of choices for their
investment needs. Schwab's registered representatives can assist investors in
developing asset allocation strategies and evaluating their investment choices,
and refer investors who desire additional guidance to independent investment
managers through the Schwab AdvisorSource(TM) service. In 1999, Schwab expanded
the AdvisorSource referral services program to include financial planners and
certified public accountants. Schwab also introduced customized portfolio
guidance through Schwab investment specialists and a range of new Web-based
planning and investment evaluation tools.
Investment Education, Research and Analysis Tools. Schwab provides
investors with investment education, research and analysis tools. In 1999,
Schwab introduced WebShops(TM), the first in a series of educational workshops,
designed to help investors increase their skills in using Schwab's online
services. Schwab provides various Internet-based research and analysis tools
including: The Analyst Center(TM), which connects customers to proprietary and
third-party investment research, guidance and decision-making tools; the
Positions Monitor(TM), which tracks customers' mutual fund and equity holdings'
historical performance; the Mutual Fund Performance Profile(TM), which allows
customers to analyze the performance of their entire mutual fund portfolio; and
the Stock Screener(TM), which allows customers to search over 9,000 equities
using their own criteria.
Customer Financing. Customers' securities transactions are conducted on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually three business days after the trade is executed. However, for purchases
of certain types of securities, such as certain mutual fund shares, a customer
must have a cash or money market fund balance in his or her account sufficient
to pay for the trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers may
sell securities short in a margin account subject to minimum equity and
applicable margin requirements and the availability of such securities to be
borrowed and delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During 1999, Schwab's outstanding margin loans to customers
averaged $13.2 billion.
In permitting a customer to engage in transactions, Schwab faces credit
risk if the customer fails to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 under the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by Schwab
at interest costs lower than Schwab's costs of borrowing from alternative
sources, Schwab's cost of funds is reduced and its net income is enhanced. Such
interest savings contribute substantially to Schwab's profitability and, if a
significant reduction of customer cash balances were to occur, Schwab's
borrowings from other sources may have to increase and such profitability would
decline. To the extent Schwab's customers elect to have cash balances in their
brokerage accounts swept into certain SchwabFunds(R) money market funds, the
cash balances available to Schwab for investments or for financing margin loans
are reduced. However, Schwab receives mutual fund service fees from such funds
based upon average daily invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Management" in the Company's 1999 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
Mutual Funds. Schwab's Mutual Fund Marketplace(R) provides customers with
the ability to invest in over 1,900 third-party mutual funds from 316 fund
families. Within the Mutual Fund Marketplace, Schwab's Mutual Fund OneSource(R)
service enables customers to trade 1,143 mutual funds from 208 fund families
without incurring transaction fees.
Schwab's Mutual Fund OneSource service allows investors to access multiple
mutual fund companies, avoid brokerage transaction fees, and achieve investment
diversity among fund families. In addition, investors' recordkeeping and
investment monitoring are simplified through one consolidated statement. Fees
received by Schwab for providing services, including recordkeeping and
shareholder services, from the Mutual Fund OneSource program are based upon the
daily balances of customer assets invested in the participating funds through
Schwab and are paid by the funds and/or fund sponsors. Customer assets held by
Schwab that have been purchased through the Mutual Fund OneSource service,
excluding SchwabFunds, totaled $102.3 billion at the end of 1999.
Customer assets invested in Schwab's Mutual Fund Marketplace, excluding the
Mutual Fund OneSource service, totaled $74.3 billion at the end of 1999. Schwab
charges a transaction fee on trades placed in the funds included in the Mutual
Fund Marketplace (except on trades through the Mutual Fund OneSource service).
These fees are recorded as commission revenues. Commissions from customer
transactions in mutual fund shares comprised 6% of total commission revenues in
1999 and 7% in both 1998 and 1997.
In addition to the third-party funds available through the Mutual Fund
Marketplace, Schwab offers a family of proprietary funds, referred to as the
SchwabFunds. SchwabFunds include money market funds, equity index funds, bond
funds, asset allocation funds, and funds that primarily invest in stock, bond
and money market funds. Qualifying Schwab customers may elect to have cash
balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds were
$107.9 billion at the end of 1999. Fees received by the Company from the
SchwabFunds, for providing transfer agent services, shareholder services,
administration and investment management, are based upon the daily balances of
customer assets invested in these funds.
Services for Independent Investment Managers. The Company provides
custodial, trading and support services to independent investment managers
through the Institutional Investor segment. To attract the business of accounts
managed by these managers, Schwab has a dedicated business unit which includes
experienced registered representatives assigned to individual managers.
Independent investment managers participating in this program who custody
customer accounts at Schwab may use SchwabLink(R), the SchwabLink Web(TM) site,
and the Managed Account Connection(TM). SchwabLink is a computer-based
information network which enables investment managers to access information
about their customers' accounts directly from Schwab's computer systems and to
enter their customers' trades online. The SchwabLink Web site enables investment
managers to use the Internet to communicate directly with Schwab service teams,
as well as receive news and information. The Managed Account Connection enables
investment managers to provide their clients with personalized equity portfolio
management by a variety of institutional asset managers. In 1999, Schwab
launched the Signature Services Alliance(TM), which provides enhanced
personalized services to customers of investment managers, including access to a
dedicated team of representatives and a new Schwab Institutional Web site(TM).
During 1999, Schwab customer assets held in accounts managed by approximately
5,800 active independent investment managers increased $66.7 billion, or 46%, to
a total of $213.1 billion. Independent investment managers generated 11% of
total commission revenues in 1999 and 12% in both 1998 and 1997.
In November 1999, the Company began to provide independent investment
managers with flat-fee pricing for Internet trades. This price reduction is
designed to enhance the Company's competitive position and to align the pricing
of Internet trades for independent investment managers with that offered to most
of the Company's individual customers. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Revenues --
Commissions" in the Company's 1999 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Retirement Plan Services. The Company provides 401(k) recordkeeping and
other retirement plan services through the Institutional Investor segment.
Schwab serves company 401(k) plans directly through a dedicated sales force, as
well as indirectly through alliances with national and regional third-party
administrators. In the direct channel, SchwabPlan(R) is the Company's
comprehensive 401(k) retirement plan, which offers plan sponsors a wide array of
investment options, participant education and servicing, trustee services, and
participant-level recordkeeping. During 1999, Schwab continued to develop its
retirement plan services business, with customer assets in corporate retirement
plans growing $8.6 billion, or 44%, to $28.3 billion.
Market-Making Activities. Market-making activities in Nasdaq,
exchange-listed and other securities are conducted through the Capital Markets
segment. SCM provides trade execution services in Nasdaq and other securities
primarily to broker-dealers, including Schwab, and institutional customers. As a
market maker in Nasdaq and other securities, SCM generally executes customer
trades as principal. While substantially all Nasdaq security trades originated
by the customers of Schwab are directed to SCM, a substantial portion of SCM's
trading volume comes from parties other than Schwab.
Schwab has specialist operations on the Pacific Exchange, the Boston Stock
Exchange and the Cincinnati Stock Exchange to make markets in exchange-listed
securities. The majority of trades originated by the customers of Schwab in
exchange-listed securities for which Schwab makes a market are directed to these
operations. At December 31, 1999, Schwab had six specialists on the Pacific
Exchange, three specialists on the Boston Stock Exchange and six specialists on
the Cincinnati Stock Exchange that made markets in 400, 100 and 100 securities,
respectively.
In the normal course of their market making in Nasdaq, exchange-listed and
other securities, Schwab and SCM maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
SCM's ownership of securities, short inventory positions represent obligations
of Schwab and SCM to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, long or short inventory positions may result in gains
or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Management" in the Company's 1999 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
Multi-Channel Delivery Systems
The Company's multi-channel delivery systems allow customers to choose how
they prefer to do business with the Company. In addition to its branch office
network, the Company maintains four regional customer telephone service centers,
two online customer support centers as well as automated telephonic and online
channels, primarily serving retail investors through the Individual Investor and
Institutional Investor segments.
Branch Office Network. At December 31, 1999, Schwab operated 340 domestic
branch offices in 48 states, as well as branches in the Commonwealth of Puerto
Rico and the U.S. Virgin Islands. In addition, the Company has offices in
Canada, the Cayman Islands, Hong Kong and the United Kingdom. The Company's
branch office network plays a key role in building its business. With the
customer service support of regional customer telephone service centers and
automated telephonic and online channels, branch personnel are focusing a
significant portion of their time on business development. Customers can use
branch offices to open accounts, deliver and receive checks and securities,
obtain market information, place orders, and obtain related customer services in
person, yet most of these activities are conducted by telephone and mail. Branch
offices also provide investors with access to the Internet.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle customer trading and service calls twenty-four hours-a-day,
seven days-a-week. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows the branch office network to be maintained at lower staffing
levels and to focus on business development.
The Company's customer service approach is to use teams led by registered
representatives in the service centers, who work closely with branch office
network personnel. Additionally, certain teams at these centers provide
specialized services to customers of the Schwab Signature Services(TM) program.
Each registered representative has immediate access to the customer account and
market-related information necessary to respond to customer inquiries. For most
customer orders, registered representatives can enter the order and confirm the
transaction immediately. As a result of this approach, the departure of a
registered representative generally does not result in a loss of customers for
the Company.
Automated Telephonic and Online Channels. Customers are able to obtain
financial information and execute trades on an automated basis through the
Company's automated telephonic and online channels. These channels are designed
to provide added convenience for customers and minimize Schwab's costs of
responding to and processing routine customer transactions. To assist customers
in using online channels, the Company maintains two online customer support
centers that operate both during and after normal market hours.
Automated telephonic channels include TeleBroker(R) -- Schwab's touch-tone
telephone quote and trading service, and VoiceBroker(TM) -- Schwab's voice
recognition quote and trading service. Schwab's automated telephonic channels
handled over 70% of total customer calls received in 1999. Online channels
include the Charles Schwab Web Site(TM) -- an information and trading service on
the Internet for individual investors, and PC-based services such as
SchwabLink(R) for independent investment managers and Velocity(TM) for certain
of Schwab's customers who trade frequently. The Company continues to stress the
importance of Clicks and Mortar(TM) access -- blending the power of the Internet
with personal service to create a full-service customer experience. The
Company's online channels handled 68% of total trades in 1999. Schwab provides
every retail customer access to all delivery channels and flat-fee pricing for
Internet trades.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its multi-channel delivery systems, as well as other
applications such as clearing functions, account administration, recordkeeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered U.S. securities exchanges, SCM, the National Securities
Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds such as security price information, as well as internal
malfunctions such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains backup and recovery functions. These include logging of all critical
files intraday, duplication and storage of all critical data outside of its
central computer site every twenty-four hours, and maintenance of facilities for
backup and communications. They also include the maintenance and periodic
testing of a disaster recovery plan that management believes would permit Schwab
to recommence essential computer operations if its central computer site were to
become inaccessible. To minimize business interruptions, the Company has two
data centers intended, in part, to further improve the recovery of business
processing in the event of an emergency. In 1999, the Company announced a joint
effort with IBM to implement new systems technology intended to help the
Company's computers share their workload more efficiently. Additionally in 1999,
the Company's investment in systems capacity, which totaled $126 million,
expanded the Company's Web server, mainframe and data storage capacity by 765%,
225% and 190%, respectively.
Year 2000 Century Change. The Company's mission critical systems operated
throughout the Year 2000 century change without material errors or interruptions
when processing data and transactions incorporating year 2000 dates, and the
Company did not encounter any material problems with any of its mission critical
vendor-supplied systems, services or products. Mission critical systems,
services and products means those systems, services and products critical to the
ongoing operation of the business. For a discussion on the Company's compliance
costs regarding the Year 2000 issue, see "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Year 2000 Century Change" in
the Company's 1999 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
customer fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab takes the
risk of the other party's failure to settle the trade. See note "13 - Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to Consolidated
Financial Statements in the Company's 1999 Annual Report to Stockholders, which
are incorporated herein by reference to Exhibit No. 13.1 of this report.
Employees
As of December 31, 1999, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 18,100 full-time employees.
Risk Management
The Company's business and activities expose it to different types of
risks. Proper identification, assessment and management of these risks are
essential to the success and financial soundness of the Company. For a
discussion on the Company's principal risks and some of the policies and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition -- Risk
Management" in the Company's 1999 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Information Systems," "Competition" and "Regulation" in this report.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including traditional brokerage firms (particularly
firms that have started providing online trading services), discount brokerage
firms, online brokerage firms, mutual fund companies and banks. Certain of these
competitors have greater financial resources than the Company. The consolidation
trend in the financial services industry is likely to increase in light of the
new financial modernization legislation that becomes effective in March 2000.
This new legislation allows banks, securities firms and insurance companies more
flexibility to affiliate under one holding company. These holding companies can
engage in activities and acquire companies engaged in activities that are
financial in nature. The expansion and customer acceptance of conducting
financial transactions online has also attracted competition from providers of
online services, software development companies and other providers of financial
services. Finally, the growth of online trading has led to the creation of new
ECNs and new exchanges, and is causing major existing markets to consider
converting to for-profit status, all of which may intensify competition. The
Company experienced declines in its average commission per revenue trade in 1998
mainly due to the Company's integration of its online and traditional brokerage
services and reduction of the price of online trades for most of its customers,
resulting in an increase in the proportion of trades placed through its online
channels. The Company's average commission per revenue trade declined again in
1999 due to the continued increase in the proportion of trades placed through
its online channels. As the Company focuses on further enhancements to its
electronic service offering and online trades increase, average commission per
revenue trade is expected to continue to decline.
Many brokerage firms employ substantial funds in advertising and direct
solicitation of customers to increase their market share of commission dollars
and other securities-related income. Most discount brokerage firms and online
brokerage firms charge commissions lower than Schwab. Traditional brokerage
firms also offer discounted commissions to selected retail brokerage customers.
In addition, some traditional brokerage firms offer discounted or free online
trades, usually as part of a fee-based account. Such competition may negatively
impact the Company's customer asset growth, revenue growth and profit margin.
Management continues to believe that the key to sustaining the Company's
competitive advantages will be its ability to combine people and technology in
ways that provide investors with the access, information, guidance, advice and
control they expect -- as well as superior service -- all at a lower cost than
traditional providers of financial services. Accordingly, the Company expects to
remain in direct competition with traditional, online and discount brokerage
firms, banks and other providers of financial products and services.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. Schwab and SCM are
registered as broker-dealers with the SEC. Schwab and CSIM are registered as
investment advisors with the SEC. Additionally, Schwab is regulated by the
Commodities Futures Trading Commission (CFTC) with respect to its introduced
futures and commodities trading activities.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers, Inc. (NASD) and the national securities exchanges such as
the New York Stock Exchange (NYSE), which has been designated by the SEC as
Schwab's primary regulator with respect to its securities activities. The NASD
has been designated by the SEC as SCM's primary regulator with respect to its
securities activities. The Chicago Board Options Exchange has been designated as
Schwab's primary regulator with respect to its options trading activities for
2000 and 2001. The NYSE was designated as Schwab's primary regulator with
respect to its options trading activities for 1998 and 1999. The National
Futures Association (NFA) has been designated by the CFTC as Schwab's primary
regulator with respect to its futures and commodities trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC or
CFTC) governing the industry and conduct periodic examinations of
broker-dealers. Securities firms are also subject to regulation by state
securities authorities in the states in which they do business. In addition to
its membership in the NYSE, Schwab is also a member of most other major U.S.
securities exchanges and is consequently subject to their rules and regulations.
Schwab was registered as a broker-dealer in fifty states, the District of
Columbia and Puerto Rico as of December 31, 1999. SCM was registered as a
broker-dealer in thirty-two states and the District of Columbia as of December
31, 1999.
The principal purpose of regulations and discipline of broker-dealers and
investment advisors is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisors. The regulations to which broker-dealers and investment
advisors are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms,
recordkeeping and reporting, fee arrangements, disclosure to clients, and the
conduct of directors, officers and employees. As registered investment advisors,
Schwab and CSIM are subject to the requirements of the Investment Advisers Act
of 1940 and the regulations thereunder, which impose, among other things,
various recordkeeping, reporting, and disclosure requirements and impose
limitations on fees and principal transactions between an advisor and its
clients. The state securities law requirements applicable to registered
investment advisors are in certain cases more comprehensive than those imposed
under the federal securities laws.
Additional legislation, changes in rules promulgated by the SEC, other
federal and state regulatory authorities and self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules may
directly affect the method of operation and profitability of broker-dealers and
investment advisors. The profitability of broker-dealers and investment advisors
could also be affected by rules and regulations which impact the business and
financial communities in general, including changes to the laws governing
taxation, antitrust regulation and electronic commerce. The SEC, CFTC,
self-regulatory organizations and state securities authorities may conduct civil
or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
advisor, its officers, or employees. Schwab and SCM have been the subject of
such administrative proceedings.
Certain SEC rules and rule amendments, known as the Order Handling Rules,
have significantly altered the manner in which orders for both Nasdaq and
exchange-listed securities are handled. These rules were implemented in phases
between January 20, 1997 and October 13, 1997. Additionally, in June 1997, most
major U.S. securities markets, including Nasdaq and the NYSE, began quoting and
trading most securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share. Mainly as a result of these regulatory changes
and changes in industry practices, SCM's average revenue per share traded
declined from 3.3(cent) in 1997 to 2.5(cent) in 1998. However, SCM's average
revenue per share traded increased to 2.8(cent) in 1999. An increase in the
market price volatility of technology stocks in 1999 contributed to SCM's higher
average revenue per share traded. The major U.S. securities markets have
announced that they intend to begin quoting and trading securities in decimal
increments. The SEC continues to discuss with the self-regulatory organizations
a viable decimal pricing implementation date. This change is likely to cause
decreases in average revenue per share traded, will only affect the Capital
Markets segment and, based on management's expectations, will not have a
material impact on that segment's revenues. See also "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Revenues --
Principal Transactions" in the Company's 1999 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
As registered broker-dealers and NASD member organizations, Schwab and SCM
are required by federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of cash balances. SIPC is funded through assessments on registered
broker-dealers. In addition, Schwab purchased from a private surety company
additional account protection for customers, as defined, of up to the net equity
value for customer securities in each account, of which $900,000 is available
for claims of cash balances. Stocks, bonds, mutual funds and money market funds
are considered securities for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
Schwab is authorized by the Municipal Securities Rulemaking Board to
conduct transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and SCM is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board Options
Exchange govern the amount of margin customers must provide and maintain in
writing uncovered options.
As a California state-chartered trust company, CSTC is primarily regulated
by the State of California Department of Financial Institutions. Since it
provides employee benefit plan trust services, CSTC is also required to comply
with the Employee Retirement Income Security Act of 1974 (ERISA) and,
consequently, is subject to oversight by both the Internal Revenue Service and
Department of Labor. CSTC is required under ERISA to maintain a fidelity bond
for the protection of employee benefit trusts for which it serves as trustee.
The Company's business is also subject to regulation by various non-U.S.
governments, securities exchanges and regulatory bodies, particularly in those
countries where it has acquired subsidiaries. Such regulation may directly
affect the method of operation and profitability of the Company's foreign
operations.
CSE is registered as a broker-dealer with the Securities and Futures
Authority in the United Kingdom.
Charles Schwab, Hong Kong, Ltd. (CSHK) and Charles Schwab Hong Kong
Securities Limited (CSHKS) are subsidiaries of CSC. CSHK is registered as a
securities dealer and commodity trading advisor with the Securities and Futures
Commission in Hong Kong (SFC). CSHKS is registered as a securities dealer with
the SFC and also as an Exchange Participant of The Stock Exchange of Hong Kong
Limited; however, CSHKS has not yet commenced operations.
CS Canada is a broker-dealer in Canada and is regulated under the laws of
the Canadian provinces by securities commissions and by the Investment Dealers
Association of Canada. CS Canada is also a member of the Toronto and Winnipeg
Stock Exchanges and is subject to their rules and regulations.
CSTMS is a securities firm licensed and regulated by the Japanese Ministry
of Finance; however, CSTMS has not yet commenced operations.
Potential Bank Holding Company Act Requirements
Upon consummation of the transaction with U.S. Trust, the Company expects
to become a financial holding company, subject to Federal Reserve supervision,
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust's shareholder approval. If such regulatory and shareholder approvals are
obtained, the Company will be required to limit its business to financial
services. It may be required to maintain capital at certain levels which could
affect its ability to pay dividends. Under certain circumstances, the Company
may be required to provide additional capital to its subsidiaries, and such
subsidiaries may be prohibited from paying dividends. Additionally, Federal
Reserve Board approval will be required for certain changes in control of CSC.
Net Capital Requirements
As registered broker-dealers, Schwab and SCM are subject to the Uniform Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934 (the Net
Capital Rule), which has also been adopted through incorporation by reference in
NYSE Rule 325. The CFTC and NFA also impose net capital requirements. Schwab is
a member firm of the NYSE, the NASD and the NFA, and SCM is a member firm of the
NASD. The Net Capital Rule specifies minimum net capital requirements that are
intended to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to twenty business days.
Schwab and SCM have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 under the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than fifteen
consecutive business days; NYSE Rule 326 also prohibits the expansion of
business if net capital is less than 5% of aggregate debit items for more than
fifteen consecutive business days. The provisions of NYSE Rule 326 also become
operative if capital withdrawals (including scheduled maturities of subordinated
borrowings during the following six months) would result in a reduction of a
firm's net capital to the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
SCM's operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See also "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources -- Liquidity" in the Company's 1999 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1999, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $345 million and had total net capital of $1,766
million. At December 31, 1999, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $1,421 million, $1,076 million and $903 million,
respectively. Aggregate debit balances as of December 29, 1999 were used to
calculate Schwab's minimum required net capital at December 31, 1999, in
accordance with applicable regulations.
At December 31, 1999, SCM was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total net capital of $13
million. At December 31, 1999, the amount in excess of its minimum required net
capital was $12 million.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. Schwab also has a lease for 398,000 square feet of office
space located at 211 Main Street in San Francisco, California. The lease expires
in 2018 and includes two ten-year extension options at then current market
rates. In addition to these locations, Schwab leases space in other buildings
for its San Francisco operations, including its principal executive offices at
120 Kearny Street, aggregating 1,103,000 additional square feet. SCM's
headquarters are located in leased office space in Jersey City, New Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception. In
addition, the Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
288,000 and 164,000 square feet, respectively. The Company also leases an
additional 148,000 square feet as part of its Phoenix service center. The
Company leases the service centers located in Denver and Orlando, with 328,000
and 226,000 square feet, respectively.
The Company owns its two primary data center facilities located in Phoenix
totaling 147,000 square feet.
While the corporate headquarters and data centers support all of the
Company's segments, the branch offices and service centers primarily support the
Individual Investor and Institutional Investor segments and SCM's headquarters
supports the Capital Markets segment.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is included
in note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the ticker symbol SCH. The number of common stockholders of record as of
March 6, 2000 was 9,996. The closing market price per share on that date was
$47.69.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 1999
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is included
in "Selected Financial and Operating Data" in the Company's 1999 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Company's 1999 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1999 and
1998 are summarized as follows (dollars in millions):
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
1999 1998
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $14,982 $ 9,048
Average interest rate 7.83% 7.54%
Investments:
Average balance outstanding $ 8,415 $ 8,895
Average interest rate 5.01% 4.95%
Average yield on interest-earning assets 6.82% 6.25%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $18,701 $14,586
Average interest rate 4.29% 4.13%
Other interest-bearing sources:
Average balance outstanding $ 1,497 $ 1,305
Average interest rate 4.25% 3.75%
Average noninterest-bearing portion $ 3,199 $ 2,052
Average interest rate on funding sources 3.70% 3.63%
Summary:
Average yield on interest-earning assets 6.82% 6.25%
Average interest rate on funding sources 3.70% 3.63%
- --------------------------------------------------------------------------------
Average net interest margin 3.12% 2.62%
================================================================================
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1998 to the fourth quarter of 1999 was primarily due to higher levels
of margin loans to customers, partially offset by higher average customer cash
balances.
Equipment, office facilities and property are detailed below (in
thousands):
- --------------------------------------------------------------------------------
December 31,
1999 1998
- --------------------------------------------------------------------------------
Land $ 14,674 $ 14,674
Buildings 95,725 90,626
Leasehold improvements 210,557 155,428
Furniture and equipment 135,096 105,168
Telecommunications equipment 126,778 100,994
Information technology equipment and software 532,652 373,226
Construction in progress 56,934 7,696
- --------------------------------------------------------------------------------
Subtotal 1,172,416 847,812
Accumulated depreciation and amortization 574,655 451,649
- --------------------------------------------------------------------------------
Total $ 597,761 $396,163
================================================================================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Risk Management -- Market Risk" in the Company's 1999 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 8. Financial Statements and Supplementary Data
The information required to be furnished pursuant to this item is included
in the Consolidated Financial Statements and "Quarterly Financial Information
(Unaudited)" in the Company's 1999 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the SEC pursuant to Regulation 14A by April 29, 2000 (the Proxy
Statement) under "The Board of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2004, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
Executive Officers of the Registrant
Name Age Title
<S> <C> <C>
Charles R. Schwab 62 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 51 President, Co-Chief Executive Officer, and Director
Karen W. Chang 51 Enterprise President - Retail Business Development and Branch Network
John Philip Coghlan 48 Vice Chairman and Enterprise President - Services for Investment Managers
and Retirement Plan Services
Linnet F. Deily 54 Vice Chairman and President - Retail Group
Christopher V. Dodds 40 Executive Vice President and Chief Financial Officer
Carrie E. Dwyer 48 Executive Vice President, General Counsel and Corporate Secretary
Lon Gorman 51 Vice Chairman and Enterprise President - Capital Markets and Trading
Daniel O. Leemon 46 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 45 Vice Chairman, Executive Vice President and Chief Information Officer
Susanne D. Lyons 42 Executive Vice President and Chief Marketing Officer
John P. McGonigle 44 Executive Vice President - Mutual Funds
George A. Rich 52 Executive Vice President - Human Resources
Robert H. Rosseau 51 Executive Vice President and Enterprise President - International
Gideon Sasson 44 Enterprise President - Electronic Brokerage
Elizabeth Gibson Sawi 47 Executive Vice President and Chief Administrative Officer
Steven L. Scheid 46 Vice Chairman and Enterprise President - Financial Products and Services
===========================================================================================================================
</TABLE>
<PAGE>
Mr. Schwab has been Co-Chief Executive Officer of the Company since 1998,
and Chairman and a director of the Company since its incorporation in 1986. Mr.
Schwab was Chief Executive Officer of the Company from 1986 to 1997. Mr. Schwab
was a founder of Schwab in 1971 and has been its Chairman since 1978. Mr. Schwab
is currently a director of The Gap, Inc.; Siebel Systems, Inc., a company that
provides support for software systems; and Vodafone AirTouch Plc. Mr. Schwab is
also a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust and Schwab Annuity Portfolios, all registered investment
companies. In 1999, Mr. Schwab was named a director of AudioBase, Inc., a
company that provides music and voice to Internet publishers, advertisers and
marketers.
Mr. Pottruck has been Co-Chief Executive Officer of the Company since 1998,
director of the Company since 1994, and President of the Company since 1992. Mr.
Pottruck was Chief Operating Officer of the Company from 1994 to 1998. Mr.
Pottruck has been Chief Executive Officer of Schwab since 1992 and President of
Schwab since 1988 (except for the period September 1997 to April 1998). Mr.
Pottruck joined Schwab in 1984. Mr. Pottruck is currently a director of Intel
Corporation, a maker of microcomputer components and related products; and
Preview Travel, Inc., an online travel services provider; and serves on the
Federal Advisory Commission on Electronic Commerce. In 1999, Mr. Pottruck was
elected to the Board of Governors of the National Association of Securities
Dealers, Inc. Additionally, Mr. Pottruck was named a director of Epoch Partners,
Inc. in 1999 and DoveBid, Inc., an auctioneer and capital asset sale advisor, in
January 2000.
Ms. Chang has been Enterprise President - Retail Business Development and
Branch Network of Schwab and Executive Vice President of the Company since 1997.
Ms. Chang was Executive Vice President - Retail Branch Network of the Company
and Schwab from 1996 to 1997 and Senior Vice President - Retail Branch Network
of the Company and Schwab from 1994 to 1996. Ms. Chang joined Schwab in 1994.
Mr. Coghlan has been Vice Chairman of the Company and Schwab since July
1999, Enterprise President - Services for Investment Managers of Schwab since
1998, Enterprise President - Retirement Plan Services of Schwab since 1997 and
Executive Vice President of the Company since 1992. Mr. Coghlan was Executive
Vice President of Schwab and General Manager of Schwab Institutional from 1992
to 1997. Mr. Coghlan joined Schwab in 1986.
Ms. Deily has been Vice Chairman of the Company and Schwab since July 1999,
President - Retail Group of Schwab since 1998 and Executive Vice President of
the Company since 1997. Ms. Deily was Enterprise President - Services for
Investment Managers of Schwab from 1997 to 1998 and Executive Vice President and
General Manager-Services for Investment Managers of the Company and Schwab from
1996 to 1997. Before joining Schwab in 1996, Ms. Deily was Chairman, President
and Chief Executive Officer of First Interstate Bank of Texas from 1991 to 1996.
Mr. Dodds has been Chief Financial Officer of the Company and Schwab since
July 1999 and Executive Vice President of the Company and Schwab since 1998. Mr.
Dodds was Corporate Controller of Schwab from 1997 to March 1999 and Corporate
Treasurer of Schwab from 1993 to 1997. Mr. Dodds joined Schwab in 1986.
Ms. Dwyer has been General Counsel and Corporate Secretary of the Company
and Schwab since 1997 and Executive Vice President of the Company and Schwab
since 1996. Before joining Schwab in 1996, Ms. Dwyer was Senior Counselor to the
Chairman of the U.S. Securities and Exchange Commission from 1993 to 1996.
Mr. Gorman has been Vice Chairman of the Company and Schwab since July
1999, Enterprise President - Capital Markets and Trading of Schwab and Executive
Vice President of the Company since 1997. Mr. Gorman was Executive Vice
President - Capital Markets and Trading of the Company and Schwab from 1996 to
1997. Before joining Schwab in 1996, Mr. Gorman was a Managing Director of
Credit Suisse First Boston Corporation from 1988 to 1996. Mr. Gorman is
currently a director of the Securities Industry Association. Additionally, Mr.
Gorman was named a director of REDIBook ECN LLC in 1999 and CyBerCorp, Inc. in
March 2000.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon
held various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
Ms. Lepore has been Vice Chairman of the Company and Schwab since July 1999
and Executive Vice President of the Company and Chief Information Officer of the
Company and Schwab since 1993. Ms. Lepore was Executive Vice President of Schwab
from 1993 to July 1999. Ms. Lepore joined Schwab in 1983. Ms. Lepore was named a
director of eBay Inc. in January 2000 and currently serves as a director of the
Times Mirror Company.
Ms. Lyons has been Chief Marketing Officer of Schwab since January 2000 and
Executive Vice President of the Company since 1997. Ms. Lyons was Enterprise
President - Retail Client Services of Schwab from 1997 to January 2000,
Executive Vice President - Retail Marketing of the Company and Schwab from 1996
to 1997, and Senior Vice President - Active Trader of the Company and Schwab
from 1994 to 1996. Ms. Lyons joined Schwab in 1992.
Mr. McGonigle has been Executive Vice President of the Company and
Executive Vice President - Mutual Funds of Schwab since April 1999. Mr.
McGonigle was Executive Vice President - Third-Party Funds of Schwab from 1998
to March 1999, Senior Vice President - Third-Party Funds of Schwab from 1996 to
1998, and Senior Vice President of Fund Relations of Schwab from 1994 to 1996.
Mr. McGonigle joined Schwab in 1989.
Mr. Rich has been Executive Vice President of the Company and Executive
Vice President - Human Resources of Schwab since 1998. Before joining Schwab in
1998, Mr. Rich was Senior Vice President of Williams-Sonoma, Inc. from 1995 to
1998. Mr. Rich was Vice President - Human Resources of Kenetech Corporation, a
company that develops and operates independent power projects, from 1994 to
1995. Mr. Rich is currently on the San Francisco Committee on Jobs and is a
Director to the Advisory Board of Pacific Crest Outward Bound School.
Mr. Rosseau has been Executive Vice President and Enterprise President -
International of the Company and Schwab since February 2000. Prior to joining
Schwab, Mr. Rosseau was Chief Executive Officer of ETC Services, Inc. from 1998
to February 2000. Mr. Rosseau was President and Chief Executive Officer of
Deluxe Electronic Payment Systems, Inc. from 1996 to 1998 and Senior Vice
President of Deluxe Corporation from 1996 to 1998. Mr. Rosseau was Chairman of
Diners Club International Ltd., and President and Chief Executive Officer of
Diners Club North America and Europe from 1991 to 1996. Mr. Rosseau previously
served as Senior Vice President - Retail Service Delivery of Schwab from 1987 to
1988.
Mr. Sasson has been Enterprise President - Electronic Brokerage of Schwab
and Executive Vice President of the Company since 1997. Mr. Sasson was Senior
Vice President - Electronic Brokerage of the Company and Schwab from 1995 to
1997. Before joining Schwab in 1995, Mr. Sasson was Vice President - Information
Services of International Business Machines Corporation in 1995. Mr. Sasson was
Vice President, Systems Engineering of FYI Online, a joint venture of MCI
Communications Corporation and Equifax, Inc., from 1992 to 1995.
Ms. Sawi has been Executive Vice President and Chief Administrative Officer
of the Company and Schwab since August 1999. Ms. Sawi returned to Schwab
full-time in August 1999 after a fifteen-month sabbatical during which she
worked for Schwab part-time on several projects. Prior to her sabbatical, Ms.
Sawi was Executive Vice President - Electronic Brokerage of the Company and
Schwab from 1995 to 1997, Executive Vice President - Mutual Funds of the Company
and Schwab, and President of CSIM from 1994 to 1995. Ms. Sawi joined Schwab in
1982.
Mr. Scheid has been Vice Chairman of the Company and Schwab since July
1999, Executive Vice President of the Company since 1996 and Enterprise
President - Financial Products and Services of Schwab since 1998. Mr. Scheid was
Executive Vice President of Schwab and Chief Financial Officer of the Company
and Schwab from 1996 to July 1999. Before joining Schwab in 1996, Mr. Scheid was
Executive Vice President of Finance of First Interstate Bancorp from 1994 to
1996 and was Principal Financial Officer from 1995 to 1996.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Director
Compensation," "Summary Compensation Table," "Option Grants," "Options
Exercised," "Compensation Committee Report," "Certain Transactions," and
"Appendix A -- Description of Employment and Severance Agreements."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Principal
Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under "Certain
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are included in
the Company's 1999 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
<PAGE>
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of January 12, 2000, by and
among The Charles Schwab Corporation, Patriot Merger Corporation and
U.S. Trust Corporation, filed as Exhibit 2.1 to the Registrant's Form
8-K dated January 12, 2000 and incorporated herein by reference.
3.7 Third Restated Certificate of Incorporation, as amended on May 6,
1996, of the Registrant, filed as Exhibit 3.7 to the Registrant's Form
10-Q for the quarter ended September 30, 1996 and incorporated herein
by reference.
3.9 Second Restated Bylaws, as amended on September 22, 1998, of the
Registrant (supersedes Exhibit 3.8) filed as Exhibit 3.9 to the
Registrant's Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
3.10 Fourth Restated Certificate of Incorporation, effective July 30, 1999,
of the Registrant, which includes amendments through May 20, 1999
(supersedes Exhibit 3.7), filed as Exhibit 3.10 to the Registrant's
Form 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. Copies of instruments
with respect to long-term debt of lesser amounts will be provided to
the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab & Co.,
Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated February
21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta Systems,
Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush
Street Associates and Charles Schwab & Co., Inc. *
10.57 Registration Rights and Stock Restriction Agreement, dated as of
March 31, 1987, between the Registrant and the holders of the Common
Stock, filed as Exhibit 4.23 to Registrant's Registration Statement
No. 33-16192 on Form S-1 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the
Registrant.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference. +
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, effective January 1, 1992,
dated December 20, 1991, filed as Exhibit 10.101 to the Registrant's
Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference. +
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992,
dated June 30, 1992, filed as Exhibit 10.116 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the Registrant's
Form 10-K for the year ended December 31, 1997 and incorporated herein
by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by
letter agreement dated September 21, 1995 and by Second Amendment to
Agreement of Sale dated September 22, 1995, between American Express
Company and Charles Schwab & Co., Inc., regarding American Express
Western Regional Operations Center located at 2423 Lincoln Drive,
Phoenix, Arizona, filed as Exhibit 10.156 in the Registrant's Form
10-Q for the quarter ended September 30, 1995 and incorporated herein
by reference.
10.157 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
effective January 1, 1996, filed as Exhibit 10.157 to the Registrant's
Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co. and
Charles Schwab & Co., Inc. dated October 8, 1996, filed as Exhibit
10.163 to the Registrant's Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between
Post-Montgomery Associates and Charles Schwab & Co., Inc. dated
October 4, 1996, filed as Exhibit 10.164 to the Registrant's Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, restated to include amendments through February 26, 1997, with
form of Non-Qualified Stock Option Agreement (Executive Officer Stock
Option Plan (1987)) attached, (supersedes Exhibit 10.159) filed as
Exhibit 10.166 to the Registrant's Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement attached, (supersedes Exhibit
10.160) filed as Exhibit 10.167 to the Registrant's Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996,
dated May 8, 1996 filed as Exhibit 10.169 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified
Stock Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form
of Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as
Exhibit 10.179 to the Registrant's Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit
10.180 to the Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference. +
10.181 Commercial office lease of 211 Main Street between Main Plaza, LLC and
Charles Schwab & Co., Inc. dated August 8, 1997 filed as Exhibit
10.181 to the Registrant's Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference.
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147)
filed as Exhibit 10.182 to the Registrant's Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's
Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement
(General Management Plan) attached (supersedes Exhibit 10.160) filed
as Exhibit 10.186 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock
Option Agreement (Executive Officer Stock Option Plan (1987))
attached, (supersedes Exhibit 10.159) filed as Exhibit 10.188 to the
Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.189 Annual Executive Individual Performance Plan restated and amended
January 1, 1998 (supersedes Exhibit 10.146) filed as Exhibit 10.189 to
the Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997 filed as Exhibit 10.190 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171)
filed as Exhibit 10.191 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172)
filed as Exhibit 10.192 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of
The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes
Exhibit 10.173) filed as Exhibit 10.193 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174)
filed as Exhibit 10.194 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.195 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 1, 1997 (supersedes Exhibit 10.168) filed as
Exhibit 10.195 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.197 Credit Agreement (364-Day Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.198 Credit Agreement (3-Year Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.199 The Charles Schwab Corporation Deferred Compensation Plan, as amended
through July 24, 1998 (supersedes Exhibit 10.162), filed as Exhibit
10.199 to the Registrant's Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference. +
10.200 Form of Indemnification Agreement entered into between Registrant and
members of the Board of Directors of Registrant (supersedes exhibit
10.34), filed as Exhibit 10.200 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
10.201 Seventh Amendment to the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan (Amendments 1 through 6 of the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan are incorporated
under Exhibit 10.195, filed with the Registrant's Form 10-K for the
fiscal year ended December 31, 1997), filed as Exhibit 10.201 to the
Registrant's Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference. +
10.202 Fourth Amendment to the Trust Agreement for the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan effective January 1,
1998, filed as Exhibit 10.202 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference. +
10.203 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include Amendments through March 20, 1998 (supersedes Exhibit
10.187), filed as Exhibit 10.203 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference. +
10.204 The Charles Schwab Corporation Deferred Compensation Plan, as amended
through January 20, 1999 (supersedes Exhibit 10.199), filed as Exhibit
10.204 to the Registrant's Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference. +
10.205 Eighth Amendment to The SchwabPlan Retirement Savings and Investment
Plan (formerly the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan), filed as Exhibit 10.205 to the Registrant's Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference. +
10.206 Credit Agreement (364-Day Commitment) dated June 25, 1999 between the
Registrant and the financial institutions listed therein (supersedes
Exhibit 10.197), filed as Exhibit 10.206 to the Registrant's Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference.
10.207 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated to
include Amendments through May 17, 1999 (supersedes Exhibit 10.203),
filed as Exhibit 10.207 to the Registrant's Form 10-Q for the quarter
ended September 30, 1999 and incorporated herein by reference. +
10.208 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include amendments through December 15, 1999 (supersedes Exhibit
10.207). +
10.209 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, restated to include amendments through October 28, 1999
(supersedes Exhibit 10.204). +
10.210 The SchwabPlan Retirement Savings and Investment Plan, restated to
include amendments through December 22, 1999 (supersedes Exhibits
10.195, 10.201 and 10.205). +
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1999 Annual Report to
Stockholders, which have been incorporated herein by reference. Except
for such portions, such annual report is not deemed to be "filed"
herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's
Registration Statement No. 33-16192 on Form S-1, as amended and declared
effective on September 22, 1987.
+ Management contract or compensatory plan.
- --------------------------------------------------------------------------------
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 2000.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ Charles R. Schwab
----------------------------
Charles R. Schwab
Chairman, Co-Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 2000.
Signature / Title Signature / Title
----------------- -----------------
/s/ Charles R. Schwab /s/ David S. Pottruck
- ----------------------------- ------------------------------
Charles R. Schwab, David S. Pottruck,
Chairman, Co-Chief Executive Officer President, Co-Chief Executive Officer
and Director and Director
(principal executive officer) (principal executive officer)
/s/ Christopher V. Dodds
- -----------------------------
Christopher V. Dodds,
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
/s/ Nancy H. Bechtle /s/ C. Preston Butcher
- ----------------------------- ------------------------------
Nancy H. Bechtle, Director C. Preston Butcher, Director
/s/ Donald G. Fisher /s/ Anthony M. Frank
- ----------------------------- ------------------------------
Donald G. Fisher, Director Anthony M. Frank, Director
/s/ Frank C. Herringer /s/ Stephen T. McLin
- ----------------------------- -------------------------------
Frank C. Herringer, Director Stephen T. McLin, Director
/s/ Condoleezza Rice /s/ Arun Sarin
- ----------------------------- -------------------------------
Condoleezza Rice, Director Arun Sarin, Director
/s/ George P. Shultz /s/ Roger O. Walther
- ----------------------------- -------------------------------
George P. Shultz, Director Roger O. Walther, Director
<PAGE>
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Information F-6
Schedule II - Valuation and Qualifying Accounts F-7
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1999 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated February 16, 2000 (which report expresses an
unqualified opinion and includes an explanatory paragraph related to an
accounting change to conform with Statement of Position 98-1); such consolidated
financial statements and report are included in your 1999 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of the Company listed in the Index at F-1.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
San Francisco, California
February 16, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 232,398 $ 180,025
Advances to subsidiaries 985,318 460,848
Investments in subsidiaries, at equity 1,800,031 1,223,417
Other assets 31,157 8,683
- ------------------------------------------------------------------------------------------------------------------------
Total $3,048,904 $1,872,973
========================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 200,008
Accrued expenses and other liabilities 119,961 $ 93,351
Borrowings 455,000 351,000
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 774,969 444,351
Stockholders' equity 2,273,935 1,428,622
- ------------------------------------------------------------------------------------------------------------------------
Total $3,048,904 $1,872,973
========================================================================================================================
See Notes to Condensed Financial Information.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest revenue $ 71,428 $ 42,780 $ 30,699
Interest expense (28,398) (25,429) (20,546)
- ------------------------------------------------------------------------------------------------------------------------
Net interest revenue 43,030 17,351 10,153
Other revenues 151 409 544
Other income (expenses) (25,392) (12,104) 4,423
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 17,789 5,656 15,120
Income tax expense 6,885 2,092 5,692
- ------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 10,904 3,564 9,428
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 434,698 56,913 199,869
Dividends paid by subsidiaries 143,275 287,985 60,980
- ------------------------------------------------------------------------------------------------------------------------
Total 577,973 344,898 260,849
Net income $588,877 $348,462 $270,277
========================================================================================================================
See Notes to Condensed Financial Information.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 588,877 $ 348,462 $ 270,277
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (434,698) (56,913) (199,869)
Change in other assets (10,995) (3,932) 279
Change in drafts payable 200,008
Change in accrued expenses and other liabilities 29,030 13,753 (4,122)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 372,222 301,370 66,565
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Increase in net advances to subsidiaries (286,393) (26,465) (51,939)
Increase in investments in subsidiaries (129,533) (800) (50,614)
Cash payments for businesses acquired, net of cash received (5,657) (1,400) (1,200)
Cash payments for investments in businesses (11,854)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (433,437) (28,665) (103,753)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 144,000 30,000 111,000
Repayment of borrowings (40,000) (40,000) (28,000)
Dividends paid (45,502) (43,068) (37,091)
Purchase of treasury stock (150,180) (18,234)
Proceeds from stock options exercised and other 55,090 30,766 14,530
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 113,588 (172,482) 42,205
- ------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 52,373 100,223 5,017
Cash and cash equivalents at beginning of year 180,025 79,802 74,785
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 232,398 $ 180,025 $ 79,802
==================================================================================================================
See Notes to Condensed Financial Information.
</TABLE>
F-5
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
1. Introduction and basis of presentation
The condensed financial information of The Charles Schwab Corporation (the
Parent Company) should be read in conjunction with the consolidated
financial statements of The Charles Schwab Corporation and subsidiaries
(the Company) and notes thereto found in the Company's 1999 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No.
13.1 of this report.
2. Supplemental cash flow information
During 1998, the Parent Company recorded a non-cash capital contribution of
$69 million to its subsidiary, Charles Schwab & Co., Inc. (Schwab), through
the assumption of indebtedness.
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
Year ended December 31,
1999 1998 1997
-------------------------------
Income taxes paid $11,264 $ 5,539 $ 2,608
======= ======= =======
Interest paid:
Borrowings $25,290 $24,113 $18,773
Other 162 306 364
------- ------- -------
Total interest paid $25,452 $24,419 $19,137
======= ======= =======
3. Common stock split
The Parent Company's Board of Directors declared a two-for-one common stock
split, distributed July 1999, effected in the form of a 100% stock
dividend.
4. Related party transactions
The Parent Company provides subordinated revolving credit facilities to its
subsidiaries, Schwab, Schwab Capital Markets L.P. (SCM) (formerly known as
Mayer & Schweitzer, Inc.) and Charles Schwab Europe (CSE).
Schwab had a $1,400 million subordinated revolving credit facility maturing
in September 2001, of which $905 million was outstanding at December 31,
1999. This credit facility was $450 million at the end of 1998, of which
$405 million was outstanding at December 31, 1998. At year end 1999, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from
the Parent Company maturing in 2001. The outstanding balance of these term
loans was also $25 million at year end 1998.
SCM had a $35 million subordinated lending arrangement maturing in 2001,
which was not used in 1999 or 1998. SCM also had a $25 million short-term
credit facility established in 1999, which was not used at December 31,
1999.
CSE had a (pound)20 million, equivalent to $32 million, subordinated
lending arrangement with the Parent Company. At December 31, 1999, CSE had
outstanding (pound)18 million under these arrangements, equivalent to $29
million, with (pound)5 million maturing in 2001 and (pound)13 million
maturing in 2003. This lending arrangement was (pound)5 million, equivalent
to $8 million, at the end of 1998, all of which was outstanding at December
31, 1998.
Interest earned by the Parent Company from these subordinated lending
arrangements totaled $60 million in 1999, $37 million in 1998 and $26
million in 1997.
F-6
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at ---------------------------- Balance at
Beginning Charged End
Description of Year to Expense Other* Written off of Year
------------ ---------- ---------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1999:
Allowance for doubtful accounts $7,575 $15,848 $917 $(12,988) $11,352
==========================================================================
For the year ended
December 31, 1998:
Allowance for doubtful accounts $7,717 $ 4,752 $231 $ (5,125) $ 7,575
==========================================================================
For the year ended
December 31, 1997:
Allowance for doubtful accounts $5,518 $ 3,896 $195 $ (1,892) $ 7,717
==========================================================================
* Represents collections of previously written-off accounts.
</TABLE>
F-7
EXHIBIT 10.72
RESTATEMENT OF ASSIGNMENT AND LICENSE
Preamble.
This is a restatement of the Assignment and License made the 31st day
of March, 1987, and the Amendment thereof made as of July 30, 1987, by and
between CL Acquisition Corporation, a Delaware corporation, The Charles Schwab
Corporation, a Delaware corporation, Charles Schwab & Co., Inc., a California
corporation, and Charles R. Schwab, an individual. For purposes of this
restatement, the parties are referred to herein by their present names: The
Charles Schwab Corporation, formerly CL Acquisition ("CS Corp."); Schwab
Holdings, Inc., formerly The Charles Schwab Corporation ("Holdings, Inc.");
Charles Schwab & Co., Inc. ("Schwab, Inc."); and Charles R. Schwab ("Schwab").
The parties hereby agree as follows:
1. Definitions. In this Agreement:
a. "Name" means "Schwab" and each name and mark based thereon
or derived therefrom including, without limitation, Schwab, C. Schwab, C.R.
Schwab, Charles Schwab, Charles R. Schwab, Chuck Schwab, Schwab One, Schwab
Tech, CRS, and the corporate names The Charles Schwab Corporation and Charles
Schwab & Co., Inc.
b. "Likeness" means any photograph, portrait, drawing or other
image or likeness of Schwab, however reproduced, and whether still, single,
multiple or moving.
c. "Financial Services Business" means the business in which
Schwab, Inc. is currently engaged and any additional and related business in
which CS Corp., Holdings, Inc. and/or Schwab, Inc. are permitted to engage from
time to time during the term of this Agreement under applicable statutes or by
the rules, regulations or orders of those regulatory agencies to which such
entities are from time to time subject.
d. "Permitted Assignees and Licensees" means persons and
entitles who have been assigned or licensed the right to use the Name and/or
Likeness as permitted in Section 9 hereof.
e. "Employment Agreement" means that certain Employment
Agreement of even date with the Assignment and License under the terms of which
Schwab agrees to perform certain services on behalf of CS Corp.
f. "Involuntary Termination," "Cause" and "Voluntary
Termination" will have the same meaning as "involuntary termination," "cause,"
and "voluntary termination," respectively, in the Employment Agreement.
g. "Loan Agreement" means that certain "Loan Agreement dated
as of March 31, 1987 between CS Corp. as Borrower, The Banks herein named as the
Banks, and Security Pacific National Bank, as the Agent."
h. "Obligations," "Bank," "Agents," "Loan Documents" will all
have the same meaning as in the Loan Agreement.
i. "Restricted Period" means that period beginning with the
date of the Assignment and License and ending on the earlier of (i) eight years
from the date of the Assignment and License and (ii) the first date when all
Obligations are fully paid.
2. Assignment and License Back. Schwab hereby assigns to CS Corp. all
service mark, trademark and trade name rights in and to the Name and Likeness as
defined below as well as all good will associated therewith. CS Corp. hereby
grants back to Schwab the perpetual, unrestricted, ongoing, exclusive,
irrevocable license to use the Name and Likeness throughout the world for
activities other than the Financial Services Business.
3. Reversion. In the event CS Corp. and all Permitted Assignees and
Licensees shall all cease using the Name while Schwab still lives, all rights
granted to CS Corp. with respect thereto shall revert to Schwab without further
act or deed. In the event CS Corp. and all Permitted Assignees and Licensees
shall all cease using the Likeness while Schwab still lives, all rights granted
to CS Corp. with respect thereto shall revert to Schwab without further act or
deed.
4. Representations by Schwab. Schwab represents that, except as
provided in this Agreement, no person or organization is authorized, permitted
or licensed by Schwab to use the Name and/or the Likeness in conjunction with
any Financial Services Business, and Schwab agrees that he will not directly,
nor indirectly through any other person or organization, use the Name and/or
Likeness in conjunction with any such business or authorize, permit, or license
any other party to use the Name or the Likeness in conjunction with any such
business, other than as permitted by Section 5 hereof.
5. Employment; Payment; Expansion of License.
5.1 As used in this Section 5:
a. "Purchase Payment" means three-tenths of one percent (0.3%)
of the Purchase Payment Base.
b. "Purchase Payment Base" means the sum of the Net Revenues
of all of the Included Users.
c. "Net Revenues" of an Included User means the Gross Revenues
of that Included User minus the Operating Interest Expense of that Included
User, in each case during the Payment Period.
d. "Gross Revenues" of an Included User means the gross
revenues of that Included User during the Payment Period, determined in
accordance with generally accepted accounting principles, and, to the extent
permitted by such principles in consolidated financial statements of that
Included User, shall include the gross revenues of all subsidiaries and
affiliates of that Included User during the Payment Period, but excluding
nonetheless from the gross revenues of that Included User and its subsidiaries
and affiliates all gross revenues (i) that would otherwise be included more than
once in the Purchase Payment Base, (ii) received from other Included Users, or
(iii) received from subsidiaries and affiliates of other Included Users.
e. "Operating Interest Expense" of an Included User means the
operating interest expense of that Included User during the Payment Period,
determined in accordance with generally accepted accounting principles and, to
the extent permitted by such principles in consolidated financial statements of
that Included User, shall include the operating interest expense of all
subsidiaries and affiliates of the Included User during the Payment Period, but
excluding nonetheless from the operating interest expense of that Included User
and its subsidiaries and affiliates all operating interest expense that would
otherwise be deducted more than once in calculating the Purchase Payment Base.
f. "Included Users" means CS Corp. and all Permitted Assignees
and Licensees except Banks and Agent.
g. The "Payment Period" begins on the first day of the month
following the termination of Schwab's employment by CS Corp., whether during or
after the Restricted Period and regardless of the reason for such termination,
unless (x) immediately prior to such termination Schwab and CS Corp. are parties
to an employment agreement whose term extends beyond the date of termination,
(y) that employment agreement requires CS Corp. to make a payment or payments in
lieu of salary or other payments that would have been payable under the
employment agreement had Schwab continued to be employed beyond the date of
termination, and (z) CS Corp. makes such payment or payments or pays a mutually
acceptable settlement in lieu thereof. If (x), (y) and (z) are all true, then
the "Payment Period" shall begin on the first day of the month following the end
of the full term of the employment agreement, provided that if a written
agreement between CS Corp. and Schwab expressly provides that the payment(s)
made or settlement paid as contemplated by (z) is (are) in lieu of salary or
other payments otherwise payable under the employment agreement for a term
shorter than the entire term of the employment agreement, then the "Payment
Period" shall begin on the first day of the month following the end of such
shorter term. The "Payment Period" shall end on the earliest of (i) such time as
CS Corp. and all Permitted Assignees and Licensees shall no longer use the Name
and/or Likeness, (ii) the day before the fifteenth (15th) anniversary of the
beginning of the Payment Period, or (iii) a Disqualifying Event.
h. A "Disqualifying Event" would occur if at any time during
the Restricted Period, whether or not Schwab is still employed by CS Corp. and
whether or not any license granted by Section 5.4 has come into effect, Schwab
should serve as a director of, render services to, invest in or otherwise engage
in any business competitive with any existing or contemplated business of CS
Corp., Holdings, Inc. or Schwab, Inc., and fail to terminate such activity or
investment within sixty (60) days after demand by CS Corp. Despite the
foregoing, a purely passive investment will not constitute a basis for a
Disqualifying Event if it is in (i) publicly traded securities, provided that
Schwab does not own beneficially or of record more than five percent (5%) of any
class of security or (ii) a professionally managed venture capital fund,
provided that Schwab does not provide more than five percent (5%) of the capital
invested in any such fund. The determination of the Board of Directors of CS
Corp. that an action or activity is or is not competitive shall be controlling
on Schwab unless Schwab objects to such determination within thirty (30) days
after the demand, in which case the determination shall be made by arbitration
in accordance with California Code of Civil Procedure, Sections 1280 et seq.,
and that determination shall be binding upon the parties. Each party shall be
entitled to discovery. The sixty-day opportunity to cure will not be extended by
any actual or requested arbitration, so that if Schwab does not terminate the
specified activity or investment within the sixty-day period and the arbitration
subsequently determines that it was in fact competitive, Schwab will have no
further opportunity to cure. Both CS Corp. and Schwab will use their best
efforts to complete the arbitration before the end of the sixty-day period.
5.2 Subject to the provisions of Sections 5.6 and 5.7 below,
and in consideration for the assignments made herein, CS Corp. agrees to pay the
Purchase Payment to Schwab, his executor, successor or assigns. The amount
payable shall be computed and paid on a calendar quarterly basis, commencing
with the end of the first complete calendar quarter in the Payment Period. CS
Corp. agrees to keep (and to require each Included User to keep) accurate books
of account and records relating to its Net Revenues, and Schwab and his duly
authorized representatives shall have the right at all reasonable hours of the
day to an examination and audit of such books of account and records and of all
documents and materials in the possession or under the control of Included Users
with respect to Gross Revenues and Operating Interest Expense. Each book of
account and record shall be kept available for at least two (2) years after all
payments are made with respect to the revenues and expenses reflected therein.
5.3. Despite anything in Section 5.2, payments to Schwab shall
be limited as follows:
a. As used in this Section 5.3:
(i) The first day of the first calendar quarter during the
Payment Period is the "Base Date."
(ii) Each twelve month period which (x) begins on the
Base Date or an anniversary of the Base Date and (y) falls entirely within the
Payment Period will be a "Payment Year."
(iii) If the Payment Period begins on any date other than
the first day of a calendar quarter, then the period beginning on the first day
of the Payment Period and ending the day before Base Date will be the "Initial
Payment Period."
(iv) If the Payment Period ends after the Base Date and
on any date other than the day before an anniversary of the Base Date, then the
period beginning on the last anniversary of the Base Date during the Payment
Period and ending at the end of the Payment Period will be the "Final Payment
Period."
(v) "Consumer Price Index" means the Consumer Price Index
for All Urban Consumers for the San Francisco-Oakland-San Jose Metropolitan Area
published by the Bureau of Labor Statistics, as it was constituted for the month
of May 1987. If the Bureau of Labor Statistics should cease publication of the
Consumer Price Index for all Urban Consumers for the San Francisco-Oakland-San
Jose Metropolitan Area or changes the basis on which it is constituted, then the
parties shall use the index then being published by the Bureau of Labor
Statistics or its successor agency which most closely approximates the original
"Consumer Price Index."
b. Despite anything to the contrary in this Agreement, the
amount payable to Schwab pursuant to Section 5.2 of this Agreement with respect
to any Initial Payment Period shall not exceed two million dollars ($2,000,000)
multiplied by two fractions. The first fraction is the number of days in the
Initial Payment Period divided by three hundred sixty-five (365). The second
fraction is the Consumer Price Index for the calendar month preceding the Base
Date divided by the Consumer Price Index for the same calendar month in 1987.
c. Despite anything to the contrary in this Agreement, the
amount payable to Schwab pursuant to Section 5.2 of the Agreement with respect
to any Payment Year shall not exceed two million dollars ($2,000,000) multiplied
by a fraction, the numerator of which is the Consumer Price Index for the
calendar month immediately preceding the first month in the Payment Year and the
denominator of which is the Consumer Price Index for the same calendar month in
1987.
d. Despite anything to the contrary in the Agreement, the
amount payable to Schwab pursuant to Section 5.2 of the Agreement with respect
to any Final Payment Period shall not exceed two million dollars ($2,000,000)
multiplied by two fractions. The first fraction is the number of days in the
Final Payment Period divided by three hundred sixty-five (365). The second
fraction is the Consumer Price Index for the calendar month preceding the
beginning of the Final Payment Period divided by the Consumer Price Index for
the same calendar month in 1987.
e. If b, c or d above requires the use of the Consumer Price
Index for a month for which it is not published, then the Consumer Price Index
for the next preceding month which is published shall be used.
5.4 Subject to the provisions of Section 5.6 below:
a. Effective immediately upon the termination of Schwab's
employment by CS Corp., Schwab shall have, without further action on his part, a
perpetual, unrestricted, ongoing, non-exclusive, irrevocable license to use the
Likeness throughout the world in the following part of the Financial Services
Business: the sale, distribution, broadcast and promotion of books, videotapes,
lectures, radio programs and television programs.
b. At any time after termination of Schwab's employment
by CS Corp., Schwab may notify CS Corp. that Schwab proposes to engage in all or
part of that portion of the Financial Services Business commonly known as
financial planning. The notice shall describe in summary form the financial
planning products and services that Schwab expects will be offered by the
business in which he proposes to engage. CS Corp. promptly shall grant to Schwab
an immediately effective, perpetual, unrestricted, ongoing, non-exclusive,
irrevocable license to use the Likeness to engage in the financial planning
business described except that CS Corp. need not grant such a license to the
extent that the business described would be in direct competition with any
Financial Services Business in which CS Corp. or any Permitted Assignee or
Licensee is then engaged or which CS Corp. or any Permitted Assignee or Licensee
plans as of the date of receipt of Schwab's notice to commence within three (3)
months after receipt of Schwab's notice.
c. Commencing on the date that is two (2) years from the
beginning of the Payment Period, Schwab shall have a perpetual, unrestricted,
ongoing, non-exclusive, irrevocable license to use the Likeness throughout the
world in the Financial Services Business. This license will supersede any
license previously granted pursuant to Section 5.4.b of this Agreement.
d. The licenses pursuant to this Section 5.4 may not be
assigned or sublicensed except that Schwab may grant sublicenses to use the
Likeness in connection with the sale, distribution, broadcast and promotion, of
goods, services and programs that Schwab personally plays a substantial role in
creating.
5.5 It is the understanding and intent of the parties
that when and if any license granted in Section 5.4 of this Agreement comes into
effect, Schwab then may engage in the business covered by the license and use
his personal name, personal initials and personal nicknames in connection
therewith without any restriction imposed by this Agreement except (i) the
restrictions set forth in Sections 6.1, 6.2 and 7 of this Agreement and (ii) the
possibility that the Payment Period might prematurely terminate because engaging
in such a business might constitute a Disqualifying Event. Further, the
restriction described in (ii) would terminate at the end of the Restricted
Period.
5.6 Despite anything in Sections 5.2 and 5.4, if the
termination of Schwab's employment by CS Corp. is an Involuntary Termination for
Cause during the Restricted Period, or alternatively if such termination is a
Voluntary Termination during the Restricted Period, then Sections 5.2 and 5.4
shall be of no further force or effect.
5.7 Despite anything in Section 5.2, if Banks or Agent should
acquire legal and beneficial ownership of the Name by virtue of foreclosing a
security interest granted to them in the Loan Documents, then thereafter Section
5.2 shall be of no further force or effect. Further, if a third party other than
Banks or Agent should acquire legal and beneficial ownership of the Name by
virtue of the foreclosure of the security interest granted to Banks and Agent in
the Loan Documents and such foreclosure does not result in an immediate and
complete satisfaction of the Obligations, then the Payment Period shall exclude
all time elapsed between the date when that third party so acquires title and
the first date when the Obligations are satisfied in full.
6. Schwab's Use of the Name.
6.1 Schwab may use all or part of his personal name, personal
initials or personal nicknames in any manner not prohibited by this Agreement.
Despite anything to the contrary in this Agreement, however, but subject
nevertheless to the provisions of Section 3 of this Agreement, in exercising
that right and the rights granted to Schwab in Sections 2 and 5.4 of this
Agreement, Schwab may not (i) use or authorize another to use the Name
(including without limitation his personal name, personal initials or personal
nicknames) as a service mark, trademark or trade name in the Financial Services
Business or (ii) use or authorize another to use the Name or Likeness or both in
a manner that causes confusion as to whether CS Corp. or any of the Permitted
Assignees and Licensees has created, manufactured, endorsed, sold or otherwise
been involved with any product or service.
6.2 Further, Schwab may not refer or authorize another to
refer to CS Corp. or any of the Permitted Assignees and Licensees by name in any
advertisement, press release, interview or other written, spoken or visual
material which is intended to promote any product or service, without first
obtaining the written consent of CS Corp. Cs Corp. shall not withhold any
consent required by the previous sentence unless CS Corp. reasonably believes
that the proposed reference would be a breach of Section 6.1 of this Agreement
or another term of the Agreement. Should Schwab request any such consent, Schwab
shall provide CS Corp. with all information that CS Corp. reasonably requests
regarding the proposed reference in order to determine whether or not such
reference would be a breach of Section 6.1 of this Agreement or another term of
the Agreement.
7. Quality of Goods and Services. CS Corp. acknowledges that Schwab
has, and Schwab acknowledges that CS Corp. intends to develop, the highest
quality reputation for the delivery of goods and services in the Financial
Services Business, and each agrees that the goods and services offered by it or
him using the Name or Likeness shall be of such quality as to be appropriate and
suited to the protection and enhancement of the Name and Likeness and the good
will appurtenant thereto, that such goods and services will be manufactured,
sold, distributed and performed in accordance with all Federal, state and local
laws that are applicable and material, and that the sale, distribution,
provision of services, and/or exploration by it or him shall be of the highest
standard and that the same shall in no manner reflect adversely upon the good
name of the other or the Name and/or Likeness. Further, CS Corp. agrees not to
use any Likeness in advertising or as a mark while Schwab is alive without first
obtaining Schwab's approval of his appearance in the Likeness, but such approval
shall not be unreasonably withheld.
8. Remedies. CS Corp. and Schwab each acknowledge that the
manufacture, sale or distribution of goods or the provision of services in
breach of Section 7 of this Agreement would result in immediate and irreparable
damage to the other. Each acknowledges and admits that there is no adequate
remedy at law for such manufacture, sale, distribution or provision and agrees
that the other shall be entitled to equitable relief by way of temporary and
permanent injunctions, without bond, and such other further relief as any court
having jurisdiction shall deem just and proper. However, such relief may not
include an injunction or other prohibition against use of the Name and Likeness
that is permitted by this agreement, a rescission of this Agreement or reversion
of the rights granted to either party herein.
9. Assignment.
9.1 Subject to compliance with Section 9.2 below, CS Corp.
may assign or license any or all rights granted to it herein: (i) as security
under the Loan Documents; (ii) to Holdings, Inc., to Schwab, Inc. and to
subsidiaries and affiliates of CS Corp., Holdings, Inc. and Schwab, Inc.; (iii)
if Schwab gives his prior written consent or votes in favor of the assignment in
his capacity as a director of CS Corp, Holdings, Inc. or Schwab, Inc., and (iv)
after the death of Schwab. In exercise of their rights under the Loan Documents,
the Banks and Agent may assign or license any and all rights assigned to them
pursuant to the preceding sentence.
9.2 All assignments to Banks or Agent must be made expressly
subject to all the terms and conditions of this Agreement. In any other
assignment or license pursuant to the other provisions of Section 9.1, all
assignees and licensees must join in all covenants of CS Corp. hereunder and
assume joint and several liability for all obligations of CS Corp. hereunder,
with such joinder and assumption being made for the express and direct benefit
of Schwab. No assignment or license by CS Corp. shall relieve it of any of its
obligations hereunder.
9.3 Except for assignments and licenses that both (i) are
permitted by Section 9.1 and (ii) conform to the requirements of Section 9.2,
neither CS Corp. nor Permitted Assignees and Licensees may assign or license any
rights granted to CS Corp. herein, and any purported assignment or license of
such rights that is not permitted shall be null and void.
9.4 For purposes hereof "assignment" and "license" shall be
construed in their broadest sense and shall include any purported direct or
indirect transfer or other disposition, voluntary or involuntary, of any of such
rights, including without limitation, any distribution upon dissolution, any
merger or other reorganization to which CS Corp. or a Permitted Assignee or
Licensee is a party unless the shareholders of such entity immediately before
the merger or other reorganization retain the ability to elect a majority of the
board of directors immediately after such merger or reorganization, any pledge
or hypothecation of any of such rights, or the imposition of any lien upon such
rights which is not fully and finally removed within 30 days following the date
of such imposition, but does not include the sale of securities for cash or
property.
10. Notices. Any notice, demand or other communication to be given
hereunder by any party to another shall be in writing and delivered personally
or sent by certified mail, postage prepaid, as follows:
CS CORP: The Charles Schwab Corporation
101 Montgomery Street
San Francisco, CA 94104
Attention: Lawrence J. Stupski, President
SCHWAB: Charles R. Schwab
c/o Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
11. Joint and Several Liability. Holdings, Inc. and Schwab, Inc. join
in all covenants of CS Corp. hereunder; and CS Corp., Holdings, Inc. and Schwab,
Inc. each agree to be jointly and severally liable for all obligations of each
of the others hereunder. Holdings, Inc. and Schwab, Inc. each acknowledge that
its inclusion in the class of Permitted Assignees and Licensees is full and fair
consideration for the liability that it is undertaking hereunder.
12. Miscellaneous. This Agreement shall be construed in accordance
with the laws of California applicable to agreements made and to be performed
entirely in that state. Section headings used herein are inserted for
convenience only and are not part of this Agreement. None of the terms of this
Agreement may be waived or modified except by an express agreement in writing
signed by both parties. Nothing contained herein shall be construed to place the
parties in the relationship of partners or joint venturers, and CS Corp. shall
have no power to obligate or bind Schwab in any manner whatsoever. In any
controversy hereunder the prevailing party shall be entitled to recover its
reasonable attorneys' fee and expenses from the opposing party or parties. This
Agreement constitutes the entire agreement between the parties with respect to
the subject matter hereof, and shall inure to the benefit of and shall be
binding upon the parties, their respective heirs, executors, administrators,
successors and permitted assigns.
13. Survival of Previous Actions; Effective Date.
13.1 This Agreement supersedes the original Assignment and
License and the Amendment thereof; but all assignments, licenses, notices,
waivers and consents previously effected by or given pursuant to either the
original Assignment and License or the Amendment thereof or both shall survive
and remain in full force and effect.
13.2 The Preamble to this Agreement and this Section 13 will
become effective on the date of execution hereof as set forth in the paragraph
next following. Sections 5.3, 5.5, 6.1 and 6.2 of this Agreement originated in
the Amendment of the original Assignment and License and hence became effective
as of July 30, 1987. Sections 5.1(a), and 5.1 (g) and 5.4 of this Agreement were
revised in the Amendment of the original Assignment and License and hence became
effective in their present form as of July 30, 1987, but the previous versions
of those sections were effective from March 31, 1987 until July 30, 1987. All
other portions of this Agreement became effective on March 31, 1987.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures
on the _________ day of _________, 1988.
The Charles Schwab Corporation
/S/ Charles R. Schwab by /S/ Lawrence J. Stupski
- --------------------------- --------------------------
Charles R. Schwab Lawrence J. Stupski,
President
Charles Schwab & Co., Inc. Schwab Holdings, Inc.
by /S/ Lawrence J. Stupski by /S/ Charles R. Schwab
----------------------- --------------------------
Lawrence J. Stupski, Charles R. Schwab,
President and Chief Chairman and Chief
Operating Officer Executive Officer
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S. Providenza, the
undersigned Notary Public, personally appeared Charles R. Schwab. personally
known to me or proved to me on the basis of satisfactory evidence to be the
person who executed the within instrument as Chairman for and on behalf of
Charles Schwab & Co., Inc. and acknowledged to me that corporation executed it.
WITNESS my hand and official seal.
/S/ Sheila S. Providenza
------------------------
Notary Public
*********************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*********************************************
OFFICIAL SEAL
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S. Providenza, the
undersigned Notary Public, personally appeared Charles R. Schwab. personally
known to me or proved to me on the basis of satisfactory evidence to be the
person whose name is subscribed to the within instruments, and acknowledged to
me that he executed the same.
WITNESS my hand and official seal.
/S/ Sheila S. Providenza
------------------------
Notary Public
*********************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*********************************************
OFFICIAL SEAL
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S. Providenza, the
undersigned Notary Public, personally appeared Lawrence J. Stupski. personally
known to me or proved to me on the basis of satisfactory evidence to be the
person who executed the within instrument as President for and on behalf of The
Charles Schwab Corporation, Inc. and acknowledged to me that corporation
executed it.
WITNESS my hand and official seal.
/S/ Sheila S. Providenza
------------------------
Notary Public
*********************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*********************************************
OFFICIAL SEAL
<PAGE>
STATE OF CALIFORNIA )
) ss.
CITY AND COUNTY OF SAN FRANCISCO )
On this 25th day of January, 1988, before me, Sheila S. Providenza, the
undersigned Notary Public, personally appeared Lawrence J. Stupski. personally
known to me or proved to me on the basis of satisfactory evidence to be the
person who executed the within instrument as President and C.O.O. for and on
behalf of the Schwab Holdings, Inc. and acknowledged to me that corporation
executed it.
WITNESS my hand and official seal.
/S/ Sheila S. Providenza
------------------------
Notary Public
*********************************************
* SHEILA S. PROVIDENZA *
* NOTARY PUBLIC-CALIFORNIA *
* CITY & COUNTY OF *
* SAN FRANCISCO *
* My Commission Expires October 13, 1990. *
*********************************************
OFFICIAL SEAL
EXHIBIT 10.149
EMPLOYMENT AGREEMENT
This Agreement is made and entered into as of March 31, 1995 by and
between The Charles Schwab Corporation, a Delaware Corporation (hereinafter
referred to as the "Company"), and Charles R. Schwab, an individual (hereinafter
referred to as the "Executive") effective March 31, 1995.
WITNESSETH:
WHEREAS, the Company desires to reward the Executive for his continuing
contribution to the Company and provide additional security for the Executive
and to provide an inducement to the Executive to remain with the Company and not
to engage in competition with it.
NOW THEREFORE, in consideration of the mutual obligations herein
contained, the parties hereto, intending to be legally bound hereby, covenant
and agree as follows:
1. EMPLOYMENT
(a) The Company hereby employs the Executive to render services to the
Company in the positions of Chairman of the Board and Chief
Executive Officer, in the capacity defined in the By-laws of the
Company, as may be amended from time to time. The Executive shall
perform such duties commensurate with his position and shall have
full authority and responsibility, subject to the control of the
Board of Directors, for the overall strategic direction,
management, and leadership of the Company.
(b) Throughout the term of this Agreement, the Executive shall devote
his full business time and undivided attention to the business and
affairs of the Company and its subsidiaries, except for reasonable
vacations and except for illness or incapacity, but nothing in the
Agreement shall preclude the Executive from devoting reasonable
periods required for serving, as appropriate, on Boards of
Directors of other companies, and from engaging in charitable and
public service activities provided such activities do not
materially interfere with the performance of his duties and
responsibilities under this Agreement.
2. TERM
This Agreement shall commence on March 31, 1995, and shall continue
through March 31, 2000, subject to the terms and conditions herein set
forth. Beginning on March 31, 1996, and on each subsequent anniversary
of this date, one year shall be added to the term of the Agreement,
unless, prior to such anniversary, the Company or the Executive has
notified the other party hereto that such extension will not become
effective.
3. COMPENSATION
For services rendered by the Executive during the term of this
Agreement, and for his performance of all additional obligations of
employment, the Company agrees to pay the Executive and the Executive
agrees to accept the following salary, other compensation, and
benefits:
(a) Base Salary. During the term of this Agreement, the Company shall
pay the Executive in periodic installments, a base salary at the
annual rate of $800,000, such base salary to be reviewed on March
31, 1996, and on each subsequent anniversary, taking into account,
among other things, individual performance, competitive practice,
and general business conditions.
(b) Annual Incentive. In addition to the base salary provided in
Section 3(a) above, the Executive shall be eligible to receive an
annual incentive award based upon the Company's attainment of
pre-established performance targets relative to specified
performance standards. The performance standards upon which annual
incentive payments will be earned shall be defined to include
consolidated pretax profit margin (defined as net income before
taxes, divided by net revenue) and annual net revenue percentage
growth of the Company.
For each fiscal year during the term of this Agreement, the
Executive's incentive opportunity shall be computed as the amount
of total cash compensation earned pursuant to the formula-based
matrix, which shall be adopted each year by the Compensation
Committee of the Board of Directors of the Company, minus the
Executive's actual base salary paid during that year. For the 1995
fiscal year, the target total annual cash compensation amount
(including base salary) is $3,500,000; therefore, the incentive
target is $2,700,000 for achieving specified pretax profit margin
and revenue growth objectives.
The formula-based matrix, as amended at the sole discretion of the
Board of Directors, shall be the sole basis for determining the
Executive's annual incentive award. For each calendar year for
which this Agreement is in effect, beginning with the calendar
year 1996, the interior values in the formula-based matrix shall
be increased by a fraction, based on the U.S. Consumer Price Index
(for all consumers, as published by the Bureau of Labor
Statistics); provided that no interior value shall be increased
above $12 million. The fractional increase shall be the CPI for
that year divided by the CPI for calendar year 1995. The
Compensation Committee of the Board shall annually review and
approve the performance standards and targets with respect to the
Executive's incentive opportunity, which review and approval shall
be completed no later than the 90th day of the Company's fiscal
year for which such incentive opportunity may be earned.
(c) Long-Term Incentive. The Executive will be considered for stock
options in accordance with the Company's 1992 Stock Incentive
Plan, as amended, or any successor thereto ("Stock Option
Program") and any other long-term incentives offered to other
executives of the Company from time to time during the term of
this Agreement.
(d) Benefits. The Executive shall be entitled to participate, as long
as he is an employee of the Company, in any and all of the
Company's present or future employee benefit plans, including
without limitation pension plans, thrift and savings plans,
insurance plans, and other benefits that are generally applicable
to the Company's executives; provided, however, that the accrual
and/or receipt by the Executive of benefits under and pursuant to
any such present or future employee benefit plan shall be
determined by the provisions of such plan.
(e) Perquisites. The Executive will be provided such additional
perquisites as are customary for senior level executives of the
Company provided that each perquisite is approved by the Board of
Directors.
(f) Business Expenses. The Executive will be reimbursed for all
reasonable expenses incurred in connection with the conduct of the
Company's business upon presentation of evidence of such
expenditures, including but not limited to travel expenses
incurred by the Executive in the performance of his duties,
security for the Executive, his family, and principal residence,
professional organization dues, and club initiation fees, dues and
expenses.
(g) Any annual incentive award earned by Executive under this Section
3 shall be paid as soon as reasonably practical after the end of
the Company's fiscal year end; provided, however, that if any such
payment would be nondeductible to the Company under Internal
Revenue Code Section 162(m), then any nondeductible amounts shall
be deferred from year to year until the payment of such amounts is
deductible by the Company.
4. TERMINATION OF EMPLOYMENT
(a) Resignation. Notwithstanding Section 2 hereof, this Agreement may
be terminated by the Executive at any time upon six (6) months
written notice of resignation by the Executive to the Company, and
in such event any payments pursuant to Section 3 and 4 of this
Agreement shall automatically terminate (except for the Company's
obligations relation to voluntary termination under its
compensation and benefit plans, as specified in the various plan
documents, and the Executive's obligations set forth in Section
5). Subsequent payments may be made to the Executive as provided
pursuant to Section 6 of this Agreement.
(b) Termination by the Company Other Than for Cause. Termination of
the Executive by the Company other than for Cause, as defined in
Section 4(c) below, shall cause the Company to make payments to
the Executive hereunder pursuant to the provisions of this Section
4(b). Such a termination shall require at least sixty (60)
business days' prior notice and must be signed by at least
three-fourths (3/4) of all the non-employee members of the Board
of Directors.
Notwithstanding anything to the contrary contained in Stock Option
Program or any agreement or document related thereto, the
Executive's total outstanding and unvested shares and/or options
under the Stock Option Plan shall at the date of termination be
deemed to be 100% vested. No further grants of stock or options
shall be made under the Plan after such termination.
With respect to base salary and annual incentive compensation, the
Company's obligation shall be to pay the Executive, according to
the terms of this Agreement and for a period of thirty-six (36)
months, an amount equal to the annual salary and incentive paid to
the Executive [at the bonus level for the year prior to which such
termination occurs unless performance of the Company as defined in
the matrix referenced in Section 3(b) is better in the year of
termination, in which event such bonus shall be based on the
matrix calculation as described in Section 3(b)], such annual
amounts to be paid in equal monthly installments.
During the 36-month severance payment period, the Executive shall
be entitled to all payments, benefits and perquisites as provided
for in this Agreement, and office space and secretarial support
comparable to that provided to the Executive during his employment
by the Company. The Executive shall be entitled to all payments
and benefits as provided for in this Section for a period of
thirty-six (36) months.
If the Board of Directors fails to reelect the Executive to a
position comparable to that described in Section 1(a) of this
Agreement or, without terminating the Executive's employment,
removes the Executive from his position for reasons other than
Cause, substantively reduces the Executive's duties and
responsibilities, reduces his pay and/or benefits, forces
relocation, or requires excessive travel, then the Executive may,
by notice to the Company, treat such action or removal as a
termination of the Executive by the Company pursuant to this
Section 4(b).
In the event of the Executive's death before the completion of the
payments pursuant to this Section 4(b), the remaining payments
hereunder shall be made to the beneficiary or beneficiaries
designated by the Executive to the Company in writing or, absent
such a designation, to his estate.
(c) Termination by the Company for Cause. The Company may terminate
the Executive's employment for Cause if the Executive has
committed a felonious act, or the Executive, in carrying out his
duties hereunder has been willfully and grossly negligent or has
committed willful and gross misconduct resulting, in either case,
in material harm to the Company. An act or omission shall be
deemed "willful" only if done, or omitted to be done, in bad faith
and without reasonable belief that it was in the best interest of
the Company. In the event of termination of the Executive by the
Company for Cause, the Executive shall no longer be entitled to
receive any payments or any other rights or benefits under this
Agreement.
(d) Disability. In the event the Executive's employment terminates due
to total and permanent disability (for the purposes of this
Agreement "disability" shall have the same meaning as applies
under the Company's Long-Term Disability Plan), he will continue
to receive the same base salary and benefits which he was
receiving prior to such disability for 36 months, offset by
payments under the Company's Long-Term Disability Plan. In
addition, he shall receive a pro-rated annual incentive payment
for the year in which is employment is terminated, based on the
formula described in Section3(b).
(e) Death. In the event of the death of the Executive during the term
of this Agreement, the rights and benefits under employee benefit
plans and programs of the Company, including life insurance, will
be determined in accordance with the terms and conditions of such
plans and programs as in effect on his date of death. In such
event, the Company shall pay in a lump sum to the Executive's
estate an amount equal to five times the then current rate of the
Executive's base salary, and no further payments shall be required
pursuant to this Agreement.
(f) Change in Control. In the event of a change in control of the
Company, as set forth below, the Executive may at any time and in
his complete discretion during a 24-month period following a
change in control, elect to terminate his employment with the
Company. For purposes of this Agreement, a "change in control"
shall mean a change in ownership of the Company that would be
required to be reported in response to Item 1(a) of a Current
Report on Form 8-K pursuant to the Securities and Exchange Act of
1934 ("Exchange Act"), as in effect on the date hereof, except
that any merger, consolidation or corporate reorganization in
which the owners of the capital stock entitled to vote in the
election of directions of the Employer or the Company ("Voting
Stock") prior to said combination, own 75% or more of the
resulting entity's Voting Stock shall not be considered a change
in control for the purposes of this Agreement; provided that,
without limitation, such a change in control shall be deemed to
have occurred if (i) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the Exchange Act), other than a
trustee or other fiduciary holding securities under an employee
benefit plan of the Company is or becomes the beneficial owner
(as that is used in Section 13(d) of the Exchange Act), directly
or indirectly, or 30% or more of the Voting Stock of the Company
or its successor; or (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute
the Board of Directors of the Company ("Incumbent Board") cease
for any reason to constitute at least a majority thereof;
provided, however, that any person becoming a director of the
Company after the beginning of the period whose election was
approved by a vote of at least three-quarters of the directors
comprising the incumbent Board shall, for the purposes hereof, be
considered as though he were a member of the incumbent Board; or
(iii) there shall occur the sale of all or substantially all of
the assets of the Company. Notwithstanding anything in the
foregoing to the contrary, no change in control of the Company
shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a
group of persons which includes the Executive acquiring, directly
or indirectly, more than 30 percent of the combined voting power
of the Company's outstanding securities. If any of the events
constituting a change in control shall have occurred during the
term hereof, the Executive shall be entitled to the privilege
provided in subparagraph (f) herein to terminate his employment.
Any termination by the Executive pursuant to this Section shall be
communicated by a written "Notice of Termination."
If, following a change in control, the Executive shall for any
reason voluntarily terminate his employment during the 24-month
period following a change in control, then the Company shall pay
base salary up to the date of termination and a prorated annual
incentive award based on the calculated bonus for the year in
which termination occurred, as defined in Section 3(b), in a lump
sum on the thirtieth (30th) day following the Date of Termination.
5. COVENANT NOT TO COMPETE
(a) As a material inducement to the Company's entering into this
Agreement, the Executive agrees that during the term of this
Agreement, he will not become associated with, render service to
or engage in any other business competitive with any existing or
contemplated business of the Company or its subsidiaries, except
that the Executive may serve as a member of the board of directors
of other companies or organizations, provided that he provides
written notice to the Board of each significant activity, and that
he will do nothing inconsistent with his duties and
responsibilities to the Company.
(b) If the Executive voluntarily resigns from the employ of the
Company prior to the expiration of the term of this Agreement, he
specifically agrees that for a period of five (5) years commencing
with the date of his voluntary resignation he will not engage in
or perform any services either on a full-time or a part-time or on
a consulting or advisory basis for any business organization that
is in competition with the Company at the time such services are
being performed by Executive, with the exception that this Section
5(b) shall not apply in the event the Executive resigns
voluntarily following a change in control of the Company as
defined in Section 4(f).
(c) The Executive will not at any time, whether while employed by the
Company or after voluntary or involuntary termination or after
retirement, reveal to any person, firm or entity any trade or
business secrets or confidential, secret, or privileged
information about the business of the Company or its subsidiaries
or affiliates except as shall be required in the proper conduct of
the Company's business.
6. CONSULTING ARRANGEMENT
Following a voluntary termination of employment pursuant to Section
4(a) and 4(f), or an involuntary termination subsequent to a change in
control of the Company, for any reason but during a 24-month period
following a change in control as defined in Section4(f), after the
Executive ceases to render services as the Chief Executive Officer, he
may in his sole discretion elect to act as a consultant to the Company
for a period of five (5) years. During this period of consulting
services, the Executive shall, at reasonable times and places, taking
into account any other employment or activities he may then have, hold
himself available to consult with and advise the officers, directors,
and other representatives of the Company. As compensation thereof, the
Executive shall be entitled to receive, and Company shall pay, an
annual amount equal to seventy-five percent (75%) of his annual base
salary rate in effect immediately prior to his termination of
employment, but in no event an annual amount to exceed $1,000,000, for
each year of such period, payable in equal monthly installments.
7. WITHHOLDING
All amounts payable hereunder which are or may become subject to
withholding under pertinent provisions of law or regulation shall be
reduced for applicable income and/or employment taxes required to be
withheld.
8. MISCELLANEOUS
(a) This Agreement supersedes any prior agreements or understandings,
oral or written, with respect to employment of the Executive and
constitutes the entire Agreement with respect thereto; provided,
however, that nothing contained herein shall supercede that
certain Assignment and License Agreement entered into as of March
31, 1987, as amended. This Agreement cannot be altered or
terminated orally and may be amended only by a subsequent written
agreement executed by both of the parties hereto or their legal
representatives, and any material amendment must be approved by a
majority of the voting shareholders of the Company.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
(c) This Agreement shall be binding upon and shall inure to the
benefit of the Company and its successors and assigns. In that
this constitutes a personal service agreement, it may not be
assigned by the Executive and any attempted assignment by the
Executive in violation of this covenant shall be null and void.
(d) For the purpose of this Agreement, the phrase "designated
beneficiary or beneficiaries" shall include the estates of such
beneficiaries in the event of their death before the receipt of
all payments under this Agreement and shall also include any
alternate or successor beneficiaries designated in writing to the
Company by the Executive.
(e) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any
other provisions, which shall remain in full force and effect.
(f) The Section and Paragraph headings contained herein are for
reference purposes only and shall not in any way affect the
meanings or interpretation of this Agreement.
(g) Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration,
conducted before a panel of arbitrators in accordance with the
rules of the American Arbitration Association then in effect.
Judgement may be entered on the arbitrators award in any court
having jurisdiction. The expense of such arbitration shall be
borne by the Company.
(h) Any notices, requests or other communications provided for by this
Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address
he has filed in writing with the Company or, in the case of the
Company, at its principal offices.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
Company:
ATTEST THE CHARLES SCHWAB CORPORATION
By: /s/ Mary B. Templeton By: /s/ Luis E. Valencia
----------------------- ------------------------------------------
Corporate Secretary Title: Executive Vice President - Human Resources
------------------------------------------
Executive: /s/ Charles R. Schwab
------------------------------------------
Charles R. Schwab
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
Performance Standards and Target Incentive Matrix ($000)
Pre-Tax Profit Margin Percent*
less
than 7% 7% 10% 13% 15% 17% 20% 23% 25%
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30% $800 $1,625 $3,115 $5,120 $6,300 $7,415 $8,925 $10,950 $12,000
----------------------------------------------------------------------------------------------
Percent 25% 800 1,475 2,420 4,175 5,120 5,930 7,145 8,765 9,575
----------------------------------------------------------------------------------------------
Annual Net 20% 800 1,340 1,880 3,500 4,175 4,715 6,200 7,550 8,360
----------------------------------------------------------------------------------------------
Revenue 15% 800 1,205 1,610 2,960 3,500 4,175 5,120 6,200 7,145
----------------------------------------------------------------------------------------------
Growth 10% 800 1,070 1,475 2,150 2,960 3,500 4,310 5,390 6,200
----------------------------------------------------------------------------------------------
Over Prior 5% 800 900 1,070 1,475 2,150 2,960 3,500 4,590 5,525
----------------------------------------------------------------------------------------------
Year 0% 800 800 800 1,070 1,475 2,150 2,960 3,500 4,715
----------------------------------------------------------------------------------------------
(5%) to 0% 800 800 800 800 800 1,475 2,150 2,960 3,500
----------------------------------------------------------------------------------------------
less than (5)% 800 800 800 800 800 800 800 800 800
----------------------------------------------------------------------------------------------
* All dollar amounts shown in the matrix are in thousands (000).
In the matrix above, where the value in any year is shown at an amount
less than the Executive's actual base salary for that year, his total
cash compensation shall be no less than and no greater than his actual
base salary. If the Company's actual financial results are between the
values shown here, payments earned will be calculated on the basis of
an interpolated result. Pre-tax profit margin shall be determined on an
LBO-adjusted basis.
</TABLE>
Exhibit 10.208
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
(Restated to include Amendments through December 15, 1999)
Article 1. Introduction.
The Plan was adopted by the Board of Directors on March 26, 1992. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of incremental stockholder value by (a) encouraging Non-Employee
Directors and Key Employees to focus on long-range objectives, (b) encouraging
the attraction and retention of Non-Employee Directors and Key Employees with
exceptional qualifications and (c) linking Non-Employee Directors and Key
Employees directly to stockholder interests. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Performance
Share Awards or Options, which may constitute incentive stock options or
nonstatutory stock options. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee. The
Committee shall consist of two or more Non-Employee Directors, who shall be
appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
Article 3. Limitations on Awards.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 29,150,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares being
issued, or if any Options terminate for any other reason before being exercised,
then such Restricted Shares, Performance Share Awards or Options shall again
become available for Awards under the Plan.
Subject to the overall limit on the aggregate shares set forth above,
the following limitations shall apply: (a) The maximum number of Common Shares
which may be granted subject to an Option to any one Participant in any one
fiscal year shall be 2,250,000; and (b) The maximum number of Restricted Shares
or Performance Share Awards which may be granted to any one Participant in any
one fiscal year shall be 900,000. The limitations set forth in the preceding
sentence shall be subject to adjustment pursuant to Article 10; and
The limitations of this Article 3 shall each be subject to adjustment
pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares.
Article 4. Eligibility.
4.1 General Rule. Key Employees and Non-Employee Directors shall be
eligible for designation as Participants by the Committee.
4.2 Non-Employee Directors. In addition to any awards pursuant to
Section 4.1, Non-Employee Directors shall be entitled to receive the automatic
NSOs described in this Section 4.2.
(a) Each Non-Employee Director shall receive a Non-Officer Stock
Option covering 3,500 Common Shares for each Award Year with respect
to which he or she serves as a Non-Employee Director on the grant
date described in subsection (b) below; provided that the Non-Officer
Stock Option shall cover 2,500 shares if the Exercise Price
determined as of the grant date, is $35 or more;
(b) The NSO for a particular Award Year shall be granted to each
Non-Employee Director as of May 15 of each Award Year, and if May 15
is not a business day, then the grant shall be made on and as of the
next succeeding business day;
(c) Each NSO shall be exercisable in full at all times during its
term;
(d) The term of each NSO shall be 10 years; provided, however, that
any unexercised NSO shall expire on the earlier of the date 10 years
after the date of grant or three (3) months following the date that
the Optionee ceases to be a Non-Employee Director or a Key Employee
for any reason other than death or disability. If an Optionee ceases
to be a Non-Employee Director or Key Employee on account of death or
disability, any unexercised NSO shall expire on the earlier of the
date 10 years after the date of grant or one year after the date of
death or disability of such Director; and
(e) The Exercise Price under each NSO shall be equal to the Fair
Market Value on the date of grant and shall be payable in any of the
forms described in Article 6.
4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the grant of
an ISO unless (a) the Exercise price under such ISO is at least 110 percent of
the Fair Market Value of a Common Share on the date of grant and (b) such ISO by
its terms is not exercisable after the expiration of five years from the date of
grant.
4.4 Attribution Rules. For purposes of Section 4.3, in determining
stock ownership, a Key Employee shall be deemed to own the stock owned, directly
or indirectly, by or for his or her brothers, sisters, spouse, ancestors or
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which the Key Employee holds an option shall not be counted.
4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock"
shall include all stock actually issued and outstanding immediately after the
grant of the ISO to the Key Employee. "Outstanding stock" shall not include
treasury shares or shares authorized for issuance under outstanding options held
by the Key Employee or by any other person.
4.6 Options Issued To Non-Employee Directors In Lieu of Fee Deferrals.
In addition to any awards pursuant to Sections 4.1 and 4.2, a Non-Employee
Director who elects to defer the receipt of amounts pursuant to Section 5.1 of
The Charles Schwab Corporation Directors' Deferred Compensation Plan (the
"Directors Deferred Compensation Plan") and elects to receive stock options in
lieu of a Deferral Account balance pursuant to Section 5.4(2) of the Directors
Deferred Compensation Plan, shall be entitled to receive a grant of NSOs
hereunder on the date the amounts would have been payable to the Non-Employee
Director if the Non-Employee Director had not made such deferral election. Any
NSOs issued pursuant to this Section shall be issued pursuant to the terms set
forth in subsections (c), (d) and (e) of Section 4.2 hereof.
4.7 Performance Shares Issued To Non-Employee Directors Pursuant to Fee
Deferrals. In addition to any awards pursuant to Sections 4.1 and 4.2, a
Non-Employee Director who elects to defer the receipt of amounts pursuant to
Section 5.1 of The Directors' Deferred Compensation Plan and elects to receive
payment in Shares pursuant to Section 5.4(1) of the Directors Deferred
Compensation Plan, shall be entitled to receive a grant of Performance Shares
hereunder on the date the amounts would have been payable to the Non-Employee
Director if the Non-Employee Director had not made such deferral election.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO (or, in the case
of a Key Employee who is subject to the tax laws of a foreign jurisdiction, as
an option qualifying for favorable tax treatment under the laws of such foreign
jurisdiction), except for Options granted to Non-Employee Directors.
5.2 Options Nontransferability. No Option granted under the Plan shall
be transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.3. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option. The term of an
ISO shall in no event exceed 10 years from the date of grant, and Section 4.3
may require a shorter term. Subject to the preceding sentence, the Committee
shall determine when all or any part of an Option is to become exercisable and
when such Option is to expire; provided that, in appropriate cases, the Company
shall have the discretion to extend the term of an Option or the time within
which, following termination of employment, an Option may be exercised, or to
accelerate the exercisability of an Option. A Stock Option Agreement may provide
for expiration prior to the end of its term in the event of the termination of
the Optionee's employment and shall provide for the suspension of vesting when
an employee is on a leave of absence for a period in excess of six months in
appropriate cases, as determined by the Company; provided that, except to the
extent otherwise specified by the Committee at the time of grant, (i) the
exercisability of Options shall be accelerated in the event of the Participant's
death or Disability and (ii) in the case of Retirement, the exercisability of
all outstanding Options shall be accelerated, other than any Options that had
been granted within two years of the date of the Optionee's Retirement. Except
as provided in Section 4.2, NSOs may also be awarded in combination with
Restricted Shares, and such an Award may provide that the NSOs will not be
exercisable unless the related Restricted Shares are forfeited. In addition,
NSOs granted under this Section 5 may be granted subject to forfeiture
provisions which provide for forfeiture of the Option upon the exercise of
tandem awards, the terms of which are established in other programs of the
Company.
5.6 Limitation on Amount of ISOs. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect to
which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 Effect of Change in Control. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options. Concurrently with the grant
of any Option to a Participant (other than NSOs granted pursuant to Section
4.2), the Committee may authorize the grant of Replacement Options. If
Replacement Options have been authorized by the Committee with respect to a
particular award of Options (the "Underlying Options"), the Option Agreement
with respect to the Underlying Options shall so state, and the terms and
conditions of the Replacement Options shall be provided therein. The grant of
any Replacement Options shall be effective only upon the exercise of the
Underlying Options through the use of Common Shares pursuant to Section 6.2 or
Section 6.3. The number of Replacement Options shall equal the number of Common
Shares used to exercise the Underlying Options, and, if the Option Agreement so
provides, the number of Common Shares used to satisfy any tax withholding
requirements incident to the exercise of the Underlying Options in accordance
with Section 13.2. Upon the exercise of the Underlying Options, the Replacement
Options shall be evidenced by an amendment to the Underlying Option Agreement.
Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement
Option is not intended to qualify as an ISO. The Exercise Price of a Replacement
Option shall be no less than the Fair Market Value of a Common Share on the date
the grant of the Replacement Option becomes effective. The term of each
Replacement Option shall be equal to the remaining term of the Underlying
Option. No Replacement Options shall be granted to Optionees when Underlying
Options are exercised pursuant to the terms of the Plan and the Underlying
Option Agreement following termination of the Optionee's employment. The
Committee, in its sole discretion, may establish such other terms and conditions
for Replacement Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees. In the case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock
Option Agreement. However, the Committee may specify in the Stock
Option Agreement that payment may be made pursuant to Section 6.2 or
6.3.
(b) In the case of an NSO, the Committee may at any time accept
payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NSOs
are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be issued
pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other criteria as the Committee may adopt;
provided that, in the case of an Award of Restricted Shares where vesting is
based entirely on the Participant's service (except to the extent otherwise
specified by the Committee at the time of grant), (i) vesting shall be
accelerated in the event of the Participant's death or Disability; (ii) in the
case of Retirement, vesting shall be accelerated for all Restricted Shares that
had been granted more than two years prior to the date of the Participant's
Retirement; and (iii) vesting shall be suspended when an employee is on a leave
of absence for a period in excess of six months in appropriate cases, as
determined by the Company. The Committee, in its sole discretion, may determine,
at the time of making an Award of Restricted Shares, that such Award shall
become fully vested in the event that a Change in Control occurs with respect to
the Company. The Committee, in its sole discretion, may determine, at the time
of making a Performance Share Award, that the issuance conditions set forth in
such Award shall be waived in the event that a Change in Control occurs with
respect to the Company.
7.4 Form of Settlement of Performance Share Awards. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries. Each
recipient of a Performance Share Award under the Plan shall designate one or
more beneficiaries for this purpose by filing the prescribed form with the
Company. A beneficiary designation may be changed by filing the prescribed form
with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need to hold a hearing) require an extension of time for processing the appeal,
in which case a written decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as
the Company's other stockholders.
(b) During the period of restriction, Named Executive Officers
holding Restricted Shares granted hereunder shall be credited with
all regular cash dividends paid with respect to all Restricted Shares
while they are so held. If a dividend is paid in the form of cash,
such cash dividend shall be credited to Named Executive Officers
subject to the same restrictions on transferability and
forfeitability as the Restricted Shares with respect to which they
were paid. If any dividends or distributions are paid in shares of
Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted
Shares with respect to which they were paid. Subject to the
succeeding paragraph, and to the restrictions on vesting and the
forfeiture provisions, all dividends credited to a Named Executive
Officer shall be paid to the Named Executive Officer within
forty-five (45) days following the full vesting of the Restricted
Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative
security" or an "equity security" pursuant to Rule 16(a) under the
Exchange Act, such dividend shall be subject to a vesting period
equal to the longer of: (i) the remaining vesting period of the
Restricted Shares with respect to which the dividend is paid; or (ii)
six (6) months. The Committee shall establish procedures for the
application of this provision.
Named Executive Officers holding Restricted Shares shall have
the same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the maximum number of
Common Shares which may be granted under Article 3 to any one Participant in any
one fiscal year either subject to an Option or as Restricted Shares or
Performance Share Awards, (c) the number of Performance Share Awards included in
any prior Award which has not yet been settled, (d) the number of Common Shares
covered by each outstanding Option or (e) the Exercise Price under each
outstanding Option.
10.2 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent, for
their continuation by the Company (if the Company is a surviving corporation),
for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain employed by
the Company or any Subsidiary. The Company and its Subsidiaries reserve the
right to terminate the employment of any employee at any time, with or without
cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights. A Participant shall have no dividend rights,
voting or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of such Common Shares, whether
by issuance of a certificate, book entry or other procedure. No adjustment shall
be made for cash dividends or other rights for which the record date is prior to
the date when such certificate is issued, except as expressly provided in
Articles 7, 9 and 10.
11.3 Creditors' Rights. A holder of Performance Share Awards shall have
no rights other than those of a general creditor of the Company. Performance
Share Awards represent unfunded and unsecured obligations of the Company,
subject to the terms and conditions of the applicable Stock Award Agreement.
11.4 Government Regulations. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating to
the issuance of such Common Shares or to their registration,
qualification or exemption from registration or qualification under
the Securities Act of 1933, as amended, or any applicable state
securities laws; and
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock
Exchange or any other securities exchange on which Common Shares are
then listed.
Article 12. Limitation of Payments.
12.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer in
the nature of compensation to or for the benefit of a Participant, whether paid
or payable (or transferred or transferable) pursuant to the terms of this Plan
or otherwise (a "Payment"), would be nondeductible for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
section 280G of the Code, then the aggregate present value of all Payments shall
be reduced (but not below zero) to the Reduced Amount; provided, however, that
the Committee, at the time of making an Award under this Plan or at any time
thereafter, may specify in writing that such Award shall not be so reduced and
shall not be subject to this Article 12. For purposes of this Article 12, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the Code.
12.2 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible because of section 280G of the Code, then the Company
shall promptly give the Participant notice to that effect and a copy of the
detailed calculation thereof and of the Reduced Amount, and the Participant may
then elect, in his or her sole discretion, which and how much of the Payments
shall be eliminated or reduced (as long as after such election, the aggregate
present value of the Payments equals the Reduced Amount) and shall advise the
Company in writing of his or her election within 10 days of receipt of notice.
If no such election is made by the Participant within such 10-day period, then
the Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Payments equals the Reduced Amount) and shall notify the Participant promptly of
such election. For purposes of this Article 12, present value shall be
determined in accordance with section 280G(d)(4) of the Code. All determinations
made by the Auditors under this Article 12 shall be binding upon the Company and
the Participant and shall be made within 60 days of the date when a Payment
becomes payable or transferable. As promptly as practicable following such
determination and the elections hereunder, the Company shall pay or transfer to
or for the benefit of the Participant such amounts as are then due to him or her
under the Plan, and shall promptly pay or transfer to or for the benefit of the
Participant in the future such amounts as become due to him or her under the
Plan.
12.3 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company on demand, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.
12.4 Related Corporations. For purposes of this Article 12, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
Article 13. Withholding Taxes.
13.1 General. To the extent required by applicable federal, state,
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the satisfaction of
any withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 Nonstatutory Options, Restricted Shares or Performance Share
Awards. The Committee may permit an Optionee who exercises NSOs, or who receives
Awards of Restricted Shares, or who receives Common Shares pursuant to the terms
of a Performance Share Award, to satisfy all or part of his or her withholding
tax obligations by having the Company withhold a portion of the Common Shares
that otherwise would be issued to him or her under such Awards. Such Common
Shares shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall
be subject to such restrictions as the Committee may impose, including any
restrictions required by rules of the Securities and Exchange Commission.
Article 14. Assignment or Transfer of Award.
14.1 General Rule. Any Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or by
operation of law, except to the extent specifically permitted by Section 14.2.
14.2 Exceptions to General Rule. Notwithstanding Section 14.1, this
Plan shall not preclude (i) a Participant from designating a beneficiary to
succeed, after the Participant's death, to those of the Participant's Awards
(including without limitation, the right to exercise any unexercised Options) as
may be determined by the Company from time to time in its sole discretion, (ii)
a transfer of any Award hereunder by will or the laws of descent or
distribution, or (iii) a voluntary transfer of an Award (other than an ISO) to a
trust or partnership for the exclusive benefit of one or more members of the
Participant's family, but only if the Participant has sole investment control
over such trust or partnership.
Article 15. Future of Plans.
15.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on May 8, 1992. The Plan shall remain in effect until it is terminated
under Section 15.2, except that no ISOs shall be granted after May 7, 2002.
15.2 Amendment or Termination. The Committee may, at any time and for
any reason, amend or terminate the Plan; provided, however, that any amendment
of the Plan shall be subject to the approval of the Company's stockholders to
the extent required by applicable laws, regulations or rules.
15.3 Effect of Amendment or Termination. No Award shall be made under
the Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
Article 16. Definitions.
16.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
16.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
16.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
16.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who
either (i) had been directors of the Company 24 months prior to such
change or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the directors
who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or
nomination;
(c) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20 percent or
more of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors
(the "Base Capital Stock"); provided, however, that any change in the
relative beneficial ownership of securities of any person resulting
solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
16.5 "Code" means the Internal Revenue Code of 1986, as amended.
16.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
16.7 "Common Share" means one share of the common stock of the Company.
16.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
16.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
16.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
16.11 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
16.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for
such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by
the NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the
Fair Market Value shall be equal to the mean between the last
reported representative bid and asked prices quoted by the NASDAQ
system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
16.13 "ISO" means an incentive stock option described in section 422(b)
of the Code.
16.14 "Key Employee" means a key common-law employee of the Company or
any Subsidiary, as determined by the Committee.
16.15 "Named Executive Officer" means a Participant who, as of the date
of vesting of an Award is one of a group of "covered employees," as defined in
the Regulations promulgated under Code Section 162(m), or any successor statute.
16.16 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
16.17 "NSO" means an employee stock option not described in sections
422 through 424 of the Code.
16.18 "Option" means an ISO or NSO or, in the case of a Key Employee
who is subject to the tax laws of a foreign jurisdiction, an option qualifying
for favorable tax treatment under the laws of such jurisdiction, including a
Replacement Option, granted under the Plan and entitling the holder to purchase
one Common Share.
16.19 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
16.20 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
16.21 "Performance Share Award" means the conditional right to receive
in the future one Common Share, awarded to a Participant under the Plan.
16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab
Corporation, as it may be amended from time to time.
16.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
16.24 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
16.25 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
16.26 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
16.27 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
16.28 "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under the
Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing
definition shall apply to all Stock Option Agreements entered into pursuant to
the Plan, irrespective of any definition to the contrary contained in any such
Stock Option Agreement.
16.29 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. All
determinations as to whether a Participant has incurred a Disability shall be
made by the Employee Benefits Administration Committee of the Company, the
findings of which shall be final, binding and conclusive.
<PAGE>
ADDENDUM A
The provisions of the Plan, as amended by the terms of this
Addendum A, shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions
shall apply in addition to those set out in section 16 of the Plan:
Approved Option Means a stock option designed to qualify as an
approved executive share option under the Taxes Act;
Inland Revenue means the Board of the Inland Revenue in the
United Kingdom.
Key U.K. Employee means a designated employee of Sharelink
Investment Services plc or any subsidiary (as that term is
defined in the Companies Act 1985 of the United Kingdom, as
amended) of which Sharelink Investment Services plc has
control for the purposes of section 840 of the Taxes Act;
Taxes Act means the Income and Corporation Taxes Act 1988 of
the United Kingdom.
2. An Approved Option may only be granted to a Key U.K.
Employee who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of
paragraph 8 of Schedule 9 to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time"
shall mean an employee who is required to work 20 hours per week, excluding meal
breaks.
3. No Approved Option may be granted to a Key U.K. Employee if
it would cause the aggregate of the exercise price of all subsisting Approved
Options granted to such employee under the Plan, or any other subsisting options
granted to such employee under any other share option scheme approved under
Schedule 9 of the Taxes Act and established by the Company or an associated
company, to exceed the higher of (a) one hundred thousand pounds sterling and
(b) four times such employee's relevant emoluments for the current or preceding
year of assessment (whichever is greater); but where there were no relevant
emoluments for the previous year of assessment, the limit shall be the higher of
one hundred thousand pounds sterling or four times such employee's relevant
emoluments for the period of twelve months beginning with the first day during
the current year of assessment in respect of which there are relevant
emoluments. For the purpose of this section 3 of Addendum A, "associated
company" means an associated company within the meaning of section 416 of the
Taxes Act; "relevant emoluments" has the meaning given by paragraph 28(4) of
Schedule 9 to the Taxes Act and "year of assessment" means a year beginning on
any April 6 and ending on the following April 5.
4. Common Shares issued pursuant to the exercise of Approved
Options must satisfy the conditions specified in paragraphs 10 to 14 of Schedule
9 to the Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan,
the exercise price of an Approved Option shall not be less than 100 percent of
the closing price of a Common Share as reported in the New York Stock Exchange
Composite Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key
U.K. Employee when that Key U.K. Employee falls within the provisions of
paragraph 8 of Schedule 9 to the Taxes Act. If at any time the shares under an
Approved Option cease to comply with the conditions in paragraphs 10 to 14 of
Schedule 9 to the Taxes Act, then all Approved Options then outstanding shall
lapse and cease to be exercisable from the date of the shares ceasing so to
comply, and no optionee shall have any cause of action against the Company,
Sharelink Investment Services plc or any subsidiary of the Company or any other
person in respect thereof.
7. An Approved Option may contain such other terms, provisions
and conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements for
approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the
terms of section 10.1 of the Plan, no adjustment shall be made pursuant to
section 10.1 of the Plan to any outstanding Approved Options without the prior
approval of the Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee
shall make arrangements satisfactory to the Company for the satisfaction of any
tax withholding or deduction -- at -- source obligations that arise by reason of
the grant to him or her of such option, or its subsequent exercise.
10. In relation to an Approved Option, in addition to the
provisions set out in section 15.2 of the Plan, no amendment which affects any
of the provisions of the Plan relating to Approved Options shall be effective
until approved by the Inland Revenue, except for such amendment as are required
to obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to
the Taxes Act.
Exhibit 10.209
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
(Restated to include Amendments through October 28, 1999)
<PAGE>
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Section Page
Article I. Purpose
1.1 Establishment of the Plan 2
1.2 Purpose of the Plan 2
Article II. Definitions
2.1 Definitions 3
2.2 Gender and Number 3
Article III. Administration
3.1 Committee and Administrator 4
Article IV. Participants
4.1 Participants 5
Article V. Deferrals
5.1 Deferrals 6
5.2 Deferral Procedures 6
5.3 Election of Time and Manner of Payment 6
5.4 Accounts and Earnings 7
5.5 Maintenance of Accounts 9
5.6 Change in Control 9
5.7 Payment of Deferred Amounts 13
5.8 Acceleration of Payment 13
Article VI. General Provisions
6.1 Unfunded Obligation 14
6.2 Informal Funding Vehicles 14
6.3 Beneficiary 15
6.4 Incapacity of Participant or Beneficiary 15
6.5 Nonassignment 16
6.6 No Right to Continued Employment 16
6.7 Tax Withholding 16
6.8 Claims Procedure and Arbitration 16
6.9 Termination and Amendment 17
6.10 Applicable Law 18
<PAGE>
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
Article I. Purpose
1.1 Establishment of the Plan. Effective as of January 1, 1996, The
Charles Schwab Corporation (hereinafter, the "Company") hereby establishes The
Charles Schwab Corporation Directors' Deferred Compensation Plan (the "Plan"),
as set forth in this document.
1.2 Purpose of the Plan. The Plan permits Directors to defer the
payment of directors' fees that they may earn. The opportunity to elect such
deferrals is provided in order to help the Company attract and retain outside
directors. This Plan is unfunded and is maintained primarily for the purpose of
providing deferred compensation for its outside directors. It is intended to be
exempt from the participation, vesting, funding, and fiduciary requirements set
forth in Title I of the Employee Retirement Income Security Act of 1974, as
amended.
<PAGE>
Article II. Definitions
2.1 Definitions. The following definitions are in addition to any other
definitions set forth elsewhere in the Plan. Whenever used in the Plan, the
capitalized terms in this section shall have the meanings set forth below unless
otherwise required by the context in which they are used:
(a) "Administrator" the administrator described in section 3.1
that is selected by the Committee to assist in the
administration of the Plan.
(b) "Beneficiary" means a person entitled to receive any benefit
payments that remain to be paid after a Participant's death,
as determined under section 6.3.
(c) "Board" means the Board of Directors of the Company.
(d) "Company" means The Charles Schwab Corporation, a Delaware
corporation.
(e) "Committee" means the Compensation Committee of the Board.
(f) "Deferral Account" means the account representing deferrals
of cash compensation, plus investment adjustments, as
described in sections 5.4 and 5.5.
(g) "Director" means each member of the Board of the Directors
who is not an employee of the Company or any of its
subsidiaries.
(h) "Plan" means The Charles Schwab Corporation Directors'
Deferred Compensation Plan, as in effect from time to time.
(i) "Plan Year" means the calendar year.
(j) "Termination" means the date a Participant ceases to be a
Director.
(k) "Valuation Date" means each December 31 and any other date
designated from time to time by the Committee for the
purpose of determining the value of a Participant's Deferral
Account balance pursuant to section 5.4.
2.2 Gender and Number. Except when otherwise indicated by the context,
any masculine or feminine terminology shall also include the neuter and other
gender, and the use of any term in the singular or plural shall also include the
opposite number.
<PAGE>
Article III. Administration
3.1 Committee and Administrator. The Committee shall administer the
Plan and may select one or more persons to serve as the Administrator. The
Administrator shall perform such administrative functions as the Committee may
delegate to it from time to time. Any person selected to serve as the
Administrator may, but need not, be a Committee member or an officer or employee
of the Company. However, if a person serving as Administrator or a member of the
Committee is a Participant, such person may not vote on a matter affecting his
interest as a Participant.
The Committee shall have discretionary authority to construe and
interpret the Plan provisions and resolve any ambiguities thereunder; to
prescribe, amend, and rescind administrative rules relating to the Plan; to
determine eligibility for benefits under the Plan; and to take all other actions
that are necessary or appropriate for the administration of the Plan. Such
interpretations, rules, and actions of the Committee shall be final and binding
upon all concerned and, in the event of judicial review, shall be entitled to
the maximum deference allowable by law. Where the Committee has delegated its
responsibility for matters of interpretation and Plan administration to the
Administrator, the actions of the Administrator shall constitute actions of the
Committee.
<PAGE>
Article IV. Participants
4.1 Participants. Each Director shall be eligible to participate in
this Plan.
<PAGE>
Article V. Deferrals
5.1 Deferrals. Each Director may elect to defer up to 100 percent of
the fees otherwise receivable from the Company for service as a Director. Any
such election must be made by entering a deferred compensation agreement with
the Company, as evidenced by a form approved by and filed with the Administrator
on or before the deadline specified by the Committee (which shall be no earlier
than one month prior to the beginning of the election period for which the
deferred fees are to be earned; provided that for the first year in which the
Plan is in effect, the deferral election shall be made within the first thirty
days of the election period). For this purpose, the election period shall be the
calendar year; provided, however, that during periods in which the Plan is not
in effect for a full calendar year or a Director is not a Participant for a full
calendar year, the election period shall be the portion of the calendar year
during which the Plan is in effect and the Director is an eligible Participant.
Deferrals that have been elected shall occur throughout the election period in
pro rata increments.
5.2 Deferral Procedures. Participants shall have an opportunity to
elect deferrals each year. Unless the Committee specifies other rules for the
deferrals that may be elected, deferrals may be made in increments of 10 percent
or in a fixed dollar amount. If a deferral is elected, the election shall be
irrevocable. Deferral elections shall be made on a form prescribed by the
Committee or the Administrator. As provided in section 6.7, any deferral is
subject to any applicable tax withholding measures and may be reduced to satisfy
any applicable tax withholding requirements.
5.3 Election of Time and Manner of Payment. At the time a Participant
makes a deferral election under section 5.1, the Participant shall also
designate the manner of payment and the date on which payments from his or her
Deferral Account shall begin, from among the following options:
(i) a lump sum payable by the end of February in the
year immediately following the Participant's Termination; or
(ii) a series of annual installments, commencing in the year
following the Participant's Termination and payable each year on or before the
end of February, over a period of five, ten, or fifteen years, as designated by
the Participant.
A Participant may modify an election of the time for payment under
circumstances determined by the Committee, provided that (i) a payment election
may not be modified in a manner that would cause payments to commence earlier
than the date payments would have commenced absent such modification, and (ii)
all payment elections shall become irrevocable one year prior to the date on
which payment will commence under the election. If payment is due in the form of
a lump sum, the payment shall equal the balance of the Deferral Account being
paid, determined as of the Valuation Date coincident with or immediately
preceding the payment date. If payment is due in the form of installments, the
amount of each installment payment shall be equal to the quotient determined by
dividing (A) the value of the portion of the Deferral Account to which the
installment payment election applies (determined as of the Valuation Date
coincident with or immediately preceding the date the payment is to be made), by
(B) the number of years over which the installment payments are to be made, less
the number of years in which prior payments attributable to such installment
payment election have been made.
Notwithstanding the foregoing, however, if earnings or any other
amounts credited to a Participant's Deferral Account do not otherwise meet any
applicable requirements of the Internal Revenue Code allowing the Company and
its Subsidiaries to receive a federal income tax deduction for such amounts upon
paying them at the time provided under the Participant's election, the payment
of such amounts, to the extent in excess of the amount that would be currently
tax deductible, shall automatically be deferred until the earliest year that the
payment can be deducted.
5.4 Accounts and Earnings. The Company shall establish a Deferral
Account for each Participant who has elected a deferral under section 5.1 above,
and its accounting records for the Plan with respect to each such Participant
shall include a separate Deferral Account or subaccount for each deferral
election of the Participant that could cause a payment made at a different time
or in a different form from other payments of deferrals elected by the same
Participant. Each Deferral Account balance shall reflect the Company's
obligation to pay a deferred amount to a Participant or Beneficiary as provided
in this Article V.
Under procedures approved by the Committee and communicated to
Participants, a Participant shall elect between the following two alternatives
with respect to the deferred amounts at the same time that the Participant
elects to defer the fees payable for a calendar year (provided that elections
made for the 1999 calendar year shall be made within 30 days of the date the
Participant receives notice of the election, or such shorter time as may be
specified by the Committee). Once made, a Participant's election for the method
of payment may not be changed; however, a Participant may make a different
election with respect to amounts that the Participant elects to defer in
subsequent periods.
(1) Payment in Shares. Under this alternative, a Participant
shall be credited with an award of Performance Shares pursuant to Section 4.7 of
the 1992 Stock Incentive Plan, in a number of Performance Shares equal to (i)
the amounts deferred hereunder, divided by (ii) the closing price of the Common
Stock of the Company on the date the Deferral occurred. Performance Shares
credited hereunder shall be issued to one or more grantor trusts formed by the
Company ("rabbi trusts") pursuant to Section 6.2 hereof. Any dividends paid on
shares of the Common Stock of the Company issued to a rabbi trust shall be
reinvested in Common Stock of the Company, which shall be treated as having been
issued to the Participant as additional Performance Shares under the 1992 Stock
Incentive Plan. Notwithstanding the foregoing, the crediting of assumed earnings
shall not mean that any deferred compensation promise to a Participant is
secured by particular investment assets or that the Participant is actually
earning any form of investment income under the Plan.
(2) Issuance of Stock Options Under the 1992 Stock Incentive
Plan. Under this alternative, a Participant may elect, in lieu of receiving any
payments from the Plan, to be issued nonqualified stock options pursuant to
Section 4.6 of The Charles Schwab Corporation 1992 Stock Incentive Plan. A
Participant who elects this alternative shall, on the date the fees deferred
pursuant to Section 5.1 hereof would otherwise have been payable, be issued a
number of nonqualified stock options with a fair market value equal to the
amounts deferred, as determined under the valuation methods set forth in Exhibit
A hereto.
5.5 Maintenance of Accounts. The Accounts of each Participant shall be
entered on the books of the Company and shall represent a liability, payable
when due under this Plan, from the general assets of the Company. Prior to
benefits becoming due hereunder, the Company shall expense the liability for
such accounts in accordance with policies determined appropriate by the
Company's auditors. Except to the extent provided pursuant to the second
paragraph of this section 5.5, the Accounts created for a Participant by the
Company shall not be funded by a trust or an insurance contract; nor shall any
assets of the Company be segregated or identified to such account; nor shall any
property or assets of the Company be pledged, encumbered, or otherwise subjected
to a lien or security interest for payment of benefits hereunder.
5.6 Change in Control. In the event of a Change in Control (as defined
below), the following rules shall apply:
(a) All Participants shall continue to have a fully vested,
nonforfeitable interest in their Deferral Accounts.
(b) Deferrals of amounts for the year that includes the Change
in Control shall cease beginning with the first payment
otherwise due that follows the Change in Control.
(c) A special allocation of earnings on all Deferral Accounts
shall be made under section 5.4 as of the date of the Change
in Control on a basis no less favorable to Participants than
the method being followed prior to the Change in Control.
(d) All payments of deferred amounts following a Change in
Control, whether or not they have previously begun, shall be
made in a lump sum no later than 30 days following the
Change in Control and, except as provided in section 5.3
with respect to installment payments in progress, shall be
in an amount equal to the full Deferral Account balance, as
adjusted pursuant to paragraph (c) above, as of the date of
the Change in Control.
(e) Nothing in this Plan shall prevent a Participant from
enforcing any rules in a contract or another plan of the
Company or any Subsidiary concerning the method of determining
the amount of fees or other form of compensation to which a
Participant may become entitled following a change in control,
or the time at which that compensation is to be paid in the
event of a change in control. For purposes of this Plan, a
"Change in Control" means any of the following:
(1) The acquisition by any individual, entity or group
(within the meaning of Section 13(d) (3) or 14(d)
(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then outstanding shares of
common stock of the Corporation (the "Outstanding
Corporation Common Stock") or (ii) the combined
voting power of the then outstanding voting
securities of the Corporation entitled to vote
generally in the election of directors (the
"Outstanding Corporation Voting Securities");
provided, however, that for purposes of this
paragraph (1), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by
the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or
maintained by the Company or any corporation
controlled by the Company, or (iv) any acquisition
by any corporation pursuant to a transaction which
complies with clauses (i), (ii) and (iii) of
paragraph (3) hereof; or
(2) Individuals who, as of January 1, 1996, constitute
the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the
Board; provided, however, that any individual
becoming a director subsequent to January 1, 1996
whose election, or nomination for election by the
Company's shareholders, was approved by a vote of
at least a majority of the directors then
comprising the Incumbent Board shall be considered
as though such individual were a member of the
Incumbent Board, but excluding, for this purpose,
any such individual whose initial assumption of
office occurs as a result of an actual or
threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or
consolidation, or sale or other disposition of all
or substantially all of the assets of the Company
(a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or
substantially all of the individuals and entities
who were the beneficial owners, respectively, of
the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities
immediately prior to such Business Combination
beneficially own, directly or indirectly, more than
50% of, respectively, the then outstanding shares
of common stock and the combined voting power of
the then outstanding voting securities entitled to
vote generally in the election of directors, as the
case may be, of the corporation resulting from such
Business Combination (including, without
limitation, a corporation which as a result of such
transaction owns the Company or all or
substantially all of the Company's assets either
directly or through one or more subsidiaries) in
substantially the same proportions as their
ownership, immediately prior to such Business
Combination, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting
Securities, as the case may be, (ii) no Person
(excluding any corporation resulting from such
Business Combination or any employee benefit plan
(or related trust) of the Company or such
corporation resulting from such Business
Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the
corporation resulting from such Business
Combination or the combined voting power of the
then outstanding voting securities of such
corporation except to the extent that such
ownership existed prior to the Business Combination
and (iii) at least a majority of the members of the
board of directors of the corporation resulting
from such Business Combination were members of the
Incumbent Board at the time of the execution of the
initial agreement, or of the action of the Board,
providing for such Business Combination; or
(4) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
A Change of Control shall occur on the first day on which
any of the preceding conditions has been satisfied. However,
notwithstanding the foregoing, this section 5.6 shall not
apply to any Participant who alone or together with one or
more other persons acting as a partnership, limited
partnership, syndicate, or other group for the purpose of
acquiring, holding or disposing of securities of the
Company, triggers a "Change in Control" within the meaning
of paragraphs (1) and (2) above. Moreover, no acquisition by
(i) Charles Schwab and/or his spouse or any of his lineal
descendants or (ii) any trust created by or for the benefit
of Charles Schwab and/or his spouse or any of his lineal
descendants or (iii) the Schwab Family Foundation shall
constitute a Change of Control.
5.7 Payment of Deferred Amounts. A Participant shall have a fully
vested, nonforfeitable interest in his or her Deferral Account balance at all
times. However, vesting does not confer a right to payment other than in the
manner elected by the Participant pursuant to section 5.3 (subject to any
modification that may occur pursuant to section 5.4, 5.6 or 5.8). Upon the
expiration of a deferral period selected by the Participant in one or more
deferral elections, the Company shall pay to such Participant (or to the
Participant's Beneficiary, in the case of the Participant's death), an amount
equal to the balance of the Participant's Account attributable to such expiring
deferral elections, plus any assumed earnings (determined by the Company
pursuant to section 5.4) thereon.
5.8 Acceleration of Payment. The Committee, in its discretion, upon
receipt of a written request from a Participant, may accelerate the payment of
all or any portion of the unpaid balance of a Participant's Deferral Account in
the event of the Participant's death, permanent disability, or upon its
determination that the Participant (or his Beneficiary in the case of his death)
has incurred a severe, unforeseeable financial hardship creating an immediate
and heavy need for cash that cannot reasonably be satisfied from sources other
than an accelerated payment from this Plan. The Committee in making its
determination may consider such factors and require such information as it deems
appropriate.
<PAGE>
Article VI. General Provisions
6.1 Unfunded Obligation. The deferred amounts to be paid to
Participants pursuant to this Plan constitute unfunded obligations of the
Company. Except to the extent specifically provided hereunder, the Company is
not required to segregate any monies from its general funds, to create any
trusts, or to make any special deposits with respect to this obligation. Title
to and beneficial ownership of any investments, including any grantor trust
investments which the Company has determined and directed the Administrator to
make to fulfill obligations under this Plan shall at all times remain in the
Company. Any investments and the creation or maintenance of any trust or
Accounts shall not create or constitute a trust or a fiduciary relationship
between the Administrator or the Company and a Participant, or otherwise create
any vested or beneficial interest in any Participant or his or her Beneficiary
or his or her creditors in any assets of the Company whatsoever. The
Participants shall have no claim for any changes in the value of any assets
which may be invested or reinvested by the Company in an effort to match its
liabilities under this Plan.
6.2 Informal Funding Vehicles. To the extent required pursuant to
Section 5.4(1), the Company shall arrange for the establishment and use of a
grantor trust or other informal funding vehicle to facilitate the payment of
benefits and to discharge the liability of the Company and participating
Affiliates under this Plan to the extent of payments actually made from such
trust or other informal funding vehicle. In addition, the Company may, but need
not, arrange for the establishment and use of such a grantor trust or other
informal funding vehicle to the extent otherwise permitted pursuant to the Plan.
Any investments and any creation or maintenance of memorandum accounts
or a trust or other informal funding vehicle shall not create or constitute a
trust or a fiduciary relationship between the Committee or the Company or an
affiliate and a Participant, or otherwise confer on any Participant or
Beneficiary or his or her creditors a vested or beneficial interest in any
assets of the Company or any Affiliate whatsoever. Participants and
Beneficiaries shall have no claim against the Company or any Affiliate for any
changes in the value of any assets which may be invested or reinvested by the
Company or any Affiliate with respect to this Plan.
6.3 Beneficiary. The term "Beneficiary" shall mean the person or
persons to whom payments are to be paid pursuant to the terms of the Plan in the
event of the Participant's death. A Participant may designate a Beneficiary on a
form provided by the Administrator, executed by the Participant, and delivered
to the Administrator. The Administrator may require the consent of the
Participant's spouse to a designation if the designation specifies a Beneficiary
other than the spouse. Subject to the foregoing, a Participant may change a
Beneficiary designation at any time. Subject to the property rights of any prior
spouse, if no Beneficiary is designated, if the designation is ineffective, or
if the Beneficiary dies before the balance of the Account is paid, the balance
shall be paid to the Participant's surviving spouse, or if there is no surviving
spouse, to the Participant's estate.
6.4 Incapacity of Participant or Beneficiary. Every person receiving or
claiming benefits under the Plan shall be conclusively presumed to be mentally
competent and of age until the date on which the Administrator receives a
written notice, in a form and manner acceptable to the Administrator, that such
person is incompetent or a minor, for whom a guardian or other person legally
vested with the care of his person or estate has been appointed; provided,
however, that if the Administrator finds that any person to whom a benefit is
payable under the Plan is unable to care for his or her affairs because of
incompetency, or because he or she is a minor, any payment due (unless a prior
claim therefor shall have been made by a duly appointed legal representative)
may be paid to the spouse, a child, a parent, a brother or sister, or to any
person or institution considered by the Administrator to have incurred expense
for such person otherwise entitled to payment. To the extent permitted by law,
any such payment so made shall be a complete discharge of liability therefor
under the Plan.
If a guardian of the estate of any person receiving or claiming
benefits under the Plan is appointed by a court of competent jurisdiction,
benefit payments may be made to such guardian provided that proper proof of
appointment and continuing qualification is furnished in a form and manner
acceptable to the Administrator. In the event a person claiming or receiving
benefits under the Plan is a minor, payment may be made to the custodian of an
account for such person under the Uniform Gifts to Minors Act. To the extent
permitted by law, any such payment so made shall be a complete discharge of any
liability therefor under the Plan.
6.5 Nonassignment. The right of a Participant or Beneficiary to the
payment of any amounts under the Plan may not be assigned, transferred, pledged
or encumbered nor shall such right or other interests be subject to attachment,
garnishment, execution, or other legal process.
6.6 No Right to Continued Service. Nothing in the Plan shall be
construed to confer upon any Participant any right to continue as a Director of
the Company.
6.7 Tax Withholding. Any appropriate taxes shall be withheld from
payments made to Participants pursuant to the Plan. To the extent tax
withholding is payable in connection with the Participant's deferral of income
rather than in connection with the payment of deferred amounts, such withholding
may be made from amounts currently payable to the Participant, or, as determined
by the Administrator, the amount of the deferral elected by the Participant may
be reduced in order to satisfy required tax withholding for any applicable
taxes.
6.8 Claims Procedure and Arbitration. The Company shall establish a
reasonable claims procedure consistent with the requirements of the Employee
Retirement Income Security Act of 1974, as amended. Following a Change in
Control of the Company (as determined under section 5.6) the claims procedure
shall include the following arbitration procedure.
Since time will be of the essence in determining whether any payments
are due to the Participant under this Plan following a Change in Control, a
Participant may submit any claim for payment to arbitration as follows: On or
after the second day following the Termination or other event triggering a right
to payment, the claim may be filed with an arbitrator of the Participant's
choice by submitting the claim in writing and providing a copy to the Company.
The arbitrator must be:
(a) a member of the National Academy of Arbitrators or one who
currently appears on arbitration panels issued by the
Federal Mediation and Conciliation Service or the American
Arbitration Association; or
(b) a retired judge of the State in which the claimant is a
resident who served at the appellate level or higher. The
arbitration hearing shall be held within 72 hours (or as
soon thereafter as possible) after filing of the claim
unless the Participant and the Company agree to a later
date. No continuance of said hearing shall be allowed
without the mutual consent of the Participant and the
Company. Absence from or nonparticipation at the hearing by
either party shall not prevent the issuance of an award.
Hearing procedures which will expedite the hearing may be
ordered at the arbitrator's discretion, and the arbitrator
may close the hearing in his or her sole discretion upon
deciding he or she has heard sufficient evidence to satisfy
issuance of an award. In reaching a decision, the arbitrator
shall have no authority to ignore, change, modify, add to or
delete from any provision of this Plan, but instead is
limited to interpreting this Plan. The arbitrator's award
shall be rendered as expeditiously as possible, and unless
the arbitrator rules within seven days after the close of
the hearing, he will be deemed to have ruled in favor of the
Participant. If the arbitrator finds that any payment is due
to the Participant from the Company, the arbitrator shall
order the Company to pay that amount to the Participant
within 48 hours after the decision is rendered. The award
of the arbitrator shall be final and binding upon the
Participant and the Company. Judgment upon the award
rendered by the arbitrator may be entered in any court
in any State of the United States. In the case of any
arbitration regarding this Agreement, the Participant shall
be awarded the Participant's costs, including attorney's
fees. Such fee award may not be offset against the deferred
compensation due hereunder. The Company shall pay the
arbitrator's fee and all necessary expenses of the hearing,
including stenographic reporter if employed.
6.9 Termination and Amendment. The Committee may from time to time
amend, suspend or terminate the Plan, in whole or in part, and if the Plan is
suspended or terminated, the Committee may reinstate any or all of its
provisions. Except as otherwise required by law, the Committee may delegate to
the Administrator all or any of its foregoing powers to amend, suspend, or
terminate the Plan. Any such amendment, suspension, or termination may affect
future deferrals without the consent of any Participant or Beneficiary. However,
with respect to deferrals that have already occurred, no amendment, suspension
or termination may impair the right of a Participant or a designated Beneficiary
to receive payment of the related deferred compensation in accordance with the
terms of the Plan prior to the effective date of such amendment, suspension or
termination, unless the affected Participant or Beneficiary gives his express
written consent to the change.
6.10 Applicable Law. The Plan shall be construed and governed in
accordance with applicable federal law and, to the extent not preempted by such
federal law, the laws of the State of California.
<PAGE>
Exhibit A
For purposes of determining the number of Options to be granted Under
the Stock Option Investment Election, Options will be valued under
the Black-Scholes method, based on the following assumptions:
* Assumed Option Term = 5 years
* Volatility = Actual volatility over the 3 year period immediately preceding
the grant
* Risk Free Interest Rate = 5 year Treasury Note Rate
* Dividend Yield = Current Annual Dividend Yield On Option Grant Date
(Quarterly Dividend x 4) / Market Price on Option Grant Date = Dividend Yield
Sample Calculation: ($.028 x 4)/ $55 = .2%
* Fair Market Value = Closing Price Of Schwab Common Stock on Date of Grant
(Same as Date of Retainer and Meeting Fee Payment)
* Exercise Price = Same as above
Sample Stock Option Calculation
* Fees Deferred / Black Scholes Valuation = Number of Stock Option grants from
Deferral Election
Sample Calculation: $14,250 / $23.82 = 598.2368 Stock Options, rounded up to
nearest full option, = grant of 599 Stock Options.
Exhibit 10.210
THE SCHWABPLAN
RETIREMENT SAVINGS AND INVESTMENT PLAN
(Restated to include Amendments through December 22, 1999)
<PAGE>
THE SCHWABPLAN
RETIREMENT SAVINGS AND INVESTMENT PLAN
Table of Contents
Section Page Number
1 Introduction and Purpose........................................ 1
2 Definitions..................................................... 2
3 Participation................................................... 14
3.1 Commencement of Participation.
3.2 Cessation of Participation
3.3 Readmission After Cessation of Participation
3.4 Waiver of Participation
4 Employer Contributions.......................................... 16
4.1 Elective Contributions
4.2 Employer Contributions
4.3 Allocation of Matching Contributions, Profit Sharing
Contributions and ESOP Contributions
4.4 Timing of Employer Contributions.
4.5 Forfeitures
4.6 Contribution Percentage Test.
4.7 Distribution of Excess Aggregate Contributions
4.8 Aggregate Limit for Contribution Percentage and Actual
Deferral Percentage.
4.9 Profit Sharing Contributions.
5 Salary Reduction Agreements and Rollover Contributions.......... 24
5.1 Salary Reduction Agreements.
5.2 Change or Suspension of Salary Reduction Agreements
5.3 Actual Deferral Percentage Test.
5.4 Amendment or Revocation of Salary Reduction Agreement
by Committee.
5.5 Distribution of Excess Contributions.
5.6 Rollover Contributions.
5.7 Trustee-to-Trustee Transfer of Assets
6 Allocation of Contributions.................................... 30
6.1 Establishment of Cash Contribution Account.
6.2 Establishment of Subaccounts
7 Special ESOP Provisions......................................... 31
7.1 Investment of ESOP Accounts
7.2 Allocation to ESOP Accounts.
7.3 Suspense Subfund for ESOP Accounts
7.4 Disposition of Shares Released from Suspense Subfund.
7.5 Limitations on Allocations to ESOP Accounts
7.6 Acquisition of Shares.
7.7 Effect of Change in Plan Sponsor's Capitalization.
7.8 Trustee and Committee Discretion to Engage in Transactions
in Shares.
7.9 Valuation of ESOP Accounts.
7.10 Role of Purchasing Agent
8 Investment of Contributions, Valuations and Participants' Cash
Contribution Accounts........................................... 39
8.1 Delivery of Contributions to Trust Fund
8.2 Participants' Right to Select Investments
8.3 Participant Investment Election
8.4 Change in Investment Election for Future Contributions
8.5 Change in Investment Election for Prior Contributions
8.6 Valuation of Cash Contribution Accounts.
9 Retirement Dates................................................ 41
9.1 Normal Retirement Date
9.2 Deferred Retirement Date.
10 Eligibility for Payment of Accounts and Vested Interests....... 42
10.1 Participants' Right to Account Upon Termination Due to
Retirement, Death or Disability.
10.2 Participants' Right to Account Upon Other Termination
of Service
10.3 Vesting Schedule for Determining Vested Interests.
10.4 Breaks in Service.
10.5 Participant's Right to Restoration of Account Upon
Return to Service.
10.6 Participant's Right to Account Upon Death After
Termination of Service
10.7 Amendment of Vesting Schedule.
10.8 Distribution Following Attainment of Age 59-1/2 to
Former Participants of The Hampton Pension Services,
Inc. 401(k) Retirement Savings Plan
11 Method of Payment of Accounts and Withdrawals................... 46
11.1 Methods of Payment.
11.2 Commencement of Payment
11.3 Special Rules For Distribution of Shares.
11.4 Payments to Surviving Spouse or Beneficiary
11.5 Latest Date for Commencement of Benefits.
11.6 Redirection of Investment of ESOP Account.
11.7 Hardship Withdrawals.
11.8 Direct Rollovers to Another Qualified Plan or IRA.
11.9 Certain Securities Law Restrictions
11.10 Participant Loans.
12 Maximum Amount of Allocation.................................... 58
12.1 Section 415 Limitations
12.2 Refund or Forfeiture of Amounts in Excess of Section
415 Limits.
13 Voting Rights................................................... 61
13.1 Voting and Tender or Exchange of Shares in General.
13.2 Voting of Allocated Shares.
13.3 Mechanics of Voting Allocated Shares
13.4 Voting of Unallocated Shares
13.5 Tender or Exchange of Allocated Shares
13.6 Tender or Exchange of Unallocated Shares.
13.7 Voting of Deceased Participant's Shares
14 Designation of Beneficiaries.................................... 65
14.1 Designation of Beneficiary
14.2 Failure to Designate Beneficiary
15 Administration of the Plan...................................... 66
15.1 The Committee.
15.2 The Trustee.
15.3 Committee's Responsibility for Entering into Exempt Loans
and Valuation of Shares
15.4 Committee's Power to Engage Outside Experts.
15.5 Composition of Committee.
15.6 Actions of Committee.
15.7 Disbursement of Plan Funds.
15.8 Application for Benefits.
15.9 Denied Claims for Benefits
15.10 Indemnification.
15.11 Agent for Service of Process.
16 Expenses........................................................ 71
16.1 Payment of Plan Expenses
16.2 Expenses Attributable to Investment of Plan Assets and Taxes.
17 Employer Participation.......................................... 72
17.1 Adoption of Plan by Affiliated Employer
17.2 Termination of Participation by Participating Employer
17.3 Effect of Termination of Participation by Participating
Employer.
17.4 Limitations on Transfer of Plan Assets to Successor Plan
17.5 Shares Allocated to Suspense Fund Excluded from Transfer
of Plan Assets to Successor Plan.
18 Amendment or Termination of the Plan............................ 75
18.1 Amendment, Suspension or Termination of Plan
18.2 Power to Retroactively Amend, Suspend or Terminate
Plan Provisions
18.3 Notice of Amendment, Suspension or Termination
18.4 Effect of Termination of Plan.
18.5 Partial Termination of Plan
18.6 Trust for Exclusive Benefit of Participant
19 Top-Heavy Plan Requirements..................................... 78
19.1 Top-Heavy Plan - In General
19.2 Effect of Top-Heavy Status
19.3 Top-Heavy Vesting Schedule.
19.4 Definitions.
19.5 Maintenance of Defined Benefit Plan in Addition to Plan.
20 General Limitations and Provisions.............................. 84
20.1 Exclusive Benefit of Participants and Beneficiaries
20.2 No Rights to Continued Employment
20.3 Trust Sole Source of Benefits.
20.3 Trust Sole Source of Benefits.
20.4 Risk of Decrease in Assets
20.5 Incapacity of Participant or Beneficiary.
20.6 Antialienation; Qualified Domestic Relations Orders
20.7 Inability to Locate Participant or Beneficiary.
20.8 Failure to Receive IRS Approval.
20.9 Contributions Conditioned on Deductibility.
20.10 Mistake of Fact
20.11 Communications with Committee.
20.12 Communications with Participants and Beneficiaries.
20.13 Prior Service Credit
20.14 Gender and Number
20.15 Headings
20.16 Governing Law.
20.17 Severability of Provisions
20.18 Heirs, Assigns and Personal Representatives
20.19 Reliance on Data and Consents.
20.20 Qualified Military Service.
21 Application to Puerto Rico Employees............................ 93
21.1 Modifications Applicable to Puerto Rico.
<PAGE>
THE SCHWABPLAN
RETIREMENT SAVINGS AND INVESTMENT PLAN
as Amended through June 24, 1999
SECTION 1. INTRODUCTION AND PURPOSE
1.1 The Plan Sponsor has established and maintains the Plan to enable
each Participant to benefit, in accordance with the terms of the Plan, from
contributions made by the Employer and from any increases in the value of the
Plan assets through investment of such assets. The Plan is comprised of three
parts: (i) a Section 401(k) plan, (ii) a profit sharing plan and (iii) an
employee stock ownership plan. The purpose of the employee stock ownership plan
portion of the Plan is to align Employees' interests with the interests of
shareholders. It is anticipated that Employer contributions to the employee
stock ownership plan will be invested primarily or entirely in Shares of The
Charles Schwab Corporation, that the employee stock ownership plan may acquire
such Shares of The Charles Schwab Corporation from time to time with the
proceeds of one or more Exempt Loans, the repayment of which may be secured in
part by a pledge of the Shares of The Charles Schwab Corporation acquired with
those loan proceeds, and that Employer contributions to the employee stock
ownership plan may be used in full or in substantial part to the payment of
interest on, and retirement of principal of, such Exempt Loans.
This Plan is a restatement of the SchwabPlan Retirement
Savings and Investment Plan, which was initially effective as of October 1,
1983. The effective date of this restatement is December 13, 1996. The rights of
any person who terminated employment or who retired on or before the effective
date of this restated Plan or any provision hereof, including his or her
eligibility for benefits and the time and form in which benefits, if any, will
be paid, shall be determined solely under the terms of the Plan provisions as in
effect on the date of his or her termination of employment or retirement, unless
such person is thereafter reemployed and again becomes a Participant. The rights
of any other person shall be determined solely under the terms of this restated
Plan, except as may otherwise be required by law.
The Plan and Trust are intended to qualify as a plan and trust
which are qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code. The Plan is intended to qualify in part as a profit sharing plan (as
defined in Section 401(a)(27) of the Code) and in part as a stock bonus plan and
an employee stock ownership plan (as defined by Section 4975(e)(7) of the Code
and Section 407(d)(6) of the Act) designed to invest primarily in shares of
stock of the Employer which meet the requirements for "qualifying employer
securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of the
Act. All provisions of the Plan and Trust shall be construed accordingly.
All Trust Fund assets acquired under the Plan as a result of
debt incurred to purchase Shares, Employer contributions, income and other
additions to the Trust Fund shall be administered, distributed, forfeited and
otherwise governed by the provisions of the Plan. It is intended that the Trust
associated with the Plan be exempt from federal income taxation pursuant to the
provisions of Section 501(a) of the Code. Subject to the provisions of Section
16 of the Plan, the assets of the Plan shall be applied exclusively for the
purposes of providing benefits to Participants and Beneficiaries under the Plan
and for defraying expenses incurred in the administration of the Plan and its
corresponding Trust.
SECTION 2. DEFINITIONS
When used herein the following terms shall have the following meanings:
2.1 "Account" means the account or accounts established and maintained
on behalf of a Participant pursuant to (i) Section 6.1 with respect to the
Participant's Cash Contribution Account and (ii) Section 7.1 with respect to the
Participant's ESOP Account.
2.2 "Act" means the Employee Retirement Income Security Act of 1974,
as now in effect or as hereafter amended.
2.3 "Actual Deferral Percentage" means the average of the ratios
(calculated separately for each Employee) for each Plan Year of (a) the amount
of Elective Contributions and Matching Contributions or Qualified Nonelective
Contributions (if the Committee determines to take such Matching Contributions
or such Qualified Nonelective Contributions into account when calculating Actual
Deferral Percentage) on behalf of each Employee for the relevant Plan Year to
(b) the Employee's compensation (as defined in Treasury Regulation
1.415-2(d)(10) or in such other manner as is prescribed under Section 414(s) of
the Code) while a Participant for the relevant Plan Year.
2.4 "Affiliated Employer" means any corporation which is included in a
controlled group of corporations (within the meaning of Section 414(b) of the
Code) which includes the Plan Sponsor, any trade or business (whether or not
incorporated) which is under common control with the Plan Sponsor (within the
meaning of Section 414(c) of the Code), any organization included in the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
the Plan Sponsor and any other entity required to be aggregated with the Plan
Sponsor pursuant to the Regulations under Section 414(o) of the Code; except
that for purposes of applying the provisions of Sections 12 and 19 with respect
to the limitations on contributions, Section 415(h) of the Code shall apply.
2.5 "Beneficiary" means the beneficiary or beneficiaries designated
by a Participant pursuant to Section 14 to receive the amount, if any, payable
under the Plan upon the death of such Participant.
2.6 "Board of Directors" means the board of directors of Charles
Schwab & Co., Inc.
2.7 "Break in Service" means a Plan Year (or for purposes of
determining membership in the Plan pursuant to Section 3, the Computation
Period) during which an individual has not completed more than 500 Hours of
Service, as determined by the Committee in accordance with the Regulations. A
Break in Service shall be deemed to have commenced on the first day of the Plan
Year in which it occurs. Solely for purposes of determining whether a Break in
Service has occurred, an individual shall be credited with the Hours of Service
which such individual would have completed but for a maternity or paternity
absence, as determined by the Committee in accordance with this Section 2.7 and
the Code and Regulations; provided, however, that the total Hours of Service so
credited shall not exceed 501 Hours of Service and that the individual shall
timely provide the Committee with such information as it shall require. Hours of
Service credited for a maternity or paternity absence shall be credited at eight
Hours of Service per day and shall be credited entirely (i) in the Plan Year or
Computation Period in which the absence began if such Hours of Service are
necessary to prevent a Break in Service in such Plan Year, or (ii) in the
following Plan Year or Computation Period. For purposes of this Section 2.7,
maternity or paternity absence shall mean an absence from work by reason of the
individual's pregnancy, the birth of the individual's child or the placement of
a child with the individual in connection with adoption of the child by such
individual, or for purposes of caring for a child for the period immediately
following such birth or adoption.
2.8 "Cash Contribution Account" means the account or accounts
established and maintained on behalf of a Participant pursuant to Section 6.1
with respect to the Participant's Elective Contributions, Matching
Contributions, Profit Sharing Contributions, Qualified Nonelective Contributions
or Rollover Contributions.
2.9 "Code" means the Internal Revenue Code of 1986, as now in effect
or as hereafter amended. All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.
2.10 "Committee" means the Administrative Committee of the Employer
provided for in Section 15. For purposes of the Act, the Employer shall be the
"named fiduciary" (with respect to the matters for which it is hereby
responsible under the Plan) of the Plan, and the Employer shall be the "plan
administrator" of the Plan within the meaning of Section 3(16)(A) of the Act.
2.11 "Compensation" means a Participant's W-2 compensation related to
services rendered to the Employer, excluding (i) living allowances, (ii) travel
or commuting allowances, (iii) reimbursements for financial planning, (iv)
amounts that are paid as a result of participation in the Employer's Long-Term
Incentive Plan, (v) employee referral awards, (vi) special incentive awards
(other than regular bonus programs), (vii) reimbursements for relocation
expenses, (viii) commissions (other than "dual commissions", commissions based
on trading results that are paid to traders who are also salaried and
commissions where the Participant's only form of remuneration is commissions),
(ix) income items attributable to the taxable portion of employee benefits and
any cash payments made as a result of an Employee's election not to receive
insured benefits pursuant to the Company's Pre-Tax Contribution Plan, (x)
amounts paid as short term disability benefits, (xi) any income items reflecting
grants in aid, and (xii) compensation in excess of $150,000 (adjusted for cost
of living to the extent permitted by Section 401(a)(17) of the Code and
Regulations). For purposes of determining the whole percentage of Compensation
for which a Participant may make a Salary Reduction Agreement, and not for any
other purposes, subparagraph (ix) hereof shall be disregarded. Compensation
shall be determined prior to reduction for (i) any contributions pursuant to
such Participant's election under Section 5.1, (ii) any contributions made by an
Employer on behalf of the Participant in the Plan Year pursuant to a Participant
salary reduction election that are not includable in the Participant's income
under Section 125 of the Code, and (iii) any contributions made by an Employer
on behalf of the Participant in the Plan Year pursuant to a Participant salary
reduction election that are not includable in the Participant's income under
Section 132(a)(5) of the Code.
2.12 "Computation Period" means a 12 consecutive month period beginning
on the day an individual first performs an Hour of Service or first performs an
Hour of Service following a Break in Service. Thereafter, the Computation Period
shall be the Plan Year, commencing with the Plan Year that includes the day
immediately following the last day of the Computation Period determined pursuant
to the first sentence hereof.
2.13 "Contribution Percentage" means the average of the ratios
(calculated separately for each Participant for each Plan Year) of (a)(i)
Matching Contributions, if any, made by the Employer on behalf of a Participant
and (ii) Elective Contributions, (if the Committee elects to take into account
Elective Contributions when calculating the Contribution Percentage) to (b) the
Employee's compensation (as defined in Section 1.415-2(d)(10) of the Regulations
or in such other manner as is prescribed under Section 414(s) of the Code) while
a Participant for the relevant Plan Year.
2.14 "Deferred Retirement Date" shall have the meaning set forth in
Section 9.2.
2.15 "Disability" means the inability to engage in any substantial
gainful activity considering the Participant's age, education and work
experience by reason of any medically determined physical or mental impairment
that has continued without interruption for a period of at least six months and
that can be expected to be of long, continued and indefinite duration. The
determination of the Committee as to whether a Participant has a Disability
shall be final, binding and conclusive.
2.16 "Effective Date" means October 1, 1983.
2.17 "Elective Contributions" means contributions made to the Trust
Fund pursuant to a Participant's Salary Reduction Agreement entered into
pursuant to Section 5.1, and which are considered tax deferred under Section
401(k) of the Code.
2.18 "Elective Contribution Subaccount" means the account established
and maintained on behalf of a Participant pursuant to Section 6.2(a) with
respect to his or her Elective Contributions and Qualified Nonelective
Contributions.
2.19 "Employee" means any "regular employee" of the Employer who is
paid through United States payroll and for whom the Employer is required to
withhold United States Federal employment taxes excluding (i) any person covered
by any other pension, profit sharing or retirement plan to which any Employer or
Affiliated Employer is required to contribute either directly or indirectly,
(ii) any nonresident alien individual who received no earned income (within the
meaning of Section 911(d)(2)) from the Employer which constitutes income from
sources within the United States, (iii) any employee who is included in a unit
of employees covered by a negotiated collective bargaining agreement which does
not provide for his or her membership in the Plan, (iv) any individual who
provides services to the Employer pursuant to an independent contractor
agreement, irrespective of whether such individual is subsequently retroactively
reclassified as a common law employee for periods during which the Employer
originally classified such individual as an independent contractor, and (v) any
individual who provides services to the Employer pursuant to an agreement
between the Employer and a temporary agency or other leasing organization. A
director of the Employer is not eligible for membership in the Plan unless such
director is also an Employee. A leased employee (within the meaning of Section
414(n) of the Code) is not eligible for membership in the Plan unless the
Employer designates such individual as eligible for membership in the Plan.
2.20 "Employer" means Charles Schwab & Co., Inc. and any Participating
Employer which adopts this Plan subject to the approval of the Board of
Directors.
2.21 "ESOP Account" means the account established and maintained on
behalf of a Participant pursuant to Section 7.1 with respect to his or her ESOP
Contributions.
2.22 "ESOP Contributions" means the Employer contributions, if any,
made to the Plan on behalf of a Participant pursuant to Section 4.2(c).
2.23 "ESOP Entry Date" means the first day of each calendar month.
2.24 "Exempt Loan" means any loan to the Plan or Trust not prohibited
by Section 4975(c) of the Code and Section 406 of the Act because the loan meets
the requirements set forth in Section 4975(d)(3) of the Code, Section 408(b)(3)
of the Act and the Regulations promulgated thereunder, the proceeds of which
loan are used within a reasonable time after receipt by the Trust Fund only for
any or all of the following purposes: (a) to acquire Shares; (b) to repay the
same Exempt Loan; or (c) to repay any previous Exempt Loan.
2.25 "Highly Compensated Participant" means any Participant who, during
the relevant period, is treated as a highly compensated employee under Section
414(q) of the Code. For purposes of determining which Employee is a Highly
Compensated Participant, the look-back determination shall be made on the basis
of the calendar year. The Plan shall comply with the procedures of Treasury
Regulation 1.401(k)-1(f) to the extent applicable. For purposes of determining
which Employee is a Highly Compensated Participant:
(a) Highly Compensated Participant means a Participant who
performs Services during the determination year and is described in one or more
of the following groups:
(1) An Employee who is a five percent (5%) owner, as defined
in Section 416(i)(1) of the Code, at any time during the determination year or
the look-back year.
(2) An Employee who: (a) had compensation from the Employer
in excess of $80,000 (indexed as referenced in Section 414(q)(1) of the Code)
during the look-back year and (b) if the Employer elects the application of this
Subsection 2.25(A)(2) for such look-back year, such Employee was in the
"top-paid group" for the look-back year.
(b) For purposes of this Section:
(1) The determination year is the Plan Year for which the
determination of who is a Highly Compensated Participant is being made.
(2) The look-back year is the calendar year ending with
or within the determination year.
(3) The "top-paid group" consists of the top twenty percent
(20%) of Employees ranked on the basis of compensation received during the
look-back year. For purposes of determining the number of Employees in the
top-paid group, Employees described in Section 414(q)(5) of the Code and the
Regulations promulgated thereunder are excluded.
(4) For purposes of this Section 2.25, the term
"compensation" means compensation as defined in Section 414(q)(4) of the Code.
(5) Employers aggregated under Section 414(b), (c), (m),
or (o) of the Code are treated as a single employer.
(6) Highly Compensated Participants include a former
Employee who had a separation year prior to the determination year and who was a
Highly Compensated Participant for either (A) the determination year in which
the Employee separated from Service or (B) any determination year ending on or
after the Employee's 55th birthday. With respect to an Employee who separated
from Service before January 1, 1987, an Employee will be included as a Highly
Compensated Participant only if the Employee was a five percent (5%) owner or
received Compensation in excess of $50,000 during (1) the determination year in
which the Employee separated from Service (or the year preceding such separation
year) or (2) any year ending on or after such Employee's 55th birthday (or the
last year ending before such Employee's 55th birthday).
2.26 "Hours of Service" means hours during the applicable Computation
Period in which an individual performs Service or is treated as performing
Service and, except in the case of military service or as otherwise determined
by the Committee, for which the Participant is directly or indirectly entitled
to payment. Hours of Service shall be credited for the applicable period in
which such Hours of Service accrue in accordance with Labor Department
Regulation 29 CFR ss. 2530.200b-2(c), which regulation is incorporated herein by
reference; provided that Hours of Service for reasons other than the performance
of duties shall be credited in accordance with Labor Department Regulation 29
CFR ss. 2530.200b-2(b), which regulation is incorporated herein by reference.
The term "Service" includes performance of duties (or periods
which are treated as the performance of duties) for the Employer or for any
Affiliated Employer (under rules determined by the Committee, uniformly
applicable to all individuals similarly situated and in accordance with the
Regulations) for which an individual is entitled to receive credit for
"Service", including (i) vacation, (ii) holiday, (iii) absence authorized by the
Employer for sickness or incapacity (including disability or leave of absence),
(iv) layoff, (v) jury duty, (vi) if and to the extent required by the Military
Selective Service Act, as amended or any other federal law, service in the Armed
Forces of the United States and (vii) an approved leave of absence granted by
the Employer to an individual on or after August 5, 1993 pursuant to the Family
Medical Leave Act, but only if such individual returns to work for the Employer
at the end of such approved leave. Service also includes periods of time for
which back pay, irrespective of mitigation of damages, is awarded or agreed to
by the Employer or any Affiliated Employer; provided that such award or
agreement is not already credited as Service under either of the preceding two
sentences. Service shall also include (i) Service with any entity formed under
the laws of a foreign jurisdiction if such entity would have constituted an
Affiliated Employer had such entity been formed under the laws of the United
States, and (ii) any period of a Participant's prior employment with any other
organization upon such terms and conditions as the Committee may approve and
subject to any required IRS approval. Notwithstanding the foregoing, (i) Hours
of Service credited with respect to an individual's service with BankAmerica
Corporation or a related corporation between January 11, 1983 and March 31, 1987
shall be considered Service only if such individual was employed by the Employer
prior to November 24, 1993, (ii) Hours of Service credited with respect to an
individual's service with BankAmerica Corporation or a related corporation prior
to January 11, 1983 shall be considered Service, but only if such individual was
employed by the Employer prior to April 1, 1987, (iii) Hours of Service credited
with respect to service with Mayer & Schweitzer, Inc. prior to July 1, 1991
shall be considered Service, and (iv) Service shall include service with The
Rose Company prior to April 1, 1989, service with Performance Technologies, Inc.
prior to August 31, 1994, service with TrustMark, Inc. prior to July 31, 1995,
and service with Hampton Pension Services, Inc. prior to November 6, 1995.
2.27 "IRS" means the United States Internal Revenue Service.
2.28 "Labor Department" means the United States Department of Labor.
2.29 "Matching Contribution" means any Employer contribution, if any,
made to the Plan on behalf of a Participant pursuant to Section 4.2(a).
2.30 "Matching Contribution Subaccount" means the account established
and maintained on behalf of a Participant pursuant to Section 6.2(b) with
respect to the Participant's Matching Contributions.
2.31 "Normal Retirement Date" shall have the meaning set forth in
Section 9.1.
2.32 "Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 below.
2.33 "Participating Employer" means Charles Schwab & Co., Inc. or any
other Affiliated Employer, the board of directors or equivalent governing body
of which shall adopt the Plan and Trust Agreement by appropriate action with the
written consent of the Board of Directors. By its adoption of this Plan, a
Participating Employer shall be deemed to appoint Charles Schwab & Co., Inc.,
the Committee and the Trustee its exclusive agent to exercise on its behalf all
of the power and authority conferred by this Plan upon the Employer. The
authority of Charles Schwab & Co., Inc., the Committee and the Trustee to act as
such agent shall continue until the Plan is terminated as to the Participating
Employer and the relevant Trust Fund assets have been distributed by the Trustee
as provided in Section 17 of this Plan.
2.34 "Plan" means this SchwabPlan Retirement Savings and Investment
Plan as the same is stated herein and as it may be amended from time to time.
2.35 "Plan Sponsor" means The Charles Schwab Corporation.
2.36 "Plan Year" means the calendar year.
2.37 "Profit Sharing Contribution" means the Employer contribution, if
any, made to the Plan on behalf of a Participant pursuant to Section 4.2(b)(ii).
2.38 "Profit Sharing Subaccount" means the account established and
maintained on behalf of a Participant pursuant to Section 6.2(c) with respect to
the Participant's Profit Sharing Contributions.
2.39 "Purchasing Agent" means the agent designated by the Trustee to
enter into certain transactions with respect to Shares hereunder.
2.40 "Qualified Nonelective Contribution" means the Employer
contribution, if any, made to the Plan on behalf of a Participant pursuant to
Section 4.2(b)(i).
2.41 "Regulations" means the applicable regulations issued under the
Code or the Act by the IRS, the Labor Department or any other governmental
authority and any temporary rules or releases promulgated by such authorities
pending the issuance of such regulations.
2.42 "Restated Effective Date" shall mean January 1, 1994.
2.43 "Retirement Date" means the Participant's Normal or Deferred
Retirement Date which has become effective pursuant to Section 9 below.
2.44 "Rollover Subaccount" means the account established and maintained
on behalf of a Participant pursuant to Section 6.2(d) with respect to the
Participant's Rollover Contributions.
2.45 "Rollover Contribution" means any contribution made by an Employee
pursuant to Section 5.6.
2.46 "Salary Reduction Agreement" means an agreement between a
Participant and the Employer entered into pursuant to Section 5.1.
2.47 "Shares" means (i) with respect to Plan assets acquired with the
proceeds of an Exempt Loan, the common stock issued by The Charles Schwab
Corporation or any successor corporation thereto meeting the requirements of
both Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act for
"qualifying employer securities," and (ii) with respect to Plan assets other
than those acquired with the proceeds of an Exempt Loan, stock issued by The
Charles Schwab Corporation or any successor corporation thereto, of any type,
kind or class meeting the requirements of Section 407(d)(5) of the Act for
"qualifying employer securities". All valuations of Shares, where such Shares
are not readily tradable on an established securities market and where such
valuations relate to activities carried on by the Plan, shall be made by one or
more independent appraisers retained by the Committee, who meet the
requirements, if any, of the Code and Regulations. To the extent and in the
manner required by the Code and Regulations, all independent appraisers, if any,
making appraisals pursuant to the foregoing sentence shall be registered with
the IRS.
2.48 "Surviving Spouse" means the survivor of a Participant to whom
such Participant was legally married on the date of the Participant's death.
2.49 "Suspense Subfund" means the subfund established under Section
7.3.
2.50 "Taxable Compensation" means the W-2 compensation paid to an
individual for Service during any period under consideration.
2.51 "Taxable Year" means the calendar year.
2.52 "Total Break in Service" means a period of five or more
consecutive Computation Periods in which a Participant incurs a Break in
Service, with respect to a Participant who did not have a nonforfeitable right
to any portion of his or her Profit Sharing Subaccount or ESOP Account prior to
the beginning of the first such Computation Period.
2.53 "Trustee" means the Trustee selected by the Employer to hold the
funds contributed by the Employer to provide benefits under the Plan or any
successor or substitute.
2.54 "Trust Agreement" means the SchwabPlan Retirement Savings and
Investment Plan Trust Agreement, as it may from time to time be amended, and
such additional and successor trust agreements as may be executed.
2.55 "Trust Fund" means the funds held by the Trustee from which
payments to the Trustee are made to provide benefits under the Plan.
2.56 "Valuation Date" means the last day of each Plan Year or such
interim periods as the Committee may designate from time to time.
2.57 "Vested Interest" means the portion of a Participant's Account
which has become nonforfeitable pursuant to Section 10.3 below.
2.58 "Year of Eligibility Service" means a Computation Period during
which an Employee completes at least 1,000 Hours of Service.
2.59 "Year of Service" means a Computation Period during which an
individual completed at least 1,000 Hours of Service or satisfied any
alternative requirement, as determined by the Committee from time to time in
accordance with the Regulations.
<PAGE>
SECTION 3. PARTICIPATION
3.1 Commencement of Participation.
(a) An Employee who is a Participant as of the date immediately
preceding the Restated Effective Date shall continue to be a Participant of the
Plan as of the Restated Effective Date.
(b) An Employee who is not a Participant on the Restated
Effective Date and who (A) is in Service on the Restated Effective Date or (B)
commences Service on or after the Restated Effective Date shall be eligible to
become a Participant of the Plan for purposes of:
(i) Elective Contributions, Matching Contributions and
Qualified Nonelective Contributions on the first day of the fourth month
following his or her commencement of Service (or, in the case of an Employee
whose service commences on the first day of a month, the first day of the third
month following his or her commencement of Service), provided that the Employee
completes at least one Hour of Service in each such month; and
(ii) Profit Sharing Contributions and ESOP Contributions on
the first ESOP Entry Date coincident with or next following the date on which he
or she completes a Year of Eligibility Service.
(c) An Employee who is eligible to become a Participant, but
declines to participate in the Plan, may become a Participant at any time, as
soon as administratively feasible following a request to participate.
(d) An Employee who satisfies the requirements of Section
3.1(b)ii) for participation but who terminates Service prior to becoming a
Participant in the Plan and subsequently becomes an Employee again prior to
incurring a Break in Service will become a Participant in the Plan for all
purposes as of the first day on which such individual again becomes an Employee.
3.2 Cessation of Participation. A Participant shall cease to be a
Participant upon the earliest to occur of (i) the Participant's retirement on
his or her Retirement Date, (ii) the Participant's death or Disability or (iii)
the Participant's termination of Service prior to his or her Retirement Date
followed by a Break in Service. A Participant who, without any Break in Service,
ceases to be an Employee for any reason, shall not cease to be a Participant,
provided that, notwithstanding any other provision of the Plan, and except as
provided in Section 4.3, no contribution shall be made for the benefit of such
Participant, no contributions under the Plan shall be allocated, added or
otherwise credited to the Account of such Participant, and no contributions,
forfeitures or Shares released from a Suspense Subfund shall be allocated, added
or otherwise credited to the Account of such Participant on or after the date on
which such Participant ceases to be an Employee and before the first day of the
Plan Year coincident with or preceding the date, if any, on which such
Participant again resumes Service as an Employee.
3.3 Readmission After Cessation of Participation. A Participant who has
incurred a Total Break in Service and subsequently returns to Service shall be
treated as a new Employee for all purposes of the Plan. In all other cases, a
former Participant who returns to Service following a Break in Service shall
again become a Participant as of the first date of such former Participant's
return to Service, except that if such former Participant is not then an
Employee, such former Participant shall again become a Participant as of the
first day on which such former Participant again becomes an Employee.
3.4 Waiver of Participation. An individual who has satisfied the
requirements for participation set forth in Section 3.1 may permanently waive
participation in the Plan, but only if such individual is on temporary transfer
of employment to a Participating Employer from an Affiliated Employer that is
not a Participating Employer.
<PAGE>
SECTION 4. EMPLOYER CONTRIBUTIONS
4.1 Elective Contributions. The Employer shall, subject to the
limitations of Sections 5 and 12, contribute to the Trust Fund for each Plan
Year on behalf of all Participants the total amount of Elective Contributions
designated to be contributed pursuant to Salary Reduction Agreements under
Section 5.1. Such contributions shall be paid in cash by the Employer to the
Trustee as soon as practicable, but in no event later than 90 days from the date
on which such amounts otherwise would have been payable to the Participant in
cash.
4.2 Employer Contributions.
(a) Subject to the limitations of Section 12, the Employer shall
contribute Matching Contributions to the Trust Fund on behalf of all
Participants for whom Elective Contributions have been made equal to a
percentage of such Elective Contributions made for each such Participant. The
percentage (and, if desired, a maximum dollar amount) of Matching Contributions
shall be determined from time to time by the Board of Directors and communicated
to the Participants.
(b) Subject to the limitations of Section 12, for any Plan Year,
the Board of Directors may designate (i) a percentage of the aggregate
Compensation of all Participants or a fixed dollar amount to be contributed to
the Plan as Qualified Nonelective Contributions on behalf of certain
Participants who are not Highly Compensated Participants and may designate (ii)
a percentage of the aggregate Compensation of all Participants or a fixed dollar
amount to be contributed to the Plan as Profit Sharing Contributions on behalf
of all Employees who are or would be Participants but for their election not to
make Elective Contributions. Provided, however, that effective as of January 1,
1995, no further Profit Sharing Contributions shall be made to the Plan.
(c) Subject to the limitations of Section 12, and the provisions
of any applicable loan or contribution agreement, the Employer shall contribute
to the Trust Fund for each Plan Year as ESOP Contributions such sum as the Board
of Directors may, in its sole discretion, determine, which sum may be zero. All
or any part of the contributions made under this Section 4.2(c) may be applied
to repay any outstanding Exempt Loan. The Committee may, subject to any pledge
or similar agreement, direct or determine the proportions of such contributions
which are applied to repay each such Exempt Loan and, with respect to any
particular Exempt Loan, the proportion of such contribution to be applied to
repay principal and interest on such Exempt Loan.
4.3 Allocation of Matching Contributions, Profit Sharing Contributions
and ESOP Contributions. Matching Contributions shall only be allocated to those
Participants employed on the last day of the Plan Year. Profit Sharing
Contributions and ESOP Contributions shall only be allocated to Participants who
are members of the Allocation Group for the Plan Year. For purposes of Sections
4 and 7, the term "Allocation Group" means the group consisting of (i) each
Participant who completed at least One Thousand (1,000) Hours of Service during
the Plan Year and is employed by the Employer as of the last day of the Plan
Year, and (ii) each Participant whose employment with the Employer terminated
during the Plan Year by reason of Disability, death or retirement on or after
the Participant's Retirement Date. Profit Sharing Contributions and ESOP
Contributions shall be allocated among the Accounts of Participants who are
members of the Allocation Group for the Plan Year in the same proportion that a
Participant's Compensation during the Plan Year bears to the total Compensation
during the Plan Year of all Participants who are members of the Allocation Group
for such Plan Year. For purposes of the preceding sentence, Compensation earned
by a Participant prior to the Participant's entry into the Plan pursuant to
Section 3.1(b)(ii) shall not be taken into account.
4.4 Timing of Employer Contributions.
(a) Any Profit Sharing Contributions, Qualified
Nonelective Contributions and ESOP Contributions shall be deemed made on account
of a Taxable Year if (i) the Board of Directors determines the amount of such
contribution by appropriate action and announces the amount in writing to its
Employees within 30 days after the end of such Taxable Year, (ii) the Employer
designates such amount in writing as payment on account of such Taxable Year or
(iii) the Employer claims such amount as a deduction on its federal tax return
for such Taxable Year.
(b) Profit Sharing Contributions, Matching Contributions, and,
subject to the provisions of any Exempt Loan, ESOP Contributions for any
particular Taxable Year may be paid to the Trustee in installments, but in any
event such contributions shall be paid no later than the due date for the
Employer's federal income tax return for such Taxable Year. The Employer may,
during any Taxable Year, make advance payments toward its contributions for such
Taxable Year. Any income, earnings or appreciation earned by any amount
contributed by the Employer prior to the end of the Plan Year shall be treated
as part of the Profit Sharing Contributions, Matching Contributions, or ESOP
Contributions, as the case may be, for such Plan Year. On or about the date of
such payment the Committee shall be advised of the amount of such payment upon
which its allocation pursuant to Section 4.3 is to be calculated.
4.5 Forfeitures. Forfeitures of Profit Sharing Contributions arising
during the Plan Year pursuant to Section 10 shall be used to reduce the amount
of Matching Contributions made for such Plan Year pursuant to Section 4.2(a).
Forfeitures of Shares attributable to ESOP Contributions (or ESOP Contributions)
arising during the Plan Year pursuant to Section 10 shall be reallocated as ESOP
Contributions on the last day of the Plan Year in which such forfeiture occurs
to all Participants entitled to receive Shares attributable to ESOP
Contributions (or ESOP Contributions), in the same proportion as contributions
are allocated pursuant to Sections 4.3 and 7.2. Provided, in either case, that
forfeitures shall first be used to fund adjustments to Participants' Accounts
required to correct operational errors, to the extent directed by the Committee,
or to fund any amounts to be recredited to a Participant's Account pursuant to
Section 10.5.
4.6 Contribution Percentage Test.
(a) Participant's Contribution Percentages must satisfy at least
one of the following tests:
(1) The Contribution Percentage for the Highly Compensated
Participants shall not exceed the Contribution Percentage of all other
Participants for the preceding Plan Year multiplied by 1.25; or
(2) (A) The excess of the Contribution Percentage for the
Highly Compensated Participants over the Contribution Percentage of all other
Participants for the preceding Plan Year shall not be more than two percentage
points and (B) the Contribution Percentage for Highly Compensated Participants
shall not be more than the Contribution Percentage for all other Participants
for the preceding Plan Year multiplied by 2.
(b) The Employer may elect to apply the foregoing tests by using
current Plan Year data rather than utilize data from the preceding Plan Year. If
such an election is made, it may not be changed except as provided by Secretary
of the Treasury. Notwithstanding the foregoing, for the 1997 Plan Year, the
Employer may rely on the transitional relief set forth in Internal Revenue
Service Notice 97-2 to use current Plan Year data to apply the foregoing tests.
(c) All Matching Contributions and Elective Contributions that
are made under two or more plans that are aggregated for purposes of Sections
401(a)(4) and 410(b) of the Code are to be treated as made under a single plan;
and if two or more plans are permissively aggregated such plans shall satisfy
Sections 401(a)(4) and 410(b) as though they were a single plan in accordance
with Section 410(m) of the Code and Section 1.401(m)-1 of the Regulations.
(d) For purposes of this Section 4.6, Matching Contributions are
taken into account for a Plan Year only if (i) made on account of the
Participant's Elective Contributions for the Plan Year, (ii) allocated to the
Participant's Account during the Plan Year and (iii) paid to the Trust Fund
prior to the end of the twelfth month following the close of the Plan Year.
(e) In applying the tests set forth in this Section 4.6, the
following rules shall apply:
(1) In the case of an Employee who receives no Matching
Contributions, the Matching Contributions that are to be included in determining
the Participant's Contribution Percentage are zero;
(2) The availability of Matching Contributions shall not
discriminate in favor of Highly Compensated Participants.
(3) The distribution of excess aggregate contributions will
include the income allocable thereto and shall be made on the basis of the
amount of Matching Contributions (and Elective Contributions, if the Regulations
permit and the Committee elects to take into account Elective Contributions when
calculating the Contribution Percentage) made on behalf of each such Highly
Compensated Participant. The income allocable to the excess aggregate
contributions includes income for the Plan Year for which the excess aggregate
contributions were made in accordance with Section 1.401(m)-1(e)(3)(ii) of the
Regulations.
(4) A Participant shall include any Employee who is directly
or indirectly eligible to receive an allocation of Matching Contributions and
includes (i) an Employee who would be a Participant but for the failure to make
required contributions and (ii) a Participant whose right to receive Matching
Contributions has been suspended because of an election (other than certain
one-time elections) not to participate.
(f) For Plan Years commencing after December 31, 1998 for which
the Employer uses Section 410(b)(4)(B) of the Code to test minimum coverage
compliance, the Employer may exclude from consideration all Participants (other
than Highly Compensated Participants) who have not met the minimum age and
service requirements of Section 410(a)(1)(A) of the Code in determining whether
the tests set forth in Subsection 4.6(a) are met.
4.7 Distribution of Excess Aggregate Contributions.
(a) The Committee shall determine as of the end of the Plan Year,
and at such other time or times in its discretion, whether one of the
Contribution Percentages of Section 4.6 is satisfied for such Plan Year. If
neither of the tests set forth in Section 4.6 is satisfied, the Committee shall
distribute the excess aggregate contributions in the manner described in this
Section 4.7. For purposes of this Section 4.7, "excess aggregate contributions"
means, with respect to any Plan Year and with respect to any Participant, the
excess of the aggregate amount of (i) Matching Contributions (and any earnings
and losses allocable thereto prior to distribution) and (ii) the Elective
Contributions (if the Regulations permit and the Committee elects to take into
account Elective Contributions when calculating the Participant's Contribution
Percentage) of Highly Compensated Participants for such Plan Year, over the
maximum amount of such contributions that could be made on behalf of
Participants without violating the requirements of Section 4.6. The amount of
each Highly Compensated Participant's excess aggregate contributions shall be
determined by reducing the Matching Contributions of all Highly Compensated
Participants whose Contribution Percentage as adjusted by this Section 4.7 are
at the highest percentage rate for the Plan Year on a pro rata basis by one
hundredth of one percent (0.01%). The Committee shall continue to utilize this
procedure until one of the tests of Section 4.6 is satisfied.
(b) If the Committee is required to distribute excess aggregate
contributions for any Highly Compensated Participant for a Plan Year in order to
satisfy the requirements of Section 4.6, then the Committee shall distribute
such excess aggregate contributions with respect to such Highly Compensated
Participants to the extent practicable before April 15th of the Plan Year next
following the Plan Year for which such excess aggregate contributions were made,
but in no event later than the end of the Plan Year following such Plan Year.
For each of such Participants, the amounts so distributed shall be made in the
following order of priority:
(i) by distributing Matching Contributions and earnings
thereon, to the extent necessary; and
(ii) by distributing Elective Contributions (to the extent
such amounts are included in the Contribution Percentage), and earnings thereon.
All such distributions shall be made to Highly Compensated
Participants on the basis of the respective portions of such amounts
attributable to each such Highly Compensated Participant. No spousal consent
shall be required of any married Participant who receives a refund of excess
aggregate contributions.
4.8 Aggregate Limit for Contribution Percentage and Actual Deferral
Percentage.
(a) The sum of the Contribution Percentage and the Actual
Deferral Percentage for Highly Compensated Participants for the Plan Year shall
not exceed the "aggregate limit" defined in this Section 4.8.
(b) The term "aggregate limit" means the greater of (1) or (2)
below:
(1) The sum of (a) the greater of the Actual Deferral
Percentage for all Participants other than the Highly Compensated Participants
or the Contribution Percentage for all Participants other than the Highly
Compensated Participants, for the Plan Year multiplied by 1.25 and (b) the
lesser of such Actual Deferral Percentage or Contribution Percentage plus 2, but
not greater than 2 multiplied by the lesser of such Actual Deferral Percentage
or Contribution Percentage.
(2) The sum of (a) the lesser of the Actual Deferral
Percentage for all Participants other than the Highly Compensated Participants
or the Contribution Percentage for all Participants other than the Highly
Compensated Participants, for the Plan Year multiplied by 1.25 and (b) the
greater of such Actual Deferral Percentage or Contribution percentage plus 2,
but not greater than 2 multiplied by the greater of such Actual Deferral
Percentage or Contribution Percentage.
(c) If the aggregate limit is exceeded, the Committee shall
determine whether to: (i) make Qualified Nonelective Contributions to permit the
satisfaction of the test set forth in subsection (a) hereof; (ii) reduce the
Contribution Percentage of the Highly Compensated Participants as set forth in
Section 4.7; or (iii) reduce the Actual Deferral Percentage of the Highly
Compensated Participants as set forth in Section 5.5.
4.9 Profit Sharing Contributions. Notwithstanding anything to the
contrary contained in the Plan, no Profit Sharing contributions shall be made to
the Plan for Plan Years beginning after December 31, 1994. Effective as of
October 1, 1998, all Profit Sharing balances of Participants shall be fully
vested and shall be merged with Participants' Matching Contribution Accounts.
Thereafter, no forfeitures of Profit Sharing Contributions shall occur, and all
references in the Plan to Profit Sharing Subaccounts shall be deemed to refer to
Matching Contribution Subaccounts.
<PAGE>
SECTION 5. SALARY REDUCTION AGREEMENTS
AND ROLLOVER CONTRIBUTIONS
5.1 Salary Reduction Agreements.
(a) A Participant may elect to make Elective Contributions in any
Plan Year by entering into a Salary Reduction Agreement with the Employer. Each
Salary Reduction Agreement shall provide that a portion of the Participant's
Compensation shall be paid through payroll deduction to the Trust Fund as an
Elective Contribution pursuant to Section 4.1 rather than paid currently to the
Participant. The Salary Reduction Agreement shall provide for Elective
Contributions equal to any whole percentage between one percent (1%) and fifteen
percent (15%) of a Participant's Compensation in any payroll period, not to
exceed the limitation set forth in Section 402(g) of the Code (adjusted
automatically for increases in accordance with the Regulations). Notwithstanding
the foregoing provisions of this Section 5.1, the Committee may, but need not,
adopt a procedure to enable Participants to make lump sum Elective Contributions
under the Plan through payroll deductions. No Salary Reduction Agreement shall
be effective unless the Participant has made an investment direction pursuant to
Section 8.3.
(b) A Salary Reduction Agreement will be taken into account for
any Plan Year only if it relates to Compensation that would have been received
by the Participant in the Plan Year (but for the deferral election).
(c) In the event that the aggregate amount of Elective
Contributions by a Participant exceeds the limitation described in subsection
(a) of this Section 5.1, the amount of such excess, increased by any income and
decreased by any losses attributable thereto, shall be refunded to the
Participant no later than the April 15th of the calendar year following the
calendar year for which the Elective Contributions were made. If a Participant
also participates, in any calendar year, in any other plans subject to the
limitations set forth in Section 402(g) of the Code and has made excess
deferrals under this Plan when combined with the other plans subject to such
limits, to the extent the Participant designates, in writing submitted to the
Committee no later than the March 1 of the calendar year next following the
calendar year for which the Elective Contributions were made, any Elective
Contributions under this Plan as excess deferrals, the amount of such designated
excess, increased by any income and decreased by any losses attributable
thereto, shall be refunded to the Participant no later than the April 15 of the
calendar year next following the calendar year for which the Elective
Contributions were made.
5.2 Change or Suspension of Salary Reduction Agreements. Subject to
Section 5.1, a Participant may enter into or change his or her Salary Reduction
Agreement at any time, effective as soon as practicable, in accordance with
rules determined by the Committee. A Participant may also suspend his or her
Salary Reduction Agreement at any time, in accordance with rules determined by
the Committee. A Participant who suspends his or her Salary Reduction Agreement
in accordance with this Section 5.2 may enter into a new Salary Reduction
Agreement at any time, effective as soon as administratively feasible.
A Participant's most recent Salary Reduction Agreement shall
continue unchanged from year to year unless the Participant notifies the
Committee in writing of a change in such Salary Reduction Agreement in
accordance with the rules determined by the Committee.
5.3 Actual Deferral Percentage Test.
(a) Participants' Elective Contributions must satisfy at least
one of the following tests:
(1) The Actual Deferral Percentage for the Highly
Compensated Participants shall not exceed the Actual Deferral Percentage of all
other Participants for the preceding Plan Year multiplied by 1.25; or
(2) (A) The excess of the Actual Deferral Percentage
for the Highly Compensated Participants over the Actual Deferral Percentage of
all other Participants for the preceding Plan Year shall not be more than two
percentage points, and (B) the Actual Deferral Percentage for the Highly
Compensated Participants shall not be more than the Actual Deferral Percentage
for all other Participants for the preceding Plan Year multiplied by 2.
(b) The Employer may elect to apply the foregoing tests by using
current Plan Year data rather than utilize data from the preceding Plan Year. If
such an election is made, it may not be changed except as provided by Secretary
of the Treasury. Notwithstanding the foregoing, for the 1997 Plan Year, the
Employer may rely on the transitional relief set forth in Internal Revenue
Service Notice 97-2 to use current Plan Year data to apply the foregoing tests.
(c) All Elective Contributions that are made under two or more
plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the
Code are to be treated as made under a single plan; and if two or more plans are
permissively aggregated, such plans shall satisfy Sections 401(a)(4) and 410(b)
as though they were a single plan in accordance with Section 410(k) of the Code
and Section 1.401(k)-1 of the Regulations. For purposes of calculating the
Actual Deferral Percentage of any Highly Compensated Participant all cash or
deferred arrangements of the Employer or any Affiliated Employer in which such
Highly Compensated Participant participates shall be treated as one cash or
deferred arrangement.
(d) In applying the tests set forth in this Section 5.3, the
following rules shall apply:
(1) In the case of a Participant who makes no Elective
Contributions, the Elective Contributions that are to be included in determining
the Participant's Actual Deferral Percentage are zero;
(2) The distribution of excess contributions will include
the income allocable thereto and shall be made on the basis of the amount of
Elective Contributions on behalf of each such Highly Compensated Participant.
The income allocable to the excess contributions includes income for the Plan
Year for which the excess contributions were made in accordance with Section
1.401(k)-1(f)(4)(ii) of the Regulations.
(e) For Plan Years commencing after December 31, 1998 for which
the Employer uses Section 410(b)(4)(B) of the Code to test minimum coverage
compliance, the Employer may exclude from consideration all Participants (other
than Highly Compensated Participants) who have not met the minimum age and
service requirements of Section 410(a)(1)(A) of the Code in determining whether
the tests set forth in Subsection 5.3(a) are met.
5.4 Amendment or Revocation of Salary Reduction Agreement by Committee.
The Committee shall determine as of the end of the Plan Year, and at such other
time or times in its discretion, whether one of the Actual Deferral Percentage
tests of Section 5.3 will be satisfied for such Plan Year. In the event that
neither of such Actual Deferral Percentage Tests is satisfied, the Committee may
amend or revoke the Salary Reduction Agreement of any Participant at any time if
it determines that such an amendment or revocation is necessary to ensure that
at least one of the Actual Deferral Percentage tests of Section 5.3 will be
satisfied for any Plan Year. The determination of whether it is necessary to
amend or revoke any Salary Reduction Agreement shall be made pursuant to Section
5.3 and the procedure for such amendment or revocation shall be determined
pursuant to Section 5.5(a).
5.5 Distribution of Excess Contributions.
(a) If neither of the tests set forth in Section 5.3 are
satisfied, the Committee shall in its discretion, to the extent permissible
under the Code and the Regulations, refund the excess contributions in the
manner described in Section 5.5(b). For purposes of this Section 5.5, "excess
contributions" means, with respect to any Plan Year, the excess of the aggregate
amount of Elective Contributions (and any earnings and losses allocable thereto
prior to distribution) made by Highly Compensated Participants for such Plan
Year, over the maximum amount of such Elective Contributions that could be made
by such Highly Compensated Participants without violating the requirements of
Section 5.3.
(b) If required in order to comply with the provisions of
Subsection 5.3 and the Code, the Committee shall refund excess contributions for
a Plan Year. The distribution of such excess contributions shall be made to
Highly Compensated Participants, to the extent practicable, before the March
15th of the Plan Year next following the Plan Year for which such excess
contributions were made, but in no event later than the end of the Plan Year
next following such Plan Year. Any such distribution shall be made to each
Highly Compensated Participant whose Elective Contributions are the highest for
the Plan Year, until one of the tests of Section 5.3 is satisfied. Matching
Contributions attributable to Elective Contributions returned to a Highly
Compensated Participant shall be distributed as provided in Section 4.6.
5.6 Rollover Contributions.
(a) A Participant may make a Rollover Contribution to the Plan in
accordance with rules established by the Committee uniformly applied consisting
of an eligible rollover distribution, as defined in Section 11.8(b), from a plan
qualified under Section 401(a) of the Code or an individual retirement account
qualified under Section 408(a) of the Code (no part of which is attributable to
any source other than an eligible rollover distribution from a qualified plan
under Section 401(a) of the Code); provided such eligible rollover distribution
is in cash and contributed to the Plan on or before the 60th day after the day
in which such Participant received such eligible rollover distribution. If a
Participant elects to make a Rollover Contribution, the Committee may require
such evidence, assurances, opinions and certifications, including a statement
from the previous plan that such plan was a qualified plan, that the Committee
may deem necessary to establish to its satisfaction that the amounts to be
contributed qualify as an eligible rollover distribution and will not affect the
qualification of the Plan or the tax-exempt status of the Trust under Sections
401(a) and 501(a) of the Code, respectively. Except as otherwise permitted by
Section 5.7, in no event shall any assets be transferred to this Plan from any
profit sharing, pension or retirement plan that would cause this Plan to become
a "transferee" plan (within the meaning set forth in Section 401(a)(11)(B) of
the Code).
(b) Any Rollover Contribution shall be allocated to the
appropriate Participant's Rollover Contribution Subaccount which shall be
established and separately accounted for. A Participant shall have at all times
a nonforfeitable right in the amount credited to his or her Rollover
Contribution Subaccount.
(c) Each request by a Participant to make a Rollover
Contribution shall be subject to review by the Committee which shall make a case
by case determination that each Rollover Contribution meets the requirements set
forth in Section 5.6(a), and such other requirements or conditions as the
Committee may, from time to time and in its sole discretion, impose; provided,
however, that any determination made by the Committee pursuant to this Section
5.6 shall not have the effect of discriminating in favor of Participants who are
officers, shareholders or who are Highly Compensated Participants.
5.7 Trustee-to-Trustee Transfer of Assets. Notwithstanding anything in
Section 5.6 to the contrary, in the event of an acquisition by the Employer or
the Plan Sponsor of a company which maintains a plan and trust which are
qualified under Sections 401(a) and 501(a) of the Code, respectively, the Board
of Directors may (but shall not be required to) authorize a "trustee-to-trustee"
transfer of assets from such qualified plan into the Plan and Trust Fund. The
Trustee may require such evidence, assurances, opinions and certifications,
including a statement from the acquired company's plan that such plan and trust
are qualified under Sections 401(a) and 501(a) of the Code, which the Trustee
may deem necessary to establish to its satisfaction that the amounts to be
transferred will not affect the qualification of the Plan or the tax-exempt
status of the Trust under Sections 401(a) and 501(a) of the Code, respectively.
<PAGE>
SECTION 6. ALLOCATION OF CONTRIBUTIONS
6.1 Establishment of Cash Contribution Account. The Committee shall
establish and maintain or cause to be established and maintained with respect to
each Participant a Cash Contribution Account showing his or her interest under
the Plan and in the Trust Fund and all relevant data pertaining thereto. Each
Participant shall be furnished with a written statement of his or her Cash
Contribution Account at least once annually and upon any distribution to him or
her. In maintaining the Cash Contribution Accounts under the Plan, the Committee
can conclusively rely on the valuations of the Trust Fund in accordance with the
Plan. The establishment and maintenance of, or allocations and credits to, the
Cash Contribution Account of any Participant shall not vest in any Participant
any right, title or interest in and to any Plan assets or benefits, except at
the time or times and upon the terms and conditions and to the extent expressly
set forth in the Plan and in accordance with the terms of the Trust Fund.
6.2 Establishment of Subaccounts. Each Participant's Cash Contribution
Account shall contain each of the following applicable subaccounts therein:
(a) All Elective Contributions on behalf of a Participant under
Section 4.1 and Qualified Nonelective Contributions on behalf of a Participant
under Section 4.2(b)(i) shall be credited to the Participant's Elective
Contribution Subaccount.
(b) All Matching Contributions on behalf of a Participant under
Section 4.2(a) shall be allocated and credited to the Participant's Matching
Contribution Subaccount.
(c) All Profit Sharing Contributions on behalf of a
Participant under Section 4.2(b)(ii) shall be allocated and credited to the
Participant's Profit Sharing Subaccount.
(d) All Rollover Contributions on behalf of a Participant under
Section 5.6 shall be allocated and credited to the Participant's Rollover
Contribution Subaccount.
<PAGE>
SECTION 7. SPECIAL ESOP PROVISIONS
7.1 Investment of ESOP Accounts. The ESOP Accounts of all Participants
shall be invested exclusively in Shares, except for cash or cash equivalent
investments held (a) for the limited purpose of making Plan distributions to
Participants and Beneficiaries, (b) pending the investment by the Purchasing
Agent of contributions or other cash receipts in Shares, (c) pending use to
repay an Exempt Loan, (d) for purposes of paying, under the terms described in
the Plan or Trust Agreement, fees and expenses incurred with respect to the Plan
or Trust and not paid for by the Participating Employers or (e) in the form of
de minimis cash balances. Neither any Participating Employer nor the Purchasing
Agent, the Committee or the Trustee shall have any responsibility or duty to
time any transaction involving Shares in order to anticipate market conditions
or changes in stock value, nor shall any such person have any responsibility or
duty to sell Shares held in the ESOP Accounts (or otherwise to provide
investment management for Shares held in the ESOP Accounts) in order to maximize
return or minimize loss. Participating Employer contributions made in cash, and
other cash received by the Trustee, may be used by the Purchasing Agent to
acquire Shares from shareholders of the Employer or directly from the Employer.
7.2 Allocation to ESOP Accounts.
(a) Subject to the provisions of Section 4, the ESOP Account
maintained for each Participant will be credited as of the last day of each Plan
Year with the Participant's allocable share of:
(i) Shares purchased using cash contributed by or on behalf
of the Participating Employer employing such Participant (and any earnings on
any cash contributions made prior to the last day of the Plan Year),
(ii) Shares contributed directly to the Trust Fund;
(iii) Dividends paid to the Trust Fund during the
Plan Year on any Shares that were purchased by the Purchasing Agent or
contributed directly to the Trust Fund prior to the last day of the Plan Year;
and
(iv) Shares released from the Suspense Subfund pursuant
to Section 7.3 and allocable to the contribution made by or on behalf of such
Participating Employer pursuant to Section 7.4.
(b) Shares attributable to ESOP Contributions shall be allocated
among the Accounts of Participants who are members of the Allocation Group for
the Plan Year in the same proportion that a Participant's Compensation during
the Plan Year bears to the total Compensation during the Plan Year of all
Participants who are members of the Allocation Group for such Plan Year. For
purposes of the preceding sentence, Compensation earned by a Participant prior
to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall
not be taken into account.
(c) Shares contributed directly to the Trust Fund for a Plan Year
shall be allocated under Section 7.2(a)(i) in the same proportion as Shares
purchased by the Trust Fund and allocated under Section 7.2(b).
7.3 Suspense Subfund for ESOP Accounts. Shares acquired by the
Participants' ESOP Accounts through an Exempt Loan shall be added to and
maintained in the Suspense Subfund and shall thereafter be released from the
Suspense Subfund and allocated to Participants' ESOP Accounts as provided in
Sections 7.3 and 7.4. Shares acquired for the Trust Fund with the proceeds of an
Exempt Loan shall be released from the Suspense Subfund as the Exempt Loan is
repaid, in accordance with the provisions of this Section 7.3.
(a) For each Plan Year until the Exempt Loan is fully repaid, the
number of Shares released from the Suspense Subfund shall equal the number of
unreleased Shares immediately before such release for the current Plan Year
multiplied by the "Release Fraction." As used herein, the term "Release
Fraction" shall mean a fraction, the numerator of which is the amount of
principal and interest paid on the Exempt Loan for such current Plan Year and
the denominator of which is the sum of the numerator plus the principal and
interest to be paid on such Exempt Loan for all future years during the term of
such Exempt Loan (determined without reference to any possible extensions or
renewals thereof). For purposes of computing the denominator of the Release
Fraction, if the interest rate on the Exempt Loan is variable, the interest to
be paid in subsequent Plan Years shall be calculated by assuming that the
interest rate in effect as of the end of the applicable Plan Year will be the
interest rate in effect for the remainder of the term of the Exempt Loan.
Notwithstanding the foregoing, in the event such Exempt Loan
shall be repaid with the proceeds of a subsequent Exempt Loan (the "Substitute
Loan"), such repayment shall not operate to release all such Shares in the
Suspense Subfund, but, rather, such release shall be effected pursuant to the
foregoing provisions of this Section 7.3(a) on the basis of payments of
principal and interest on such Substitute Loan.
(b) If required by any pledge or similar agreement, or if
permitted by such pledge or agreement and required by the Committee pursuant to
a one-time, irrevocable designation (which shall be made, if at all, in
connection with the making of an Exempt Loan) by the Committee, then, in lieu of
applying the provisions of Section 7.3(a) hereof with respect to an Exempt Loan,
Shares shall be released from the Suspense Subfund as the principal amount of
such Exempt Loan is repaid (without regard to interest payments), provided the
following three conditions are satisfied:
(i) The Exempt Loan shall provide for annual payments of
principal and interest at a cumulative rate that is not less rapid at any time
than level annual payments of such amounts for ten years;
(ii) The interest portion of any payment shall be
disregarded only to the extent it would be treated as interest under standard
loan amortization tables; and
(iii) If the Exempt Loan is renewed, extended or refinanced,
the sum of the expired duration of the Exempt Loan and the renewal, extension or
new Exempt Loan period shall not exceed ten years.
(c) If at any time there is more than one Exempt Loan
outstanding, then separate accounts may be established under the Suspense
Subfund for each such Exempt Loan. Each Exempt Loan for which a separate account
is maintained may be treated separately for purposes of the provisions governing
the release of Shares from the Suspense Subfund under this Section 7.3
(including for purposes of determining whether Section 7.3(a) or Section 7.3(b)
governs the release of Shares from any particular Suspense Subfund) and for
purposes of the provisions governing the application of Participating Employer
contributions to repay an Exempt Loan under Section 4.2.
(d) All Shares released from the Suspense Subfund during any Plan
Year shall be allocated among Participants as prescribed by Section 7.4.
7.4 Disposition of Shares Released from Suspense Subfund.
(a) Shares released from the Suspense Subfund for a Plan Year in
accordance with Section 7.3 shall be held in the Trust Fund on an unallocated
basis until allocated by the Committee as of last day of the Plan Year. Shares
released from the Suspense Subfund on account of a payment for a Plan Year of
principal or interest on an Exempt Loan, to the extent payment is made with
contributions for such Plan Year, shall be allocated under Section 7.2(a)(ii) in
the same proportion as Shares purchased with contributions under Section 7.2(b).
(b) (i) Shares released from the Suspense Subfund on account of
the payment for a Plan Year of principal or interest on an Exempt Loan to the
extent such payment is made with dividends paid on Shares allocated to ESOP
Accounts, shall be allocated in the same proportion as dividends used to pay
principal or interest on such Exempt Loan would have been allocated under
Section 7.9(b) had such dividends not been so used; and
(ii) Subject to Section 4.2, Shares released from the
Suspense Subfund on account of the payment of principal or interest on an Exempt
Loan, to the extent such payment is made with dividends on Shares not allocated
to Accounts, shall be allocated to those ESOP Accounts and in the same
proportion as Shares released pursuant to Section 7.4(b)(i); provided that
Shares so released shall be otherwise allocated if necessary to satisfy the
requirements of the Code (other than Section 404(k)) and any Regulations
thereunder.
(c) All Shares in the Trust Fund, other than the Shares held in
the Suspense Subfund as of the last day of any Plan Year, must be allocated to
ESOP Accounts as of the last day of any Plan Year.
7.5 Limitations on Allocations to ESOP Accounts. Notwithstanding the
foregoing provisions of this Section 7:
(a) If more than one-third of all ESOP Contributions for a Plan
Year which are deductible only under Section 404(a)(9) of the Code would be
allocated, in the aggregate, to Participants described in Section 414(q) of the
Code, then the Committee may reduce such allocations pro rata in an amount
sufficient to ensure that such ESOP Contributions will be deductible with
respect to such Plan Year; and
(b) Any contributions which are prevented from being allocated
due to the restriction contained in Section 7.5(a) shall be allocated as of the
last day of the Plan Year pursuant to Sections 7.2 and 7.4 as though those
Participants described in Section 414(q) of the Code did not participate in the
Plan.
7.6 Acquisition of Shares.
(a) Notwithstanding the foregoing provisions of this Section 7,
in the event that Shares are acquired in a transaction to which Section 1042 of
the Code applies, then, in accordance with the Regulations, such Shares shall
not be allocated, directly or indirectly, to prohibited individuals as defined
in Section 409(n)(1) of the Code for the duration of the nonallocation period
(as defined in Section 409(n)(3)(C) of the Code).
(b) If Shares are prevented from being allocated due to the
prohibition contained in Section 7.6(a), the allocation of Shares attributable
to ESOP Contributions (or ESOP Contributions) otherwise provided under Section
7.2 shall be adjusted to reflect such result.
7.7 Effect of Change in Plan Sponsor's Capitalization. Any Shares
received by the Trustee as a result of a stock split, dividend, conversion, or
as a result of a reorganization or other recapitalization of the Plan Sponsor
shall be allocated as of the day on which the Shares are received by the Trustee
in the same manner as the Shares to which they are attributable are then
allocated.
7.8 Trustee and Committee Discretion to Engage in Transactions in
Shares. Neither the Purchasing Agent, the Trustee nor the Committee shall be
required to engage in any transaction, including, without limitation, directing
the purchase or sale of Shares, which it determines in its sole discretion may
subject itself, its Participants, the Plan, any Participating Employer, or any
Participant to liability under federal or other state laws.
7.9 Valuation of ESOP Accounts.
(a) Subject to the requirements of Section 7.9(b), the fair
market value of the assets of the ESOP Accounts shall be determined as of each
Valuation Date, in accordance with generally accepted valuation methods and
practices including, but not limited to, in the case of Shares, the use of one
or more independent appraisers.
(b) The value of a Participant's ESOP Account as of any Valuation
Date shall equal the sum of:
(i) The aggregate value (as determined under Section 7.9(a))
of all Shares and dividends on Shares previously allocated to such Participant's
ESOP Account as of such Valuation Date; and
(ii) Subject to Section 7.9(c), the aggregate value (as
determined under Section 7.10(a)) of dividends, if any, received during the Plan
Year on Shares allocated to such Participant's ESOP Account.
(iii) Such Participant's allocable portion (determined in
accordance with the rules set forth in Section 7.4 for determining Participant's
allocable portion of Shares released from the Suspense Subfund) of the earnings,
if any, on all amounts contributed to the Trust Fund for purposes other than the
repayment of an Exempt Loan.
(c) Except as provided in Section 7.7, dividends payable, if any,
with respect to Shares held by the Participant's ESOP Account will be, in the
discretion of the Committee and in conformity with the terms of the Shares on
which such dividends are paid, (i) used for the purpose of repaying one or more
Exempt Loans, (ii) distributed from the Trust Fund to Participants or their
Beneficiaries not later than 90 days after the close of the Plan Year in which
they are paid to the Trust Fund, (iii) paid directly to such Participants or
their Beneficiaries, (iv) retained in the Trust Fund and allocated pursuant to
Section 7.9(b), or (v) paid or utilized in a combination of any or all of the
foregoing four options.
(d) The Committee shall establish accounting procedures for the
purpose of making the allocations, valuations and adjustments to Participant's
ESOP Accounts in accordance with the provisions of the Plan. From time to time,
the Committee may modify its accounting procedures for the purpose of achieving
equitable and nondiscriminatory allocations among the ESOP Accounts of
Participants in accordance with the provisions of the Plan.
7.10 Role of Purchasing Agent.
(a) All purchases of Shares made by the Trust Fund shall be made
by the Purchasing Agent. The Trustee shall forward to the Purchasing Agent all
amounts contributed to the employee stock ownership plan, and all amounts to be
invested in Shares pursuant to participant investment directions given pursuant
to Sections 8.3, 8.4 and 8.5. Amounts to be invested in Shares shall be invested
in Shares in the amount, in the manner and at the price determined by the
Purchasing Agent in its sole discretion, provided such price shall be the fair
market value of such Shares at the time of purchase. The Purchasing Agent shall
in its sole discretion select the broker-dealer through which the purchase of
such Shares shall be executed. The Purchasing Agent shall also invest any cash
dividends received on any Shares which are allocated to Participants' Accounts
and held as part of the Plan as provided in Section 5.05(c) of the Trust
Agreement.
(b) The Purchasing Agent shall sell Shares only at the direction
of the Trustee, which shall issue such instructions only at the direction of the
Committee; provided that such Committee direction shall not be required for any
of the following purposes: (i) any sales of Shares required pursuant to the
participant investment directions given pursuant to Sections 8.3, 8.4 or 8.5;
(ii) any sales of Shares required pursuant to the provisions of Section 13.5 or
13.6; (iii) any sales of Shares required to fund a participant loan or a
distribution to a Participant; or (iv) any sales of Shares required to maintain
the levels of investment of Shares and cash specified by the Committee for the
Company Stock Fund.
<PAGE>
SECTION 8. INVESTMENT OF CONTRIBUTIONS, VALUATIONS
AND PARTICIPANTS' CASH CONTRIBUTION ACCOUNTS
8.1 Delivery of Contributions to Trust Fund. All monies, securities or
other property contributed to Participants' Cash Contribution Accounts shall be
delivered to the Trustee under the Trust Fund, to be managed, invested,
reinvested and distributed in accordance with the Plan and the Trust Fund.
8.2 Participants' Right to Select Investments. Each Participant shall
have the right to invest his or her Cash Contribution Account among one or more
investment funds selected by the Company, which may include a fund established
for investment in Shares.
8.3 Participant Investment Election. As of any date permitted by the
Committee, a Participant may, in accordance with the rules of the Committee
uniformly applied, specify the percentage (in minimum multiples as may be
determined from time to time by the Committee) of contributions which are made
to the Participant's Cash Contribution Account that shall be invested in
investment funds selected by the Committee. An investment election may be made
separately with respect to (i) the aggregate of the Participant's Elective
Contribution Subaccount, Matching Contribution Subaccount, and Rollover
Contribution Subaccount and (ii) the Participant's Profit Sharing Subaccount.
8.4 Change in Investment Election for Future Contributions. Any
investment direction specified by a Participant shall be deemed to be a
continuing direction until changed. A Participant may change an investment
direction as to future contributions made by such Participant or on his or her
behalf to the subaccounts of his or her Cash Contribution Account as of any day
permitted by the Committee in accordance with the rules of the Committee
uniformly applied.
8.5 Change in Investment Election for Prior Contributions. As of any
date permitted by the Committee, a Participant may change the percentages (in
minimum multiples as may be determined from time to time by the Committee) in
which the investment of the portion of his or her Cash Contribution Account
attributable to prior contributions shall be allocated among the funds
maintained by the Trustee. Such changes of investment allocation may be made
separately with respect to (i) the aggregate of the Participant's Elective
Contribution Subaccount, Matching Contribution Subaccount, and Rollover
Contribution Subaccount, and (ii) the Participant's Profit Sharing Subaccount.
8.6 Valuation of Cash Contribution Accounts.
(a) As of each Valuation Date, Participants' Cash Contribution
Accounts shall be valued pursuant to the terms of the Plan. Such valuation shall
be conclusive and binding upon all persons having an interest in the Trust Fund.
(b) The Committee shall adjust the value of each Elective
Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing
Subaccount, or Rollover Contribution Subaccount, as the case may be, maintained
under Participants' Cash Contribution Accounts as of each Valuation Date to
reflect the effect of income received and accrued, realized and unrealized
profits and losses, and all other transactions of the preceding period. Such
adjustments shall be made with respect to the period since the next preceding
Valuation Date by (i) deducting from each such Subaccount the total of all
payments made from such Subaccount during such period, (ii) adding to or
deducting from, as the case may be, each such Subaccount such proportion of each
item of income, profit or loss as the amount in such Subaccount as of the next
preceding Valuation Date bears to the total of the amounts in all of such
Participants' Elective Contribution Subaccount, Matching Contribution
Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as
the case may be, as of the preceding Valuation Date and (iii) adding
contributions to each such Elective Contribution Subaccount, Matching
Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution
Subaccount, as the case may be, pursuant to Sections 4 and 5 of the Plan. In
making such allocations, the Committee can conclusively rely on the valuations
of the Subaccounts by the Trustee in accordance with the Plan and the Trust.
<PAGE>
SECTION 9. RETIREMENT DATES
9.1 Normal Retirement Date. The Normal Retirement Date of a Participant
shall be his or her 65th birthday or, if earlier, the date on which the
Participant has attained age fifty (50) and completed seven (7) Years of
Service. Upon attainment of his or her Normal Retirement Date, a Participant
shall have a nonforfeitable right to 100% of his or her Account.
9.2 Deferred Retirement Date. A Participant who remains in Service
after his or her Normal Retirement Date may retire on a Deferred Retirement Date
which shall be the first day of the month coincident with or next following his
or her termination of Service or as specified in a written application to the
Committee.
<PAGE>
SECTION 10. ELIGIBILITY FOR PAYMENT OF ACCOUNTS
AND VESTED INTERESTS
10.1 Participants' Right to Account Upon Termination Due to Retirement,
Death or Disability.
(a) A Participant shall have a nonforfeitable right to his or
her Account upon the occurrence of any of the following events while employed
by the Employer:
(i) attainment of his or her Retirement Date;
(ii) his or her death; or
(iii) his or her Disability.
(b) Upon the termination of Service of any Participant on or
after his or her Retirement Date or by reason of his or her death or Disability
("Terminated Participant"), the Terminated Participant (or, in the event of the
Participant's death, his or her Beneficiary) shall be entitled to an amount
equal to the Terminated Participant's Account, including any subsequent
contribution allocated to the Terminated Participant's Account pursuant to
Sections 6 or 7 with respect to the Plan Year in which the Participant's Service
is terminated. The Participant's Account shall be distributable, in accordance
with the methods and rules of distribution described in Section 11, as soon as
practicable following the Participant's termination of Service. The value of the
Participant's Account shall be determined as of the Valuation Date coincident
with or immediately preceding the date of distribution of the Participant's
Account.
10.2 Participants' Right to Account Upon Other Termination of Service.
Upon the termination of Service of any Participant prior to his or her
Retirement Date for any reason other than death or Disability, the Terminated
Participant shall be entitled to receive an amount equal to the sum of (i) 100%
of the Participant's Elective Contribution Subaccount, Matching Contribution
Subaccount, and Rollover Contribution Subaccount and (ii) the Participant's
Vested Interest in his or her Profit Sharing Subaccount and ESOP Account,
including the Participant's Vested Interest in any subsequent contribution
allocated to the Participant's Account pursuant to Sections 6 or 7 with respect
to the Plan Year in which the Participant's Service terminated. The
Participant's Account shall be distributable, in accordance with the methods and
rules of distribution described in Section 11, as soon as practicable following
the Valuation Date immediately following the Participant's termination of
Service. The value of the Participant's Account shall be determined as of the
Valuation Date coincident with or immediately preceding the date of distribution
of the Participant's Account. If such Terminated Participant's Vested Interest
is less than 100 percent, the non-vested balance of such Participant's Profit
Sharing Subaccount and ESOP Account shall be forfeited and reallocated pursuant
to Section 4.5 as of the last day of the earlier of (i) the Plan Year in which
the Participant's Account is distributed, or (ii) the Plan Year in which the
Participant incurs a Total Break in Service.
10.3 Vesting Schedule for Determining Vested Interests. For all
purposes of this Plan, a Participant's Vested Interest in his or her Profit
Sharing Subaccount and ESOP Account shall consist of (i) the Participant's
percentage of his or her Profit Sharing Subaccount and (ii) the percentage of
the Participant's ESOP Account, both as determined from the following vesting
schedule on the basis of the number of Years of Service which the Participant
has completed as of the date of the Participant's termination of Service.
VESTING SCHEDULE
Years of Service Percentage
---------------- ----------
Less than three years 0%
Three years but less than four years 25%
Four years but less than five years 50%
Five years or more 100%
10.4 Breaks in Service. If a Participant's Service is terminated prior
to his or her Retirement Date for any reason other than the Participant's death
or Disability prior to completing three Years of Service, and such Participant
incurs a Total Break in Service, such Participant shall not be entitled to any
benefit attributable to amounts allocated to the Participant's Profit Sharing
Subaccount or ESOP Account prior to such Total Break in Service. If a
Participant returns to Service, Years of Service before such return shall be
counted, in addition to Years of Service following such return, in determining
the Participant's Vested Interest in the amount credited to the Participant's
Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return
to Service. If such Participant does not complete one Year of Service following
his or her return, then the Participant shall not be entitled to any further
benefit under the Plan and the non-vested balance of any Profit Sharing
Contribution or ESOP Contributions credited or recredited to such Participant's
Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return
shall be forfeited and reallocated pursuant to Section 4.5 upon the
Participant's termination of Service. All forfeitures shall occur in conformity
with the ordering rules of Section 54.4975-11(d) of the Regulations.
10.5 Participant's Right to Restoration of Account Upon Return to
Service. If a Terminated Participant who had a vested interest in such
Participant's Profit Sharing Subaccount or ESOP Account returns to Service prior
to incurring a Total Break in Service, the non-vested balance of the Terminated
Participant's Account, if any, forfeited pursuant to Section 10.2 shall be
recredited to such Participant's Account, provided that, not later than the
fifth anniversary of the first date on which the Participant is subsequently
employed, such Participant repays the full amount of any distribution made to
the Participant upon his or her prior termination of Service. Any amount so
repaid, together with any non-vested portion of such Participant's Account
recredited pursuant to this Section 10.5, shall be invested in the Trust Fund.
If such Participant fails to make a repayment of any distributed amounts
pursuant to this Section 10.5, the non-vested portion of such Participant's
Account, if any, shall not be recredited.
10.6 Participant's Right to Account Upon Death After Termination of
Service. Subject to the provisions of Section 10, if a Terminated Participant
dies before payment of the full value of his or her Account from the Trust Fund,
an amount equal to the current value of the unpaid portion of the Participant's
Vested Interest in his or her Account, including any subsequent contribution
allocated to the Terminated Participant's Account pursuant to Sections 6 or 7
with respect to the Plan Year in which the Participant's Service is terminated,
shall be distributable, in accordance with the methods and rules of distribution
described in Section 11, as soon as practicable following the Participant's
death. The value of the Participant's Account shall be determined as of the
Valuation Date coincident with or immediately preceding the date of distribution
of the Participant's Account.
10.7 Amendment of Vesting Schedule. If the vesting schedule contained
in Section 10.3 is amended, each Participant who has completed at least three
(3) Years of Service may elect, during the election period specified in this
Section, to have his or her vested percentage determined without regard to such
amendment. For purposes of this Section, the election period shall begin as of
the date on which the amendment changing the vesting schedule is adopted, and
shall end on the latest of the following dates: (i) the date occurring sixty
(60) days after the Plan amendment is adopted; (ii) the date which is sixty (60)
days after the day on which the Plan amendment becomes effective; (iii) the date
which is sixty (60) days after the day the Participant is issued written notice
of the Plan amendment by the Committee; or (iv) such later date as may be
specified by the Committee. The election provided for in this Section shall be
made in writing and shall be irrevocable when made.
10.8 Distribution Following Attainment of Age 59-1/2 to Former
Participants of The Hampton Pension Services, Inc. 401(k) Retirement Savings
Plan. A Participant who was employed by Hampton Pension Services, Inc. on
November 6, 1995 shall be entitled to receive, at any time following the date
such Participant attains age 59-1/2, a distribution of all or any portion of the
Participant's Account, to the extent attributable to any amounts that were
transferred to the Plan from such Participant's former account in The Hampton
Pension Services, Inc. 401(k) Retirement Savings Plan.
<PAGE>
SECTION 11. METHOD OF PAYMENT OF ACCOUNTS
AND WITHDRAWALS
11.1 Methods of Payment. Any benefit payable under the Plan, except as
otherwise provided in Section 11.2 shall be payable as soon as practicable
following the last day of the calendar month in which falls a Participant's
termination of Service (or other event requiring a distribution under the Plan),
in one lump sum payment from the Trust Fund, provided that the Participant may
elect to direct the Committee to directly transfer all or any portion of his or
her "eligible rollover distribution" (as defined in Section 11.8 below) to
another tax-qualified plan pursuant to Section 401(a)(31) of the Code. A
Participant who has no Vested Interest in his or her Account upon his or her
termination of Service will be deemed to have received a full distribution of
his or her Account as of such date. A Participant who elects not to receive a
distribution at the time set forth in the first sentence may receive a
distribution at any time thereafter upon reasonable notice to the Plan.
Subject to the provisions of Section 11.3 with respect to the
distribution of Shares, any distribution hereunder shall be made in cash;
provided, however, that pursuant to procedures adopted from time to time by the
Committee, a Participant may elect to receive a distribution in the form of
shares of the assets in which such Participant's Account was invested
immediately prior to the distribution, but only if such distribution is made
directly to a rollover IRA established with the Employer as custodian.
11.2 Commencement of Payment. Notwithstanding any other provision of
the Plan to the contrary, (i) if a Participant has a Vested Interest in his or
her Account with a value of $5,000 or less, it shall be distributed in one lump
sum as soon as is administratively feasible following the last day of the
calendar month in which such Participant's termination of employment occurs, and
(ii) if a Participant has a Vested Interest in his or her Account with a value
of more than $5,000, it shall not commence to be distributed without the consent
of the Participant before the Participant's Normal Retirement Date.
In the absence of receipt of such consent by the Committee,
payment of the benefit to such Participant shall commence as soon as practicable
after the Participant's attainment of his or her Normal Retirement Date, which
benefit shall be in an amount equal to the value of the Participant's
distributable Account as of the Valuation Date coincident with or immediately
following the Participant's attainment of his or her Normal Retirement Date. In
any case where distribution of any benefit amount from the Participant's Cash
Contribution Account is to be deferred, the Committee shall either (i) establish
or cause to be established a special account for the benefit of the former
Participant, to be invested by the Trustee in a fixed investment account
established by the Trustee or (ii) cause all amounts in the Participant's Cash
Contribution Account deferred by the Participant to be invested at the
Participant's election in the same manner as the normal Cash Contribution
Accounts maintained for Participants under to the Plan.
11.3 Special Rules For Distribution of Shares.
(a) Distribution of a Participant's Vested Interest from his or
her Account which is invested in Shares will be made entirely in whole Shares,
with the value of any fractional interest in Shares paid in cash; provided, that
pursuant to procedures adopted from time to time by the Committee, a Participant
may elect to receive such distribution in the form of cash. Any cash or other
property in a Participant's ESOP Account will be used by the Purchasing Agent to
acquire Shares, valued as of the last day of the calendar month in which occurs
(i) the Participant's election to receive a distribution of his or her Account
pursuant to Section 11.1, (ii) the Participant's termination of Service, in the
case of a distribution pursuant to Section 11.2(i), or (iii) the Participant's
Normal Retirement Date (or the Participant's death, if earlier), in the case of
a distribution pursuant to Section 11.2(ii) to a Participant who failed to
consent to a distribution prior to his or her Normal Retirement Date (the "Share
Conversion Date"). Notwithstanding the foregoing, if applicable corporate
charter or bylaw provisions restrict ownership of substantially all outstanding
Shares to Employees or to a plan or trust described in Section 401(a) of the
Code, then any distribution of a Participant's Vested Interest in the
Participant's ESOP Account shall be in cash. When a distribution consists in
whole or in part of Shares, and if such Shares consists of more than one class
of securities, the distribution of such Shares shall consist of substantially
the same proportion of each such class of Shares as such classes of Shares
represent proportions of the Participant's Account. If the record date for
dividends payable with respect to Shares distributable to a Participant occurs
following the Share Conversion Date, such dividends shall not be considered
attributable to such Shares, but shall be considered as earnings of the Fund and
allocated among Participants' Accounts pursuant to Section 8.6(b).
(b) Notwithstanding anything in Section 11 to the contrary,
in the discretion of the Committee, Section 11.1 may not apply to Shares held in
a Participant's ESOP Account until the close of the Plan Year in which any
Exempt Loan used to acquire such Shares is repaid in full.
(c) If at the time of distribution, Shares distributed from
the Trust Fund that were acquired with the proceeds of an Exempt Loan are not
treated as "readily tradable on an established market" within the meaning of
Section 409(h) of the Code and Regulations, such Shares shall be subject to a
put option in the hands of a Qualified Holder by which such Qualified Holder may
sell all or any part of such Shares to the Trust. Should the Trust decline to
purchase all or any part of such Shares, the Employer shall purchase those
Shares that the Trust declines to purchase. The put option shall be subject to
the following conditions:
(i) The term "Qualified Holder" shall mean the Participant
or Beneficiary receiving the distribution of such Shares, any other party to
whom the Shares are transferred by gift or reason of death, or any trustee of an
individual retirement account (as defined under Code Section 408) to which all
or any portion of the distributed Shares is transferred pursuant to a tax-free
"rollover" transaction satisfying the requirements of Sections 402 and 408 of
the Code.
(ii) During the 60-day period following any distribution
of such Shares, a Qualified Holder shall have the right to require the Trust or
the Employer to purchase all or a portion of the distributed Shares held by the
Qualified Holder. The purchase price to be paid for any such Shares shall be
their fair market value determined as of the Valuation Date coinciding with or
immediately preceding the exercise of the put option under this Section
11.3(c)(ii), provided that in the case of a transaction between the Plan and a
"disqualified person" within the meaning of Section 4975(e)(2) of the Code, such
fair market value shall be determined as of the date of the transaction.
(iii) If a Qualified Holder shall fail to exercise such put
option, the put option shall temporarily lapse upon the expiration of the 60-day
period. As soon as practicable following the last day of the Plan Year in which
the 60-day option period expires, the Employer shall notify the non-electing
Qualified Holder (if he or she is then a shareholder of record) of the valuation
of the Shares as of that date. During the 60-day period immediately following
receipt of such valuation notice, the Qualified Holder shall again have the
right to require the Employer to purchase all or any portion of the distributed
Shares. The purchase price to be paid therefor shall be based on the valuation
of the Shares as of the Valuation Date coinciding with or immediately preceding
the exercise of the option under this Section 11.3(c)(iii), provided that in the
case of a transaction between the Plan and a "disqualified person" within the
meaning of Section 4975(e)(2) of the Code, such fair market value shall be
determined as of the date of the transaction.
(iv) The foregoing put options under Section 11.3(c)(ii) and
(iii) hereof shall be effective solely against the Employer and shall not
obligate the Plan or Trust in any manner.
(v) Except as otherwise required or permitted by the Code,
the put options under this Section 11.3(c) shall satisfy the requirements of
Section 54.4975-7(b) of the Treasury Regulations to the extent, if any, that
such requirements apply to such put options.
If a Qualified Holder exercises a put option under this
Section 11.3(c), payment for the Shares shall be made in substantially equal
annual payments over a period beginning not later than 30 days after the
exercise of the put option and not exceeding five years (provided that adequate
security and reasonable interest are provided with respect to unpaid amounts).
Except as provided in this Section 11.3(c) or in Section
11.2, no shares acquired with the proceeds of an Exempt Loan may be subject to a
put, call or other option, or buy-sell or similar arrangement while held by or
distributed from the Plan. The rights and protections set forth in this Section
11.3(c) shall be non-terminable.
11.4 Payments to Surviving Spouse or Beneficiary. If a Participant or
former Participant dies before the commencement of his or her benefits under the
Plan, such Participant's or former Participant's Vested Interest in his or her
Account is payable in full to his or her Surviving Spouse. If such Participant
has no Surviving Spouse, he or she may designate a Beneficiary pursuant to
Section 14. A Participant may with the written consent of his or her spouse
elect to designate a Beneficiary other than or in addition to his or her spouse.
The written consent of the spouse must acknowledge the effect of such election
and must be witnessed by a representative of the Plan or a notary public. Any
such election may not be changed without spousal consent. Such an election or
revocation must be made in accordance with the procedures developed by the
Committee in accordance with the Code and Regulations.
11.5 Latest Date for Commencement of Benefits.
(a) Payments will commence no later than 60 days following the
latest of the close of the Plan Year in which:
(i) the Participant attains his or her Normal Retirement
Date,
(ii) occurs the 10th anniversary of the year in which the
Participant commenced participation in the Plan, or
(iii) the Participant terminates his or her Service with the
Employer.
(b) Notwithstanding the provisions of the foregoing sentence, if
the amount payable cannot be ascertained, or, subject to the provisions of
Section 20.6, the Participant cannot be located after reasonable efforts, a
payment retroactive to the date determined under the foregoing sentence may be
made not later than 60 days after the earliest date on which the amount of such
payment can be ascertained under the Plan or the date on which the Participant
is located (whichever is applicable).
(c) Notwithstanding any other provision of the Plan, benefits
payable to a Participant who is a five percent (5%) owner, as defined in Section
416 of the Code with respect to the Plan Year ending in the calendar year in
which the Participant attains age 70 1/2, shall commence no later than April 1st
of the calendar year following the calendar year in which such Participant
attains age 70 1/2. Commencing July 1, 1997, to the extent permitted by the Code
and Regulations, Participants who are not five percent (5%) owners may elect to
commence distribution of their benefits on April 1st of the calendar year
following the later of the calendar year in which such Participant attains age
70 1/2 or the calendar year following the calendar year in which such
Participant retires.
(d) If a Participant dies before benefits have commenced,
distributions to any Surviving Spouse or Beneficiary shall be made as soon as
administratively feasible, but not later than five years after such
Participant's death. In the event that payment is made to the Participant's
Surviving Spouse, such distribution shall not commence later than the date on
which such Participant would have had to commence distributions under Section
401(a)(9) of the Code (or, in either case, on any later date prescribed by
Regulations). If the Participant's Surviving Spouse dies after such
Participant's death but before distribution has been made to such Surviving
Spouse, the Section 11.5(d) shall be applied to require payment of any benefits
as if such Surviving Spouse were the Participant.
(e) Pursuant to Regulations, any benefit paid to a child shall be
treated as if paid to a Participant's Surviving Spouse if such amount would
become payable to such Surviving Spouse on the child's attaining majority, or
other designated event permitted by Regulations.
11.6 Redirection of Investment of ESOP Account.
(a) Upon both attaining age 50 and completing five Years of
Service, a Participant shall be permitted to direct the Plan to transfer all or
any portion of the Vested Interest in the Participant's ESOP Account to the
Participant's Cash Contribution Account.
(b) In addition, effective as of May 1, 1999, upon completing
the number of Years of Service indicated in the table below, a Participant shall
be permitted to direct the Plan to transfer the percentage indicated below of
the Vested Interest in the Participant's ESOP Account to the Participant's Cash
Contribution Account.
Years of Service Percentage
---------------- ----------
5 50
10 75
15 100
(c) Any directions pursuant to this Section 11.6 shall be made
pursuant to rules prescribed by the Committee, and shall be effective as soon as
administratively feasible, but not later than 30 days from the date on which
such direction is given. Any directions given pursuant to subsection (b) hereof
may be given not more than once per Plan Year. For purposes of this Section
11.6, the number of the Participant's Years of Service shall be determined
without regard to Hours of Service, and shall be based on periods of continuous
service from the date the Participant commenced employment with the Company.
(d) In the event that the Participant's Account does not
provide at least three investment options to the Participant other than
investment in Shares, the Committee shall provide diversification options to any
Participant required to be given such diversification options under Section
401(a)(28)(B) of the Code in a manner consistent with the Code. Notwithstanding
the foregoing, the ability to make transfers may be restricted by the Committee
to the extent necessary to comply with any applicable federal securities laws
(including Rule 144); provided, however, that in no event shall a Participant be
prevented from transferring any amount necessary in order to meet the
diversification requirements set forth in Section 401(a)(28)(B) of the Code.
11.7 Hardship Withdrawals.
(a) A Participant who is an Employee may elect to withdraw all or
any portion of the Vested Interest in his or her Cash Contribution Account
attributable to Elective Contributions (but excluding any earnings on Elective
Contributions accruing after December 31, 1988), Profit Sharing Contributions
(if, and only if, the withdrawal is occasioned by a life threatening illness to
the Participant) by giving written notice thereof to the Committee specifying
such date, which shall not be less than 30 days following the date such notice
is given to the Committee. Such notice shall designate that the hardship
withdrawal shall be withdrawn from the investment funds in which the Participant
has directed investment of the Participant's Cash Contribution Account.
(b) The Committee may authorize a hardship withdrawal only for:
(i) medical expenses described in Section 213(d) of the
Code incurred or immediately anticipated by the Participant, the Participant's
spouse, or any dependents of the Participant (as defined in Section 152 of
the Code);
(ii) the purchase (excluding mortgage payments) of a
principal residence of the Participant;
(iii) the payment of tuition and related educational
fees for the next 12 months of post-secondary education for the Participant or
the Participant's spouse, children, or dependents; or
(iv) the need to prevent the eviction of the Participant
from the Participant's principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(c) A hardship withdrawal may be authorized only to the extent
necessary to satisfy the hardship. A distribution will be deemed to be necessary
to satisfy the hardship only if the distribution is not in excess of the amount
of the immediate and heavy financial need of the Participant and such
Participant's tax obligations as a result of such distribution and the Employee
certifies in writing that such a hardship exists (and the Committee has no
knowledge to the contrary); provided that the Committee may set stricter
standards for making such determination on a nondiscriminatory basis; and
provided further that the Participant must obtain the written consent of his or
her spouse to the extent required by law. The Committee's decision shall be
final and binding on the Participant.
(d) In the event that a Participant's Vested Interest is less
than 100% at the time of making a withdrawal from his Profit Sharing Subaccount
pursuant to Section 11.7(a), the Participant's Vested Interest in his or her
Profit Sharing Subaccount at any relevant time thereafter shall be equal to an
amount ("X") determined by the following formula: X = P [AB + (R x D)] - (R x
D). For purposes of applying the formula: P is the Participant's Vested Interest
at the relevant time, AB is the balance of the Participant's Profit Sharing
Subaccount at the relevant time; D is the amount distributed to the Participant
pursuant to Section 11.7(a); and R is the ratio of the Participant's Profit
Sharing Subaccount balance at the relevant time to the Participant's Profit
Sharing Subaccount balance immediately after the distribution pursuant to
Section 11.7(a).
11.8 Direct Rollovers to Another Qualified Plan or IRA.
(a) This Section 11.8 applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Section 11.8, a
distributee may elect, at the time and in the manner prescribed by the
Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a direct
rollover.
(b) An eligible rollover distribution is any distribution of all
or any portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributee's
designated Beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Section 401(a)(9)
of the Code; and the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(c) An eligible retirement plan is an individual retirement
account described in section 408(a) of the Code, an individual retirement
annuity described in section 408(b) of the Code, an annuity plan described in
section 403(a) of the Code or a qualified trust described in section 401(a) of
the Code, that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the surviving
spouse, an eligible retirement plan is an individual retirement account or
individual retirement annuity.
(d) A distributee includes a Participant or former Participant.
In addition, the Participant's or former Participant's Surviving Spouse and the
Participant's or former Participant's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
Section 414(p) of the Code, are distributees with regard to the interest of the
Surviving Spouse, spouse or former spouse.
(e) A direct rollover is a payment by the Plan to the eligible
retirement plan specified by the distributee.
(f) If a distribution is one to which Sections 401(a)(11) and 417
of the Code do not apply, such distribution may commence less than 30 days after
the notice required under Section 1.411(a)-11(c) of the Regulations is given,
provided that:
(1) the Committee clearly informs the Participant that the
Participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution (and,
if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
11.9 Certain Securities Law Restrictions. Any distribution of Shares
pursuant to this Section 11 shall be subject to all applicable laws, rules and
regulations and to such approvals by stock exchanges or governmental agencies as
may be deemed necessary or appropriate by the Board of Directors. Each
distributee may be required to give the Employer a written representation that
such distributee will not be involved in a violation of state or federal
securities laws, including the Securities Act of 1933, as amended; the form of
such written representation will be prescribed by the Board of Directors.
11.10 Participant Loans.
(a) Upon a Participant's written request the Committee may
direct the Trustee to make a loan to such Participant from such Participant's
Account. Loans to Participants pursuant to this Section 11.10 shall be
administered by the Committee and shall be subject to a Participant Loan Policy
and such other procedures as may be adopted from time to time by the Committee.
The Company shall not have the discretion to refuse a loan request, so long as
the terms of the loan comply with the requirements of this Section 11.10 and the
Participant Loan Policy. The terms of the loan shall be determined by the
Committee, subject to the limits set forth in this Section, and shall be
evidenced by the Participant's promissory note. Loans shall be held in a
segregated Account of the Trust. An Employee who has made a Rollover
Contribution shall be considered a Participant for purposes of this Section,
even if such Employee has not yet become a Participant pursuant to Section 3.
(b) The aggregate outstanding balance of all loans to a
Participant from this Plan and all other qualified plans maintained by the
Employer, when added to any principal repayments on any participant loans made
within the twelve-month period preceding the date on which the loan is made, may
not exceed the lesser of (i) $50,000 or (ii) 50% of the vested interest in the
Participant's Account as of the day of making the loan.
(c) Principal and interest shall be repaid in level, periodic
installments by payroll deductions not less frequent than quarterly over a
definite period of time not to exceed five (5) years, provided, however, that in
the case of a loan the proceeds of which are used by the Participant to acquire
a principal residence of the Participant, the loan may be repayable over a
reasonable period of time in excess of five (5) years as determined by the
Committee.
(d) All loans shall be secured by a lien on the Participant's
interest in the trust. The amount of the loan may not exceed fifty percent (50%)
of the value of the Participant's vested Account balance at the time the loan is
made. The Committee may determine that any distribution made pursuant to the
Plan shall be reduced by an amount up to the outstanding principal and interest
balance of the loan.
(e) Any loan made pursuant to this Section 11.10 must not
constitute a prohibited transaction as defined in Section 4975 of the Code.
(f) Loan repayments will be suspended under the Plan as permitted
under Section 414(u)(4) of the Code.
<PAGE>
SECTION 12. MAXIMUM AMOUNT OF ALLOCATION
12.1 Section 415 Limitations. Annual additions to a Participant's
Account with respect to any Plan Year may not exceed the limitations set forth
in Section 415 of the Code, which are incorporated herein by reference. For
these purposes, (i) "annual additions" shall have the meaning set forth in
Section 415(c)(2) of the Code, as modified elsewhere in the Code and the
Regulations, (ii) the limitation year shall mean the Plan Year unless any other
twelve consecutive month period is designated pursuant to a written resolution
adopted by the Employer, (iii) "compensation" shall have the meaning elected by
the Employer pursuant to Section 415(c)(3) of the Code, and (iv) "annual
additions" shall include annual additions under all other defined contribution
plans maintained by the Employer or any Affiliated Employer. Effective for Plan
Years beginning on or after January 1, 1998, "compensation" shall be computed
without reduction for a Participant's elective deferrals under Section 402(g)(3)
of the Code or for contributions made by the Employer or the Participant under
Section 125 of the Code. If the requirements of Section 7.5(a) are satisfied,
the term "annual additions" shall not include any amounts credited to the
Participant's Account (i) resulting from rollover contributions, (ii) due to
Participating Employer contributions relating to interest payments on an Exempt
Loan deductible under Section 404(a)(9)(B) of the Code, or (iii) attributable to
a forfeiture of Shares acquired with the proceeds of an Exempt Loan.
Effective for limitation years commencing prior to January 1, 1999, if
a Participant in the Plan also participates in any defined benefit plan (as
defined in Sections 414(j) and 415(k) of the Code) maintained by the Employer or
any Affiliated Employer, in the event that in any Plan Year the sum of the
Participant's Defined Benefit Fraction (as defined in Section 415(e)(2) of the
Code) and the Participant's Defined Contribution Fraction (as defined in Section
415(e)(3) of the Code) exceed 1.0, the benefit under such defined benefit plan
or plans shall be reduced in accordance with the provisions of that plan or
those plans, so that the sum of such fractions with respect to the Participant
will not exceed 1.0. If this reduction does not ensure that the limitation set
forth in Section 12.1 is not exceeded, then the annual addition to any defined
contribution plan, other than the Plan, shall be reduced in accordance with the
provisions of that plan but only to the extent necessary to ensure that such
limitation is not exceeded.
12.2 Refund or Forfeiture of Amounts in Excess of Section 415 Limits.
(a) In the event that amounts which would otherwise be
allocated to a Participant's Account under the Plan must be reduced by reason of
the limitations of Section 12.1, then such reduction shall be made in the
following order or priority, but only to the extent necessary:
(i) first the Participant's Profit Sharing Contributions
shall be forfeited and reallocated pursuant to this Section 12.2; and then
(ii) the Participant's Matching Contributions shall be
forfeited and reallocated pursuant to this Section 12.2; and then
(iii) the Participant's Elective Contributions shall be
refunded to the Participant; and then
(iv) Shares allocated to the Participant's Account
attributable to ESOP Contributions shall be forfeited and reallocated pursuant
to this Section 12.2.
(b) Forfeitures arising under the Plan and allocable to such
Participant in respect of such Plan Year shall be reallocated to the Accounts of
other Participants as of the end of the Plan Year for which such reduction is
made in the manner provided under Section 4.5 above.
(c) If, with respect to any Plan Year, there is an excess
contribution on account of the limitations contained in this Section 12.2, and
such excess cannot be fully allocated in accordance with Section 12.2(b) because
of the limitations prescribed in this Section 12, the amount of such excess
which cannot be so allocated shall be held in suspense and allocated in the
succeeding Plan Year prior to any other contributions by the Employer for such
Plan Year.
<PAGE>
SECTION 13. VOTING AND TENDER OR EXCHANGE RIGHTS
13.1 Voting and Tender or Exchange of Shares in General. Except as
otherwise required by the Act, the Code and the Regulations, all voting and
tender or exchange rights of Shares held in Participants' Accounts shall be
exercised by the Purchasing Agent only as directed by the Participants or their
Beneficiaries or as otherwise provided in accordance with the provisions of this
Section 13.
13.2 Voting of Allocated Shares.
(a) If any Participating Employer has a registration-type
class of securities (as defined in Section 409(e)(4) of the Code or any
successor statute thereto), then, with respect to all corporate matters
submitted to shareholders, all Shares (including fractional interests in Shares)
allocated and credited to the Accounts of Participants shall be voted in
accordance with the directions of such Participants as given to the Purchasing
Agent; provided that (i) with regard to Shares allocated to ESOP Accounts,
allocated Shares for which no directions are received by the Purchasing Agent
shall be voted in the same proportion as allocated Shares for which directions
are received are voted pursuant to this Section 13.2, and (ii) Shares allocated
to Accounts other than ESOP Accounts for which no directions are received by the
Purchasing Agent shall not be voted.
(b) If no Participating Employer has a registration-type class
of securities (as defined in Section 409(e)(4) of the Code or any successor
statute thereto), then, only with respect to corporate matters relating to a
corporate merger or consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially all assets of a trade or
business, or such other similar transaction that Regulations require, all Shares
allocated and credited to the Accounts of Participants shall be voted in
accordance with the directions of such Participants as given to the Purchasing
Agent; provided that (i) with respect to Shares allocated to ESOP Accounts,
allocated Shares for which no directions are received by the Purchasing Agent
shall be voted in the same proportion as allocated Shares for which directions
are received are voted pursuant to this Section 13.2, and (ii) Shares allocated
to Accounts other than ESOP Accounts for which no directions are received by the
Purchasing Agent shall not be voted.
13.3 Mechanics of Voting Allocated Shares.If Participants are entitled
under Section 13.2 to direct the vote with respect to allocated Shares, then, at
least 30 days before each annual or special shareholders' meeting of the
Employer (or, if such schedule cannot be met, as early as practicable before
such meeting), the Committee shall cause each Participant to be furnished with a
copy of the proxy solicitation material sent generally to shareholders, together
with a form requesting confidential instructions concerning the manner in which
the Shares allocated to such Participant's Account are to be voted. Upon timely
receipt of such instructions, the Purchasing Agent (after combining votes of
fractional Shares to give effect to the greatest extent possible to
Participants' instructions) shall vote the Shares as instructed. The
instructions received by the Purchasing Agent from each Participant shall be
held by the Purchasing Agent in strict confidence and shall not be divulged or
released to any person, including, without limitation, any officers or Employees
of any Participating Employer, or of any other Employer. The Trustee, the
Employer, the Purchasing Agent and the Committee shall not make recommendations
to Participants concerning whether to vote or how to vote.
13.4 Voting of Unallocated Shares. With respect to unallocated Shares
held in the Trust Fund, absent specific instructions from the Trustee or other
fiduciary pursuant to the Trust Agreement, the Purchasing Agent shall vote such
Shares in the same proportion as Shares are voted pursuant to Section 13.2;
provided that the Purchasing Agent shall follow any directions of the Trustee or
any other fiduciary authorized to instruct the Trustee with respect to the
voting of such unallocated Shares under the Trust Agreement.
13.5 Tender or Exchange of Allocated Shares. The Committee shall
notify each Participant of each tender or exchange offer for the Shares and
utilize its best efforts to distribute or cause to be distributed to each
Participant in a timely manner all information distributed to shareholders of
the Employer in connection with any such tender or exchange offer. Each
Participant shall have the right from time to time with respect to the Shares
allocated to the Participant's Account to instruct the Purchasing Agent in
writing as to the manner in which to respond to any tender or exchange offer
which shall be pending or which may be made in the future for all Shares or any
portion thereof. A Participant's instructions shall remain in force until
superseded by the Participant. The Purchasing Agent shall tender or exchange
whole Shares only as and to the extent so instructed. If the Purchasing Agent
does not receive instructions from a Participant regarding any tender or
exchange offer for Shares, the Purchasing Agent shall have no discretion in such
matter and shall not tender or exchange any such Shares in response thereto. For
purposes of responding to such tender or exchange offers, each Participant shall
be the "named fiduciary" with respect to such Shares allocated to his or her
Account. Unless and until Shares are tendered or exchanged, the individual
instructions received by the Purchasing Agent from Participants shall be held by
the Purchasing Agent in strict confidence and shall not be divulged or released
to any person, including, without limitation, any officers or Employees of any
Participating Employer, or of any other Employer; provided, however, that the
Purchasing Agent shall advise the Employer, at any time upon request, of the
total number of Shares not subject to instructions to tender or exchange.
13.6 Tender or Exchange of Unallocated Shares. Absent specific
instructions from the Trustee or other fiduciary pursuant to the Trust
Agreement, the Purchasing Agent shall tender unallocated Shares held in the
Trust Fund in proportion to the ratio that (A) the number of Shares with respect
to which Participant instructions favor of the tender or exchange have been
received bears to (b) the number of Shares with respect to which Participant
instructions for or against the tender or exchange have been received; provided
that the Purchasing Agent shall follow any directions of the Trustee or any
other fiduciary authorized to instruct the Trustee with respect to the tender or
exchange of unallocated Shares under the Trust Agreement.
13.7 Voting of Deceased Participant's Shares. If this Section 13
applies to Shares allocated to the Account of a deceased Participant, such
Participant's Beneficiary shall be entitled to direct the manner in which to
respond to any tender or exchange offer as if such Beneficiary were the
Participant.
<PAGE>
SECTION 14. DESIGNATION OF BENEFICIARIES
14.1 Designation of Beneficiary. Each Participant shall file with the
Committee a written designation of one or more persons as the Beneficiary who
shall be entitled to receive the amount, if any, payable under the Plan upon his
or her death. A Participant may from time to time revoke or change his or her
Beneficiary designation without the consent of any prior Beneficiary by filing a
new designation with the Committee. The last such designation received by the
Committee shall be controlling; provided, however, that no designation, or
change or revocation thereof, shall be effective unless received by the
Committee prior to the Participant's death, and in no event shall it be
effective as of a date prior to such receipt. A Participant's Beneficiary
designation shall not be effective to the extent that payments to the Surviving
Spouse are required pursuant to Section 11, and in no event shall it be
effective as of a date prior to such receipt.
14.2 Failure to Designate Beneficiary. If no such Beneficiary
designation is in effect at the time of a Participant's death, or if no
designated Beneficiary survives the Participant, the payment of the amount, if
any, payable under the Plan upon his or her death shall be made to the
Participant's Surviving Spouse, if any; or if the Participant has no Surviving
Spouse, then to the Participant's children, if any, in equal shares; or if the
Participant has no children, to the Participant's parents, if any, in equal
shares; or if the Participant has no parents, to the Participant's brothers and
sisters, if any, in equal shares. If the Participant has no brothers or sisters,
payment shall be made to the Participant's estate. If the Committee is in doubt
as to the right of any person to receive such amount, the Committee may direct
the Trustee to retain such amount, without liability for any interest thereon,
until the rights thereto are determined, or the Committee may direct the Trustee
to pay such amount into any court of appropriate jurisdiction and such payment
shall be a complete discharge of the liability of the Plan and the Trust Fund
therefor.
<PAGE>
SECTION 15. ADMINISTRATION OF THE PLAN
15.1 The Committee. The Committee shall have general responsibility
for the administration, interpretation and construction of the Plan. The
Committee shall be responsible for establishing and maintaining Plan records,
including responsibility for compliance with the Actual Deferral Percentage and
Actual Contribution Percentage tests described in Sections 4.6 and 5.3, and the
Committee shall be responsible for complying with the reporting and disclosure
requirements of the Act. The Committee shall report to the Board of Directors,
or to a committee of the Board of Directors designated for that purpose,
periodically as shall be specified by the Board of Directors or such designated
committee, with regard to the matters for which it is responsible under the
Plan.
15.2 The Trustee. Except as otherwise provided in the Trust Agreement
or the Plan, the Trustee may act only as directed by the Committee, the Employer
or any other party, as applicable. The Trustee shall have responsibility under
the Plan for the management and control of the assets of the Plan. The Committee
shall periodically review the performance and methods of the Trustee. The
Employer or the Committee shall have the power to appoint, remove or change the
Trustee and, to the extent that the Trust Fund is invested in assets other than
Shares, shall have the power to appoint or remove one or more investment
advisers and to delegate to such adviser authority and discretion to manage
(including the power to acquire and dispose of) the assets of the Plan, provided
that (i) such adviser with such authority and discretion shall be either a bank
or a registered investment adviser under the Investment Advisers Act of 1940,
and shall acknowledge in writing that it is a fiduciary with respect to the Plan
and (ii) the Committee shall periodically review the investment performance and
methods of each adviser(s) with such authority and discretion. The Committee
shall establish investment standards and policies and communicate the same to
the Trustee. If annuities are to be purchased under the Plan, the Committee
shall determine what contracts should be made available to terminated
Participants or purchased by the Trust Fund.
15.3 Committee's Responsibility for Entering into Exempt Loans and
Valuation of Shares. The Committee shall have responsibility for directing the
Trustee as to whether and under what terms it shall enter into an Exempt Loan
and for directing the Purchasing Agent whether and under what terms it shall
purchase or otherwise dispose of Shares. In the event that there is no generally
recognized market for Shares, the Committee shall be the named fiduciary with
responsibility for determining the fair market value of the Shares, provided,
that any such determination shall be in accordance with applicable Regulations,
if any, and the Committee shall, in making such determination, retain an
independent appraiser to make such valuation on behalf of the Committee in
accordance with Section 7.9.
15.4 Committee's Power to Engage Outside Experts. The Committee may
arrange for the engagement of such legal counsel, who may be counsel for the
Employer, and make use of such agents and clerical or other personnel as they
each shall require or may deem advisable for purposes of the Plan. The Committee
may rely upon the written opinion of such counsel and the accountants engaged by
the Committee and may delegate to any such agent of said Committee its authority
to perform any act hereunder, including without limitation, those matters
involving the exercise of discretion, provided that such delegation shall be
subject to revocation at any time at the discretion of said Committee. The
Committee shall engage such certified public accountants, who may be accountants
for the Employer, as it shall require or may deem advisable for purposes of the
Plan.
15.5 Composition of Committee. The Committee shall consist of at least
three members, each of whom shall be appointed by, shall remain in office at the
will of, and may be removed, with or without cause, by the Board of Directors.
Any member of said Committee may resign at any time. No member of said Committee
shall be entitled to act on or decide any matter relating solely to himself or
any of his or her rights or benefits under the Plan. The members of the
Committee shall not receive any special compensation for serving in their
capacities as members of such Committee but shall be reimbursed for any
reasonable expenses incurred in connection therewith. Except as otherwise
required by the Act, no bond or other security need be required of the Committee
or any member thereof in any jurisdiction. Any member of the Committee, or any
agent to whom said Committee delegates any authority, and any other person or
group of persons, may serve in more than one fiduciary capacity (including
service both as a Trustee and administrator) with respect to the Plan.
15.6 Actions of Committee. The Committee shall elect or designate its
own chairman, establish its own procedures and the time and place for its
meetings and provide for the keeping of minutes of all meetings. A majority of
the members of the Committee shall constitute a quorum for the transaction of
business at a meeting of the Committee. Any action of the Committee may be taken
upon the affirmative vote of a majority of the members of the Committee at a
meeting or, at the direction of its Chairman, without a meeting, by mail,
telephone or facsimile, provided that all of the members of the Committee are
informed by mail or telephone of their right to vote on the proposal and of the
outcome of the vote thereon.
15.7 Disbursement of Plan Funds. The Committee shall cause to be kept
full and accurate accounts of receipts and disbursements of the Plan, shall
cause to be deposited all funds of the Plan to the name and credit of the Plan
in such depositories as may be designated by the Committee, shall cause to be
disbursed the monies and funds of the Plan when so authorized by the Committee
and shall generally perform such other duties as may be assigned to them from
time to time by the Committee.
15.8 Application for Benefits. Each Participant or Beneficiary
believing himself eligible for benefits under the Plan shall apply for such
benefits by completing and filing with the Committee an application for benefits
on a form supplied by the Committee. Before the date on which benefit payments
commence, each such application must be supported by such information and data
as the Committee deems relevant and appropriate. Evidence of age, marital status
(and, in the appropriate instances, health, death or disability) and location of
residence shall be required of all applicants for benefits. All claims for
benefits under the Plan shall, within a reasonable period of time, be decided by
one or more persons designated in writing by the chairman of the Committee.
15.9 Denied Claims for Benefits. In the event that any claim for
benefits is denied in whole or in part, the Participant or Beneficiary whose
claim has been so denied shall be notified of such denial in writing by the
Committee. The notice advising of the denial shall specify the reason or reasons
for denial, make specific reference to pertinent Plan provisions, describe any
additional material or information necessary for the claimant to perfect the
claim (explaining why such material or information is needed) and shall advise
the Participant or Beneficiary, as the case may be, of the procedure for the
appeal of such denial. All appeals shall be made by the following procedure:
(a) The Participant or Beneficiary whose claim has been denied
shall file with the Committee a notice of desire to appeal the denial. Such
notice shall be filed within sixty (60) days of notification by the Committee of
claim denial, shall be made in writing and shall set forth all of the facts upon
which the appeal is based. Appeals not timely filed shall be barred.
(b) The Committee shall, within thirty (30) days of receipt of
the Participant's or Beneficiary's notice of appeal, establish a hearing date on
which the Participant or Beneficiary may make an oral presentation to the
Committee in support of his or her appeal. The Participant or Beneficiary shall
be given not less than ten (10) days' notice of the date set for the hearing.
(c) The Committee shall consider the merits of the claimant's
written and oral presentations, the merits of any facts or evidence in support
of the denial of benefits and such other facts and circumstances as the
Committee shall deem relevant. If the claimant elects not to make an oral
presentation, such election shall not be deemed adverse to the claimant's
interest, and the Committee shall proceed as set forth below as though an oral
presentation of the contents of the claimant's written presentation had been
made.
(d) The Committee shall render a determination upon the
appealed claim which determination shall be accompanied by a written statement
as to the reasons therefor. The determination so rendered shall be binding on
all parties.
(e) For all purposes under the Plan, such decisions on claims
(where no review is requested) and decisions on review (where review is
requested) shall be final, binding and conclusive on all interested persons as
to participation and benefit eligibility, the Employee's amount of Compensation
and any other matter of fact or interpretation relating to the Plan.
15.10 Indemnification. To the maximum extent permitted by law, no
member of the Committee shall be personally liable by reason of any contract or
other instrument executed by such member of the Committee or on his or her
behalf in the Committee member's capacity as a member of such Committee nor for
any mistake of judgment made in good faith, and the Employer shall indemnify and
hold harmless, directly from its own assets (including the proceeds of any
insurance policy the premiums of which are paid from the Employer's own assets),
each member of the Committee and each other officer, employee or director of the
Employer to whom any duty or power relating to the administration or
interpretation of the Plan or to the management and control of the assets of the
Plan may be delegated or allocated, against any cost or expense (including
counsel fees) or liability (including any sum paid in settlement of a claim with
the approval of the Employer) arising out of any act or omission to act in
connection with the Plan unless arising out of such person's own fraud or
willful misconduct. The Employer shall advance funds for legal expenses to the
extent permitted by the Act.
15.11 Agent for Service of Process. The Committee or such other person
as may from time to time be designated by the Committee shall be the agent for
service of process under the Plan.
<PAGE>
SECTION 16. EXPENSES
16.1 Payment of Plan Expenses. The expenses incurred in the management
and administration of the Plan shall be paid from the Trust Fund, except to the
extent the Employer, in its sole discretion, may choose to pay such expenses
from time to time; provided that any Trustee expenses paid to The Charles Schwab
Trust Company shall be payable solely by the Employer. Such expenses shall
include (i) the fees and expenses of any employee and of the Trustee for the
performance of their duties under the Plan and Trust Fund (including but not
limited to obtaining investment advice, record keeping services and legal
services), (ii) the expenses incurred by the members of the Committee in the
performance of their duties under the Plan (including reasonable compensation
for any legal counsel, certified public accountants, consultants and agents, and
cost of services rendered with respect to the Plan) and (iii) all other proper
charges and disbursements of the Trustee or the members of the Committee
(including settlements of claims or legal actions approved by counsel to the
Plan).
16.2 Expenses Attributable to Investment of Plan Assets and Taxes.
Brokerage fees, transfer taxes and any other expenses incident to the purchase
or sale of securities by the Trustee shall be deemed to be part of the cost of
such securities, or deducted in computing the proceeds therefrom, as the case
may be. Expenses attributable to investments of the Trust Fund shall be paid out
of the Trust Fund, except to the extent the Employer, in its sole discretion,
may choose to pay such expenses from time to time; provided that expense
entirely attributable to any one investment or to any one investment fund shall
be allocated pro rata in accordance with Account balances among Accounts
invested in such investment or investment fund. Taxes, if any, of any and all
kinds whatsoever which are levied or assessed on any assets held or income
received by the Trustee shall be paid out of the Trust Fund.
<PAGE>
SECTION 17. EMPLOYER PARTICIPATION
17.1 Adoption of Plan by Affiliated Employer. Any Affiliated Employer
may adopt the Plan and the Trust Fund by resolution of its board of directors or
equivalent governing body provided that (i) the Board of Directors has not
expressly disallowed participation by such Affiliated Employer in the Plan; (ii)
the Affiliated Employer has not previously expressly declined to participate in
the Plan; or (iii) the Affiliated Employer is not precluded from participating
in the Plan by a legally binding written document that precludes such
participation; and provided further that the Board of Directors consents to such
adoption. Any Affiliated Employer which so adopts the Plan shall be deemed to
appoint Charles Schwab & Co., Inc., the Committee and the Trustee its exclusive
agents to exercise on its behalf all of the power and authority conferred under
the Plan or the Trust Agreement. This authority shall continue until the Plan is
terminated and the relevant Trust Fund assets have been distributed.
17.2 Termination of Participation by Participating Employer. A
Participating Employer may terminate its participation in the Plan by giving the
Committee prior written notice specifying a termination date which shall be the
last day of a month at least 60 days subsequent to the date such notice is
received by the Committee. The Board of Directors may terminate any
Participating Employer's participation in the Plan, as of any termination date
specified by the Committee, for the failure of the Participating Employer to
make proper contributions or to comply with any other provision of the Plan.
17.3 Effect of Termination of Participation by Participating Employer.
Upon termination of the Plan as to any Participating Employer, such
Participating Employer shall not make any further contributions under the Plan
and no amount shall thereafter be payable under the Plan to or with respect to
any Participants then employed by such Participating Employer, except as
provided in this Section 17. To the maximum extent permitted by the Act, any
rights of Participants no longer employed by such Participating Employer and of
former Participants and their Beneficiaries and Surviving Spouses and other
eligible survivors under the Plan shall be unaffected by such termination and
any transfer, distribution or other disposition of the assets of the Plan as
provided in this Section 17 shall constitute a complete discharge of all
liabilities under the Plan with respect to such Participating Employer's
participation in the Plan and any Participant then employed by such
Participating Employer.
The interest of each such Participant who is in Service with
such Participating Employer as of the termination date is the amount, if any,
credited to his or her Account after payment of or provision for expenses and
charges and appropriate adjustment of the Accounts of all such Participants for
expenses and charges as described in Section 16, and all forfeitures shall be
nonforfeitable as of the termination date, and upon receipt by the Committee of
IRS approval of such termination, the full current value of such amount shall be
paid from the Trust Fund in the manner described in Section 17.4 or transferred
to a successor employee benefit plan which is qualified under Section 401(a) of
the Code; provided, however, that in the event of any transfer of assets to a
successor employee benefit plan the provisions of Section 17.4 will apply. No
advances against such payments shall be made prior to such receipt of approval,
but after such receipt the Committee, in its sole discretion, may direct the
Trustee to make one or more advances in accordance with Section 11.1.
All determinations, approvals and notifications referred to
above shall be in form and substance and from a source satisfactory to the
Committee. To the maximum extent permitted by the Act, the termination of the
Plan as to any Participating Employer shall not in any way affect any other
Participating Employer's participation in the Plan.
17.4 Limitations on Transfer of Plan Assets to Successor Plan. No
transfer of the Plan's assets and liabilities to a successor employee benefit
plan (whether by merger or consolidation with such successor plan or otherwise)
shall be made unless each Participant would, if either the Plan or such
successor plan then terminated, receive a benefit immediately after such
transfer which (after taking account of any distributions or payments to such
Participants as part of the same transaction) is equal to or greater than the
benefit such Participant would have been entitled to receive immediately before
such transfer if the Plan had then been terminated. The Committee may also
request appropriate indemnification from the employer or employers maintaining
such successor plan before making such a transfer.
17.5 Shares Allocated to Suspense Fund Excluded from Transfer of Plan
Assets to Successor Plan. Notwithstanding any provision of this Section 17 to
the contrary, any Shares allocated to a Suspense Subfund shall not be
transferred to a successor employee benefit plan except as is required or
permitted by the Committee in accordance with the terms of an Exempt Loan and
the Regulations.
<PAGE>
SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN
18.1 Amendment, Suspension or Termination of Plan.
(a) Subject to the provisions of Section 18.1(b) and (c)
hereof, the board of directors of the Plan Sponsor reserves the right at any
time to suspend or terminate the Plan, any contributions thereunder, or any
other agreement or arrangement forming a part of the Plan, in whole or in part
and for any reason, and to adopt any amendment or modification thereto, all
without the consent of any Participating Employer, Participant, Beneficiary,
Surviving Spouse or other eligible survivor. Subject to the provisions of
Section 18.1(b) and (c) hereof, the Board of Directors reserves the right at any
time to amend or modify the Plan. Each Participating Employer by its adoption of
the Plan shall be deemed to have delegated this authority to the Board of
Directors.
(b) The Board of Directors shall not make any amendment or
modification which would (i) retroactively impair any rights to any benefit
under the Plan which any Participant, Beneficiary, Surviving Spouse or other
eligible survivor would otherwise have had at the date of such amendment by
reason of the contributions theretofore made or (ii) make it possible for any
part of the funds of the Plan (other than such part as is required to pay taxes,
if any, and administration expenses as provided in Section 16) to be used for or
diverted to any purposes other than for the exclusive benefit of Participants
and their Beneficiaries and Surviving Spouses and other eligible survivors under
the Plan prior to the satisfaction of all liabilities with respect thereto.
18.2 Power to Retroactively Amend, Suspend or Terminate Plan
Provisions. Subject to the provisions of Section 18.1, any amendment,
modification, suspension or termination of any provision of the Plan may be made
retroactively if necessary or appropriate to qualify or maintain the Plan as a
plan meeting the requirements of Sections 401(a) of the Code or any other
applicable provision of law (including the Act) as now in effect or hereafter
amended or adopted and the Regulations issued thereunder.
18.3 Notice of Amendment, Suspension or Termination. Notice of any
amendment, modification, suspension or termination of the Plan shall be given by
the Board of Directors or the board of directors of the Plan Sponsor, as the
case may be, to the Trustee and all Participating Employers.
18.4 Effect of Termination of Plan. Upon termination of the Plan, no
Participating Employer shall make any further contributions under the Plan and
no amount shall thereafter be payable under the Plan to or with respect to any
Participant except as provided in this Section 18, and to the maximum extent
permitted by the Act, transfers or distributions of the assets of the Plan as
provided in this Section 18 shall constitute a complete discharge of all
liabilities under the Plan. The provisions of the Plan which are necessary for
the operation of the Plan and the distribution or transfer of the assets of the
Plan shall remain in force.
Upon receipt by the Committee of IRS approval of such
termination, the full current value of such adjusted amount, and the full value
of each account described in Sections 6.2 and 7.1 above, shall be paid from the
Trust Fund to each Participant and former Participant (or, in the event of the
death of a Participant or former Participant, to the Surviving Spouse or
Beneficiary thereof) in any manner of distribution specified in Section 11
above, including payments which are deferred until the Participant's termination
of Service, as the Committee shall determine. Without limiting the foregoing,
any such distribution may be made in cash or in property, or both, as the
Committee in its sole discretion may direct.
All determinations, approvals and notifications referred to above
shall be in form and substance and from a source satisfactory to the Committee.
18.5 Partial Termination of Plan. In the event that any governmental
authority, including without limitation the IRS, determines that a partial
termination (within the meaning of the Act) of the Plan has occurred or if there
is a complete discontinuance of Employer contributions then (i) the interest of
each Participant affected thereby in his or her Account shall become
nonforfeitable as of the date of such partial termination or complete
discontinuance of contributions and (ii) the provisions of Sections 18.2, 18.3
and 18.4 above, which in the opinion of the Committee are necessary for the
execution of the Plan and the allocation and distribution of the assets of the
Plan, shall apply.
18.6 Trust for Exclusive Benefit of Participant. In no event shall
any part of the Trust Fund (other than such part as is required to pay taxes, if
any, and administration expenses as provided in Section 16 above) be used for or
diverted to any purposes other than for the exclusive benefit of Participants
and their Beneficiaries and Surviving Spouses under the Plan.
<PAGE>
SECTION 19. TOP-HEAVY PLAN REQUIREMENTS
19.1 Top-Heavy Plan-In General. For any Plan Year for which this Plan
is a Top-Heavy Plan, the provisions of this Section 19 shall apply
notwithstanding any other provisions of the Plan.
19.2 Effect of Top-Heavy Status. Each Participant who (i) is a Non-
Key Employee and (ii) is employed on the last day of the Plan Year, shall be
entitled to have contributions allocated to his or her Account of not less than
three percent (3%) of the Participant's Compensation (the "Minimum Contribution
Percentage") regardless of (i) whether such Non-Key Employee has completed a
Year of Service, and (ii) the amount of such Non-Key Employee's Compensation;
provided, however, that the minimum contribution percentage for any Plan Year
shall not exceed the percentage at which contributions are made under the Plan
for the Plan Year for the Key Employee for whom such percentage is the highest
for such Plan Year. For this purpose, such percentage shall be determined by
dividing the contributions made for such Key Employee by so much of his or her
Compensation (which solely for this purpose includes Elective Contributions made
by the Employer for the Key Employee) for the Plan Year as does not exceed
$150,000 (adjusted automatically for increases in accordance with the
Regulations).
Contributions taken into account under this Section 19.2 shall
include contributions under this Plan and under all other defined contribution
plans (as defined in Section 414(i) of the Code) required to be included in an
Aggregation Group; provided, however, that such contributions shall not include
(i) contributions to any defined contribution plan in the required aggregation
group if such contributions enable such a defined contribution plan to meet the
requirements of Sections 401(a)(4) or 410 of the Code or (ii) contributions
under the Social Security Act or any other federal or state law.
19.3 Top-Heavy Vesting Schedule.
In the event that the Plan is a Top-Heavy Plan, all contributions shall
be vested according to the following vesting schedule:
Years of Service Percentage
---------------- ----------
Less than two years 0%
At least two years but less than three years 20%
At least three years but less than four years 50%
At least four years but less than five years 75%
Five years or more 100%
19.4 Definitions.
(a) "Top-Heavy Plan" means this Plan for any Plan Year if, as of
the Determination Date, (i) the present value of the Accounts of all
Participants who are Key Employees (excluding former Key Employees) exceeds 60
percent of the present value of all Participants' Accounts (excluding former Key
Employees) or (ii) the Plan is required to be in an Aggregation Group which for
such Plan Year is a Top-Heavy Group. In determining whether the Plan constitutes
a Top-Heavy Plan, the Committee shall make the following adjustments:
(i) When more than one plan is aggregated, the Committee
shall determine separately for each plan as of any Determination Date, the
present value of accrued benefits of all Participants and the value of Accounts
of all Participants.
(ii) Any such determination shall include the present value
of distributions made to former Participants under the applicable plan
(including a terminated plan) during the five-year period ending on the
Determination Date, unless reflected in the value of the accrued benefits or the
Accounts of such former Participants as of the Determination Date.
(iii) Any such determination shall include any Rollover
Contribution from any other plan as follows:
(A) If the Rollover Contribution is initiated by the
Employee and made to or from a plan maintained by a corporation which is not an
Affiliated Employer, the plan providing the distribution shall include such
distribution in the value of such accrued benefit or Account.
(B) If the Rollover Contribution is not initiated
by the Employee or made from a plan maintained by an Affiliated Employer, the
plan accepting the distribution shall include such distribution in the value of
such accrued benefit or Account.
(b) "Determination Date" means for any Plan Year the last day of
the next preceding Plan Year.
(c) "Aggregation Group" means all plans maintained by the
Employer or any Affiliated Employer which are required to be aggregated or
permitted to be aggregated. For purposes of this Section 19.4(c),
(i) The group of plans that are required to be aggregated
(the "required aggregation group") includes each plan of the Employer or any
Affiliated Employer in which a Key Employee is a Participant, and each other
plan of the Employer or any Affiliated Employer which enables a plan in which a
Key Employee is a Participant to meet the requirements of Sections 401(a)(4) or
410 of the Code; and
(ii) The group of plans that are permitted to be aggregated
(the "permissive aggregation group") includes the required aggregation group
plus one or more plans of the Employer or any Affiliated Employer that is not
part of the required aggregation group and that the Committee certifies as
constituting a plan within the permissive aggregation group. Such plan or plans
may be added to the permissive aggregation group only if the permissive
aggregation group would continue to meet the requirements of Sections 401(a)(4)
and 410 of the Code.
(d) "Top Heavy Group" means the Aggregation Group, if as of any
Determination Date, the sum of (i) the present value of the accrued benefits of
all Participants who are Key Employees under all defined benefit plans (within
the meaning of Section 414(j) of the Code) included in the Aggregation Group
plus (ii) the aggregate value of the Accounts of all Participants who are Key
Employees under all defined contribution plans (within the meaning of Section
414(i) of the Code) included in the Aggregation Group exceeds 60 percent of the
sum of (i) the present value of the accrued benefits for all Participants
(excluding former Key Employees), under all such defined benefit plans plus (ii)
the aggregate value of the Accounts of all Participants (excluding former Key
Employees) under all such defined contribution plans. If the Aggregation Group
that is a Top-Heavy Group is a required aggregation group, each plan in the
Aggregation Group will be a Top-Heavy Plan. If the Aggregation Group that is a
Top-Heavy Group is a permissive aggregation group, only those plans that are
part of the required aggregation group will be treated as a Top-Heavy Plan. If
the Aggregation Group is not a Top-Heavy Group, no plan within such Aggregation
Group will be a Top-Heavy Plan.
For purposes of Section 19.4(a), the present value of
accrued benefits under any defined benefit plan and the value of Accounts under
any defined contribution plan shall be determined as of the Valuation Date that
is coincident with the Determination Date in accordance with the Regulations.
(e) "Key Employee" means any Employee or former Employee who,
at any time during the Plan Year preceding the Determination Date or during any
of the four preceding Plan Years, is or was one of the following:
(i) An officer of the Employer or any Affiliated Employer
having annual compensation (within the meaning of Section 414(q)(4)) greater
than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code
for any Plan Year (as adjusted for increases in the cost of living in accordance
with the Regulations). For purposes of the preceding sentence there shall be
treated as officers for any such Plan Year no more than the lesser of:
(A) 50 Employees, or
(B) the greater of three Employees or 10 percent of
the Employees of the Employer or any Affiliated Employer;
(ii) One of the ten Employees owning (or considered as
owning within the meaning of Section 318 of the Code) more than a five percent
(5%) interest and one of the largest interests in the Employer or any Affiliated
Employer. An Employee will not be considered such an owner for any Plan Year if
the Employee's compensation (within the meaning of Section 414(q)(4)) is less
than $30,000 (as adjusted for increases in the cost of living in accordance with
the Regulations); for purposes of determining ownership pursuant to Section
19.4(e)(ii) the aggregation rules of Section 414(b), (c) and (m) of the Code
apply.
(iii) Any person who owns (or considered as owning within
the meaning of Section 318 of the Code) more than a five percent interest in the
Employer;
(iv) Any person having compensation (within the meaning
of Section 414(q)(4)) of more than $150,000, and owning (or considered as owning
within the meaning of Section 318 of the Code) more than a one percent interest
in the Employer. For purposes of this Section 19.4(e), a Beneficiary of a Key
Employee shall be treated as a Key Employee and the interests inherited by such
Beneficiary shall be treated the same as if owned by the Key Employee.
(f) "Non-Key Employee" means any "Non-Key Employee" as defined in
Section 416(i)(2) of the Code and the Regulations promulgated thereunder.
19.5 Maintenance of Defined Benefit Plan in Addition to Plan.
Effective for limitation years commencing prior to January 1, 2000, in
the event that the Plan is a Top-Heavy Plan for any Plan Year and the Employer
also maintains a defined benefit plan (within the meaning of Section 414 of the
Code) which provides benefits on behalf of Participants, then one of the two
following provisions shall apply:
(1) If the Plan is a Top-Heavy Plan for any Plan Year but
would not be a "Top-Heavy Plan" for the Plan Year if "90 percent" were
substituted for "60 percent" in Section 19.4(a), then Section 19.2 shall be
applied for such Plan Year by substituting "four percent" for "three percent."
(2) If a Top-Heavy Plan would continue to be a "Top-Heavy
Plan" for the Plan Year if "90 percent" were substituted for "60 percent", then
the denominator of the defined contribution plan fraction shall be calculated
for such Plan Year by substituting "1.0" for "1.25", except with respect to any
Participant who is not entitled to an allocation of Employer contributions and
does not receive any accruals under any defined benefit plan (within the meaning
of Section 414(j) of the Code) maintained by the Employer.
In the event that another defined contribution plan or a defined
benefit plan maintained by the Employer provides contributions or benefits on
behalf of Participants, the Committee shall take such other plan into account as
a part of this Plan to the extent required by the Code and in accordance with
the Regulations.
<PAGE>
SECTION 20. GENERAL LIMITATIONS AND PROVISIONS
20.1 Exclusive Benefit of Participants and Beneficiaries. In no event
shall any part of the funds of the Plan be used for or diverted to any purposes
other than for the exclusive benefit of Participants and their Beneficiaries
under the Plan except as permitted under Section 403(c) of the Act. Upon the
transfer by a Participating Employer of any money to the Trustee, all interest
of the Participating Employer therein shall cease and terminate.
20.2 No Rights to Continued Employment. Nothing contained in the Plan
shall give any employee the right to be retained in the employment of the
Employer or any Affiliated Employer or affect the right of the Employer or any
Affiliated Employer to dismiss any employee. The adoption and maintenance of the
Plan shall not constitute a contract between the Employer and any employee or be
consideration for, or an inducement to or condition of, the employment of any
employee.
20.3 Trust Sole Source of Benefits. The Trust Fund shall be the sole
source of benefits under the Plan and, except as otherwise required by the Act,
the Employer and the Committee assume no liability or responsibility for payment
for such benefits, and each Participant, Surviving Spouse, Beneficiary or other
person who shall claim the right to any payment under the Plan shall be entitled
to look only to the Trust Fund for such payment and shall not have any right,
claim or demand therefor against the Employer, the Committee, or any Participant
thereof, or any employee or director of the Employer.
20.4 Risk of Decrease in Assets. Each Participant, Beneficiary and
Surviving Spouse shall assume all risk in connection with any decrease in the
value of the assets of the Trust Fund and the Participants' Accounts or special
accounts and neither the Employer nor the Committee shall be liable or
responsible therefor.
20.5 Incapacity of Participant or Beneficiary. If the Committee shall
find that any person to whom any amount is payable under the Plan is unable to
care for his or her affairs because of illness or accident, or is a minor, or
has died, then any payment due such person or his or her estate shall be made to
his or her duly appointed legal representative. Any such payment shall be a
complete discharge of the liability of the Plan and the Trust Fund therefor.
20.6 Antialienation; Qualified Domestic Relations Orders.
(a) Except insofar as may otherwise be required by law or
pursuant to the terms of a Qualified Domestic Relations Order, as set forth in
this Section 20.5, no amount payable at any time under the Plan and the Trust
Fund shall be subject in any manner to alienation by anticipation, sale,
transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of
any kind nor in any manner be subject to the debts or liabilities of any person,
and any attempt to so alienate or subject any such amount, whether presently or
thereafter payable, shall be void. If any person shall attempt to, or shall,
alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber
any amount payable under the Plan and Trust Fund, or any part thereof, or if by
reason of his or her bankruptcy or other event happening at any such time such
amount would be made subject to his or her debts or liabilities or would
otherwise not be enjoyed by such person, then the Committee, if it so elects,
may direct that such amount be withheld and that the same or any part thereof be
paid or applied to or for the benefit of such person.
(b) Upon receipt of notification of any judgment, decree or order
(including approval of a property settlement agreement) which relates to the
provision of child support, alimony payments, or marital property rights of a
spouse, former spouse, child, or other dependent of a Participant and which is
made pursuant to a state domestic relations law (including a community property
law) (herein referred to as a "domestic relations order"), the Committee shall
(i) notify the Participant and any prospective Alternate Payee named in the
order of the receipt and date of receipt of such domestic relations order and of
the Plan's procedures for determining the status of the domestic relations order
as a Qualified Domestic Relations Order, and (ii) within a reasonable period
after receipt of such order, determine whether it constitutes a Qualified
Domestic Relations Order. The Plan's procedures for the determination of whether
a domestic relations order constitutes a Qualified Domestic Relations Order
shall be set forth by the Committee in writing, shall provide for the
notification of each person specified in that order as entitled to payment of
benefits under the Plan (at the address included in the domestic relations
order) of such procedures promptly upon receipt by the Committee of such
domestic relations order, and shall permit the prospective Alternate Payee to
designate a representative for receipt of copies of notices that are sent to the
prospective Alternate Payee with respect to a domestic relations order.
(c) During any period in which the issue of whether a domestic
relations order is a Qualified Domestic Relations Order is being determined (by
the Committee, by a court of competent jurisdiction, or otherwise), including
the period beginning on the date of the Committee's receipt of the order, the
Committee shall segregate in a separate account in the Plan or in an escrow
account held by a Trustee the amounts, if any, which would have been payable to
the Alternate Payee during such period if the order had been determined to
constitute a Qualified Domestic Relations Order, provided that if no payments
would otherwise be made under the Plan to the Alternate Payee or to the
Participant or a Beneficiary of the Participant while the status of the order as
a Qualified Domestic Relations Order is being determined, no segregation into a
separate or escrow account shall be required. If a domestic relations order is
determined to be a Qualified Domestic Relations Order within eighteen (18)
months of the date of its receipt by the Committee (or from the beginning of any
other period during which the issue of its being a Qualified Domestic Relations
Order is being determined by the Committee) the Committee shall cause to be paid
to the persons entitled thereto the amounts, if any, held in the separate or
escrow account referred to above in one lump sum. If a domestic relations order
is determined not be a Qualified Domestic Relations Order, or if the status of
the domestic relations order as a Qualified Domestic Relations Order is not
finally resolved within such eighteen month period, the Committee shall cause
the separate account or escrow account balance to be returned, with interest
thereon, to the Participant's Account or to be paid to the person or persons to
whom such amount would have been paid if there had been no such domestic
relations order, whichever shall apply. Any subsequent determination that such
domestic relations order is a Qualified Domestic Relations Order shall be
prospective in effect only.
(d) (i) Benefits payable to an Alternate Payee shall be payable
in one lump sum and in no event shall such benefits continue beyond the lifetime
of the Alternate Payee. Such payment may be made at the time specified in the
Qualified Domestic Relations Order irrespective of whether the Participant has
attained the "earliest retirement age" (within the meaning of Section
414(p)(4)(B) of the Code). In particular, no Alternate Payee shall have the
right with respect to any benefit payable by reason of a Qualified Domestic
Relations Order to (A) designate a beneficiary with respect to amounts becoming
payable under the Plan, (B) elect a method of benefit distribution providing for
benefits continuing beyond the Alternate Payee's lifetime, (C) provide
survivorship benefits to a spouse or dependent of such Alternate Payee or to any
other person, spouse, dependent or other person, or (D) transfer rights under
the Qualified Domestic Relations Order by will or by state law of intestacy.
(ii) None of the payments, benefits or rights of any
Alternate Payee shall be subject to any claim of any creditor, and, in
particular, to the fullest extent permitted by law, all such payments, benefits
and rights shall be free from attachment, garnishment, trustee's process, or any
other legal or equitable process available to any creditor of such Alternate
Payee. No Alternate Payee shall have the right to alienate, anticipate, commute,
pledge, encumber or assign any of the benefits or payments which he or she may
expect to receive, contingently or otherwise, under the Plan.
(iii) Alternate Payees shall not have any right to (A) borrow
money under any Participant loan provisions under the Plan, (B) exercise any
Participant investment direction rights or privileges under the Plan, (C)
exercise any other election, privilege, option or direction rights of the
Participant under the Plan except as specifically provided in the Qualified
Domestic Relations Order, or (D) receive communications with respect to the Plan
except as specifically provided by law, regulation or the Qualified Domestic
Relations Order.
(iv) Each Alternate Payee shall advise the Committee in
writing of each change of his or her name, address or marital status, and of
each change in the provisions of the Qualified Domestic Relations Order or any
circumstance set forth therein which may be material to the Alternate Payee's
entitlement to benefits thereunder or the amount thereof. Until such written
notice has been provided to the Committee, the Committee shall be (A) fully
protected in not complying with, and in conducting the affairs of the Plan in a
manner inconsistent with, the information set forth in the notice, and (B)
required to act with respect to such notice prospectively only, and then only to
the extent provided for in the Qualified Domestic Relations Order. The Committee
shall not be required to modify or reverse any payment, transaction or
application of funds occurring before the receipt of any notice that would have
affected such payment, transaction or application of funds, nor shall the
Committee or any other party be liable for any such payment, transaction or
application of funds.
(v) Except as specifically provided for in the Qualified
Domestic Relations Order, an Alternate Payee shall have no right to interfere
with the exercise by the Participant or by any Beneficiary of their respective
rights, privileges and obligations under the Plan.
(e) For purposes of this Plan, a Qualified Domestic Relations
Order means any judgment, decree, or order (including approval of a property
settlement agreement) which has been determined by the Committee in accordance
with procedures established under the Plan, to constitute a qualified domestic
relations order within the meaning of Section 414(p)(1) of the Code and
Alternate Payee means any person entitled to current or future payment of
benefits under the Plan pursuant to a Qualified Domestic Relations Order.
20.7 Inability to Locate Participant or Beneficiary. If the Committee
cannot ascertain the whereabouts of any person to whom a payment is due under
the Plan, and if, after five years from the date such payment is due, a notice
of such payment due is mailed to the last known address of such person, as shown
on the records of the Committee or the Employer, and within three months after
such mailing such person has not made written claim therefor, the Committee, if
it so elects, may direct that such payment and all remaining payments otherwise
due to such person be canceled on the records of the Plan and the amount thereof
applied to reduce the contributions of the Employer, and upon such cancellation,
the Plan and the Trust Fund shall, to the maximum extent permitted by the Act,
have no further liability therefor except that, in the event such person later
notifies the Committee of his or her whereabouts and requests the payment or
payments due to such person under the Plan, the amount so applied shall be paid
to him or her as provided in Section 11. All elections, designations, requests,
notices, instructions, and other communications from the Employer, a
Participant, Beneficiary, Surviving Spouse or other person to the Committee
required or permitted under the Plan shall be in such form as is prescribed from
time to time by the Committee, shall be mailed or delivered to such location as
shall be specified by the Committee, and shall be deemed to have been given and
delivered only upon actual receipt thereof by the Committee at such location.
20.8 Failure to Receive IRS Approval. Notwithstanding any other
provision herein, if this Plan shall not be approved by the IRS under the
provisions of the Code and the Regulations for any reason (including failure to
comply with any condition for such approval imposed by the IRS) contributions
made after the restatement of this Plan and prior to such denial shall be
returned, without any liability to any person, within one year after the date of
denial of such approval.
20.9 Contributions Conditioned on Deductibility. Notwithstanding any
other provision herein, all contributions to the Trust Fund are expressly
conditioned upon their deductibility under Section 404 of the Code and the
Regulations, and in the event of the final disallowance of the deduction for any
contribution, in whole or in part, then such contribution (to the extent the
deduction is disallowed) shall upon direction of the Committee, which shall be
given in conformity with the provisions of the Act, be returned, without
liability to any person, within one year after such final disallowance.
20.10 Mistake of Fact. Notwithstanding any other provisions herein, if
any contribution is made by a mistake of fact, such contribution shall upon the
direction of the Committee, which shall be given in conformity with the
provisions of the Act, be returned, without liability to any person, within one
year after the payment of such contribution.
20.11 Communications with Committee. All elections, designations,
requests, notices, instructions, and other communications from the Employer, a
Participant, Beneficiary, Surviving Spouse or other person to the Committee
required or permitted under the Plan shall be in such form as is prescribed from
time to time by such Committee, shall be mailed by first-class mail or delivered
to such location as shall be specified by such Committee, and shall be deemed to
have been given and delivered only upon actual receipt thereof by such Committee
at such location.
20.12 Communications with Participants and Beneficiaries. All notices,
statements, reports and other communications from the Employer or the Committee
to any Employee, Participant, Surviving Spouse, Beneficiary or other person
required or permitted under the Plan shall be deemed to have been duly given
when delivered to, or when mailed by first-class mail, postage prepaid and
addressed to, such Employee, Participant, Surviving Spouse, Beneficiary or other
person at his or her address last appearing on the records of the Committee.
20.13 Prior Service Credit. Upon such terms and conditions as the
Committee may approve, and subject to any required IRS approval, benefits may be
provided under the Plan to a Participant with respect to any period of the
Participant's prior employment by any organization, and such benefits (and any
Service credited with respect to such period of employment under Section 2.25)
may be provided for, in whole or in part, by funds transferred, directly or
indirectly (including a rollover from an individual retirement account), to the
Trust Fund from an employee benefit plan of such organization which qualified
under Section 401(a) of the Code.
20.14 Gender and Number. Except where otherwise required by the
context, whenever used in the Plan the masculine gender includes the feminine
and the singular shall include the plural.
20.15 Headings. The captions preceding the Sections of the Plan have
been inserted solely as a matter of convenience and in no way define or limit
the scope or intent of any provisions of the Plan.
20.16 Governing Law. The Plan and all rights thereunder shall be
governed by and construed in accordance with the Act and, to the extent not
inconsistent therewith, the laws of the State of California.
20.17 Severability of Provisions. If any provision of the Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
20.18 Heirs, Assigns and Personal Representatives. The Plan shall be
binding upon the heirs, executors, administrators, successors and assigns of the
parties, including each Participant and Beneficiary, present and future and all
persons for whose benefit there exists any QDRO with respect to any Participant
(except that no successor to the Plan Sponsor shall be considered a Plan Sponsor
unless that successor adopts the Plan).
20.19 Reliance on Data and Consents. The Plan Sponsor, the Employer,
each participating Employer, the Board of Directors, the Committee, the Trustee,
all fiduciaries with respect to the Plan, and all other persons or entities
associated with the operation of the Plan, the management of its assets, and the
provision of benefits thereunder, may reasonably rely on the truth, accuracy and
completeness of all data provided by any Participant, Surviving Spouse,
Beneficiary, and Alternate Payee, including, without limitation, data with
respect to age, health and marital status. Furthermore, the Plan Sponsor, the
Employer, each participating Employer, the Board of Directors, the Committee,
the Trustee, and all fiduciaries with respect to the Plan may reasonably rely on
all consents, elections and designations filed with the Plan or those associated
with the operation of the Plan and its corresponding Trust by any Participant,
Surviving Spouse, Beneficiary, Alternate Payee, or any representative of any
such person, without duty to inquire into the genuineness of any such consent,
election or designation. None of the aforementioned persons or entities
associated with the operation of the Plan, its assets and the benefits provided
under the Plan shall have any duty to inquire into any such data, and all may
rely on such data being current to the date of reference, it being the duty of
the Participants, Surviving Spouses, Beneficiaries and Alternate Payees to
advise the appropriate parties of any change in such data.
20.20 Qualified Military Service. Notwithstanding any provision of this
Plan to the contrary, contributions, benefits and service credit with respect to
qualified military service will be provided in accordance with Section 414(u) of
the Code.
<PAGE>
SECTION 21. APPLICATION TO PUERTO RICO EMPLOYEES
21.1 Modifications Applicable to Puerto Rico. The provisions of this
Section shall govern the application of the provisions of the Plan to
Participants who are employed by the Company in and are residents of the
Commonwealth of Puerto Rico ("Puerto Rico Participants"):
(a) Notwithstanding Section 2.25, the definition of "Highly
Compensated Participant" shall be a Puerto Rico Participant employed by the
Company who receives Compensation that exceeds the Compensation paid to two
thirds of the Puerto Rico Participants, as provided in Section 165(e) of the
Puerto Rico Income Tax Act;
(b) The following shall apply in lieu of the second sentence of
Section 5.1(a) hereof: The Salary Reduction Agreement shall provide for Elective
Contributions equal to any whole percentage between one percent (1%) and ten
Percent (10%) of a Participant's Compensation in any payroll period, not to
exceed $7,500 (reduced by any contributions made by the Participant to an IRA)
in any calendar year;
(c) The Actual Deferral Percentage Test set forth in Section 5.3
shall be applied separately with respect to Puerto Rico Participants. For
purposes of applying the Actual Deferral Percentage Test to Puerto Rico
Participants, the definition of Highly Compensated Employee contained in
subparagraph (a) hereof shall be used; and
(d) For purposes of applying subparagraphs (b) and (c) of this
Section 21.1, the definition of Compensation contained in Section 2.11 shall be
applied without regard to clause (xii) thereof.
In all other respects, the terms of this Plan shall apply to
Puerto Rico Participants.
<TABLE>
<CAPTION>
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands, unaudited)
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings before taxes on income $ 971,239 $ 576,544 $ 447,247 $394,063 $277,104
- ----------------------------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 688,503 579,930 480,988 368,462 321,225
Interest expense - other 79,900 71,951 65,495 57,410 35,998
Interest portion of rental expense 43,417 32,326 26,045 23,051 20,810
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed charges (A) 811,820 684,207 572,528 448,923 378,033
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income and fixed charges (B) $1,783,059 $1,260,751 $1,019,775 $842,986 $655,137
============================================================================================================================
Ratio of earnings to fixed charges (B) / (A)* 2.2 1.8 1.8 1.9 1.7
============================================================================================================================
Ratio of earnings to fixed charges excluding
customer interest expense** 8.9 6.5 5.9 5.9 5.9
============================================================================================================================
</TABLE>
* The ratio of earnings to fixed charges is calculated in a manner
consistent with SEC requirements. For such purposes, "earnings"
consist of earnings before taxes on income and fixed charges. "Fixed
charges" consist of interest expense incurred on payable to customers,
borrowings and one-third of rental expense, which is estimated to be
representative of the interest factor.
** Because interest expense incurred in connection with payable to
customers is completely offset by interest revenue on related
investments and margin loans, the Company considers such interest to
be an operating expense. Accordingly, the ratio of earnings to fixed
charges excluding customer interest expense reflects the elimination
of such interest expense as a fixed charge.
EXHIBIT 13.1
The Charles Schwab Corporation
1999 Annual Report to Stockholders
(Only those portions specifically incorporated by reference into
The Charles Schwab Corporation 1999 Annual Report on Form 10-K
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial and Operating Data The Charles Schwab Corporation
(In Millions, Except Per Share Amounts, Ratios,
Number of Branches, Average Commission and as Noted)
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Rates
Compunded Annual
5-Year 1-Year
1994-1999 1998-1999 1999 1998 1997(1) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results
Revenues 30% 44% $ 3,945 $ 2,736 $ 2,299 $ 1,851 $ 1,420
Expenses excluding interest 29% 38% $ 2,974 $ 2,160 $ 1,852 $ 1,457 $ 1,143
Net income (2) 34% 69% $ 589 $ 348 $ 270 $ 234 $ 173
Basic earnings per share (2, 3, 4) 32% 66% $ .73 $ .44 $ .34 $ .30 $ .22
Diluted earnings per share (2, 3, 4) 33% 67% $ .70 $ .42 $ .33 $ .29 $ .21
Dividends declared per common share (3) 22% 4% $ .0560 $ .0540 $ .0467 $ .0400 $ .0311
Weighted-average common shares outstanding - diluted (3) 843 823 818 807 803
Trading revenues as a percentage of revenues (5) 60% 58% 62% 66% 66%
Non-trading revenues as a percentage of revenues (5) 40% 42% 38% 34% 34%
Effective income tax rate 39.4% 39.6% 39.6% 40.7% 37.7%
====================================================================================================================================
Performance Measures
Revenue growth 44% 19% 24% 30% 33%
Pre-tax profit margin 24.6% 21.1% 19.5% 21.3% 19.5%
After-tax profit margin 14.9% 12.7% 11.8% 12.6% 12.2%
Return on stockholders' equity 32% 27% 27% 31% 31%
====================================================================================================================================
Financial Condition (at year end)
Total assets 30% 32% $29,299 $22,264 $16,482 $13,779 $10,552
Borrowings 22% 30% $ 455 $ 351 $ 361 $ 284 $ 246
Stockholders' equity 37% 59% $ 2,274 $ 1,429 $ 1,145 $ 855 $ 633
Assets to stockholders' equity ratio 13 16 14 16 17
Borrowings to total financial capital
(borrowings plus stockholders' equity) 17% 20% 24% 25% 28%
====================================================================================================================================
Customer Information (at year end)
Schwab active customer accounts (6) 17% 18% 6.6 5.6 4.8 4.0 3.4
Schwab customer assets (in billions) 43% 48% $ 725 $ 491 $ 354 $ 253 $ 182
SchwabFunds(R) assets (in billions) (7) 36% 32% $ 107.9 $ 81.5 $ 55.8 $ 43.1 $ 31.7
Mutual Fund OneSource(R) assets (in billions) (8) 52% 46% $ 102.3 $ 69.9 $ 56.6 $ 39.2 $ 23.9
Total Mutual Fund Marketplace(R) assets
(in billions) (8) 42% 37% $ 176.6 $ 129.1 $ 104.6 $ 74.6 $ 50.0
Active independent investment managers (in thousands) 4% 7% 5.8 5.4 5.3 4.8 5.6
Independent investment manager client accounts
(in thousands) 23% 23% 848.3 689.9 547.2 442.2 390.6
Independent investment manager client assets
(in billions) 46% 46% $ 213.1 $ 146.4 $ 105.8 $ 72.9 $ 50.6
Number of domestic branches 10% 17% 340 291 272 235 226
====================================================================================================================================
Employee Information
Full-time equivalent employees
(at year end, in thousands) 23% 36% 18.1 13.3 12.7 10.4 9.2
Revenues per average full-time equivalent employee
(in thousands) 8% 18% $ 245 $ 208 $ 198 $ 190 $ 185
Compensation and benefits expense as a percentage
of revenues 41.2% 42.5% 41.8% 41.4% 41.8%
====================================================================================================================================
Selected Cash Flow Highlights
Net income plus depreciation and amortization (2) 31% 53% $ 746 $ 487 $ 395 $ 332 $ 241
Capital expenditures - cash purchases of
equipment, office facilities and property, net 55% 53% $ 283 $ 185 $ 139 $ 160 $ 166
Capital expenditures as a percentage of revenues 7.2% 6.8% 6.0% 8.6% 11.7%
Cash dividends paid 24% 7% $ 46 $ 43 $ 37 $ 31 $ 24
====================================================================================================================================
Customers' Daily Average Trading Volume (in thousands) (9)
Daily average revenue trades 41% 68% 163.1 97.2 71.8 54.0 40.8
Mutual Fund OneSource trades 26% 13% 45.6 40.3 34.2 27.2 17.8
- ------------------------------------------------------------------------------------------------------------------------------------
Daily average trades 37% 52% 208.7 137.5 106.0 81.2 58.6
====================================================================================================================================
Average Commission Per Revenue Trade (9%) (15%) $ 45.55 $ 53.44 $ 64.27 $ 69.08 $ 73.11
====================================================================================================================================
Certain prior years' revenues and expenses have been reclassified to conform to the 1999 presentation.
(1) 1997 includes charges for a litigation settlement of $24 million after-tax ($.03 per share for both basic and diluted earnings
per share).
(2) 1999 reflects an accounting change, which increased net income by $41 million ($.05 per share for both basic and diluted
earnings per share), for certain internal-use software development costs to conform with Statement of Position 98-1.
(3) All periods have been restated for the July 1999 two-for-one common stock split.
(4) Both basic and diluted earnings per share are net of the effect of an extraordinary charge in 1993 of $.01 per share.
(5) Trading revenues include commission and principal transaction revenues. Non-trading revenues include mutual fund service fees,
net interest revenue and other revenues.
(6) Effective in 1998, active accounts are defined as accounts with balances or activity within the preceding eight months instead
of twelve months as previously defined. This change in definition had the effect of decreasing the number of active accounts
in 1998 by approximately 200,000. Prior years have not been restated.
(7) Includes money market, equity and bond funds.
(8) Excludes money market funds and all of Schwab's proprietary money market, equity and bond funds. Mutual Fund OneSource assets
are included in Total Mutual Fund Marketplace assets.
(9) Effective in 1997, revenue trades have been restated for all years presented to include all customer trades (both domestic and
international) that generate either commission revenue or revenue from principal markups.
</TABLE>
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<PAGE>
The Charles Schwab Corporation
Management's Discussion and Analysis
of Results of Operations and Financial Condition
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related financial
services for 6.6 million active customer accounts(a). Customer assets in these
accounts totaled $725.2 billion at December 31, 1999. CSC's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with 340 domestic branch offices in 48 states, as well as branches in the
Commonwealth of Puerto Rico and the U.S. Virgin Islands. Another subsidiary,
Charles Schwab Europe (CSE), is a retail securities brokerage firm located in
the United Kingdom. Other subsidiaries include Charles Schwab Investment
Management, Inc., the investment advisor for Schwab's proprietary mutual funds,
and Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq and other
securities providing trade execution services to broker-dealers and
institutional customers.
- --------
(a) Accounts with balances or activity within the preceding eight months.
The Company provides financial services to individuals, institutional
customers and broker-dealers through three segments - Individual Investor,
Institutional Investor and Capital Markets. The Individual Investor segment
includes the Company's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. The Capital Markets segment provides trade execution
services in Nasdaq, exchange-listed and other securities primarily to
broker-dealers and institutional customers. The Company's mutual fund services
are considered a product and not a segment. Mutual fund service fees are
included in both the Individual Investor and Institutional Investor segments.
(CHART OMITTED)
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry - retail brokerage,
mutual funds, support services for independent investment managers, 401(k)
defined contribution plans and equity securities market-making.
To pursue its strategy and its objective of long-term profitable growth, the
Company plans to continue to leverage its competitive advantages. These
advantages include a nationally recognized brand, a broad range of products and
services, multi-channel delivery systems and an ongoing investment in
technology. While the Company's business continues to be predominantly conducted
in the U.S., in 1999 the Company continued to selectively expand its
international presence.
Brand: The Company's nationwide advertising and marketing programs support
its strategy by continually reinforcing the strengths and key attributes of
Schwab's full-service offering. By maintaining a consistent level of visibility
in the marketplace, the Company seeks to establish a leading and lasting
financial services brand in a focused and cost-effective manner. The Company
primarily uses a combination of network, cable and local television, print
media, national and local radio, and athletic event sponsorship in its
advertising to investors. These programs helped the Company attract $106.9
billion in net new customer assets and open 1,481,000 new accounts during 1999.
Products and Services: The Company offers a broad range of value-oriented
products and services to meet customers' varying investment and financial needs,
including help and advice and access to extensive investment research, news and
information. The Company's approach to advice is based on long-term investment
strategies and guidance on portfolio diversification and asset allocation. The
Company strives to demystify investing by educating and assisting customers in
the development of investment plans. This approach is designed to be offered
consistently across all of the Company's delivery channels and provides
customers with a wide selection of choices for their investment needs. Schwab's
registered representatives can assist investors in developing asset allocation
strategies and evaluating their investment choices, and refer investors who
desire additional guidance to independent investment managers through the Schwab
AdvisorSource(TM) service. In 1999, Schwab expanded the AdvisorSource referral
services program to include financial planners and certified public accountants.
Schwab also introduced customized portfolio guidance through Schwab investment
specialists and a range of new Web-based planning and investment evaluation
tools. Schwab's Mutual Fund Marketplace(R) provides customers with the ability
to invest in over 1,900 mutual funds from 316 fund families, including 1,143
Mutual Fund OneSource(R) funds. Schwab's share of the industry's net inflows to
direct-marketed mutual funds was 14% in 1999, down from 18% in 1998(b). Schwab's
share of the industry's direct-marketed mutual fund assets was 11% at December
31, 1999, up from 10% at December 31, 1998(b).
- --------
(b) Source: Strategic Insight Mutual Fund Research and Consulting, LLC.
-2-
<PAGE>
Schwab also provides custodial, trading and support services to approximately
5,800 independent investment managers. As of December 31, 1999, these managers
were guiding the investments of 848,000 Schwab customer accounts containing
$213.1 billion in assets.
The Company responds to changing customer needs with continued product,
technology and service innovations. In 1999, the Company launched the Schwab
Signature Services(TM) program and Velocity(TM). Schwab Signature Services
provides enhanced personal and online services for customers with higher asset
balances or trading volumes with Schwab. Velocity, an online trading system,
provides enhanced trade information and order execution for certain of Schwab's
customers who trade frequently. Also in 1999, Schwab introduced a number of
Web-based service offerings, including MyResearch(TM) report, which enables
customers to design their own research reports. Additionally, Schwab launched
two mutual fund research tools, Advanced Mutual Fund Screener and Fund Details,
which allow customers to access detailed information on all Morningstar, Inc.
rated funds. Further, Schwab enabled customers to open a new account, update
contact information, sign up for the Schwab MoneyLink(R) service and request a
check through automated Web-based processes. Continuing its practice of
leveraging technology to improve customer service, in 1999 Schwab launched
SchwabAlerts(TM), which delivers investment and market activity news to
customers via both wireless and regular e-mail. Also in 1999, Schwab introduced
eConfirms(TM), a service that delivers trade confirmations electronically.
Additionally, Schwab launched an online service, MySchwab(TM), allowing users to
customize a personal Schwab home page with content provided by Excite@Home. The
Company formed additional alliances during 1999 with Financial Engines, Inc. and
mPower.com, Inc. to provide participants in SchwabPlan(R), a bundled 401(k)
offering, with access to online investment guidance services; and with OffRoad
Capital to provide certain customers with access to private equity investment
opportunities. Further, during 1999, the Company and several major financial
services firms formed a new electronic communications network (ECN), REDIBook
ECN LLC, which utilizes technology developed by Spear, Leeds & Kellogg LP.
Participation in this ECN has enabled Schwab to launch an extended-hours trading
session for certain Nasdaq and selected exchange-listed stocks. Also in 1999,
the Company entered into an agreement with TD Waterhouse Group, Inc., Ameritrade
Holding Corporation, KPCB Holdings, Inc., Trident Capital Management, LLC and
Benchmark Capital Partners to form Epoch Partners, a new online investment bank
that intends to focus on information technology and Internet companies. This new
company plans to commence operations in 2000. In addition, a precedent-setting
no-action letter from the Securities and Exchange Commission (SEC) will enable
Schwab to be the first brokerage firm to provide individual investors with
access to Web-based presentations by companies in the process of going public.
Delivery Systems: The Company's multi-channel delivery systems allow
customers to choose how they prefer to do business with the Company. To enable
customers to obtain services in person with a Company representative, the
Company maintains a network of branch offices which also provides investors with
access to the Internet. The Company's branch office network was expanded by 49
during 1999 to 340 at December 31, 1999. Telephonic access to the Company is
provided primarily through four regional customer telephone service centers and
two online customer support centers that operate both during and after normal
market hours. Additionally, customers are able to obtain financial information
on an automated basis through the Company's automated telephonic and online
channels. Automated telephonic channels include TeleBroker(R), Schwab's
touch-tone telephone quote and trading service, and VoiceBroker(TM), Schwab's
voice recognition quote and trading service. Schwab's automated telephonic
channels handled over 70% of customer calls received in both 1999 and 1998.
Schwab handled a total of 110 million automated and live calls received in 1999,
up 6% from 1998. Online channels include the Charles Schwab Web Site(TM), an
information and trading service on the Internet at www.schwab.com, and PC-based
services such as SchwabLink(R), a service for investment managers. While the
online channel is the Company's fastest-growing channel, the Company continues
to stress the importance of Clicks and Mortar(TM) access - blending the power of
the Internet with personal service to create a full-service customer experience.
The Company's online channels handled 68% of total trades during 1999, up from
54% of total trades in 1998. Schwab's share of the industry's online assets was
39% at December 31, 1999, down from 42% at December 31, 1998(c). Schwab's share
of the industry's online trades was 24% in 1999, down from 30% in 1998(c).
Schwab provides every retail customer access to all delivery channels and
flat-fee pricing for Internet trades. To help improve multi-channel access for
independent investment managers and their customers, Schwab launched the
Signature Services Alliance(TM) during 1999. This service provides enhanced
personalized services, including access to a dedicated team of representatives,
a new Schwab Institutional Web site(TM) and flat-fee pricing for Internet
trades.
- --------
(c) Source: U.S. Bancorp Piper Jaffray.
Technology: The Company's ongoing investment in technology is a key element
in expanding its product and service offerings, enhancing its delivery systems,
providing fast and consistent customer service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in customer
activity without a corresponding rise in staffing levels. The Company uses
-3-
<PAGE>
technology to empower its customers to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
In 1999, the Company announced a joint effort with IBM to implement new systems
technology intended to help the Company's computers share their workload more
efficiently. Additionally in 1999, the Company's investment in systems capacity,
which totaled $126 million, expanded the Company's Web server, mainframe and
data storage capacity by 765%, 225% and 190%, respectively.
International Expansion: The Company moved to expand its international
presence through several transactions during 1999, including entering into a
joint venture agreement with The Tokio Marine and Fire Insurance Co., Limited
(TMI) and certain of its related companies (collectively, the TMI Group). The
Company and each member of the TMI Group are shareholders in a Japanese
corporation, Charles Schwab Tokio Marine Securities Co., Ltd. (CSTMS), in which
the Company has a 50% equity interest. CSTMS, whose business is expected to
commence in the first half of 2000, will initially provide retail brokerage and
investment services in U.S. dollar-denominated securities to residents of Japan.
CSTMS is currently expected to offer Japanese Yen-denominated securities later
in 2000. In 1999, the Company made an initial capital contribution of (Yen)
3.0 billion, or approximately $27 million. The Company may, under certain
circumstances, be required to make additional capital contributions pursuant to
the joint venture agreements, including contributions to assure that CSTMS is in
compliance with regulatory requirements regarding capital adequacy. Also in
1999, the Company completed the acquisitions of Canadian-based Priority
Brokerage Inc. and Porthmeor Securities Inc. These two companies were combined
to create Charles Schwab Canada, Co., a subsidiary of CSC. Additionally in 1999,
the Company signed a definitive agreement to form a joint venture with ecorp
Limited to provide financial services to Australian and New Zealand investors.
The transaction closed in February 2000. Further, during 1999 CSE extended
online and telephonic services to Swiss investors.
SUBSEQUENT EVENTS
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust), a leading wealth management
firm serving affluent individuals and families. This transaction is intended to
combine certain of the Company's strengths - technology, operations,
advertising and distribution - with U.S. Trust's highly personalized service
model, research capabilities, trust and estate services, investment track record
and reputation in wealth management services. Management believes that the
combined organization can create a comprehensive, integrated, value-priced,
wealth management offering for affluent households, including both individual
investors and customers of independent investment managers.
Under the terms of the agreement, which provides for a non-taxable
stock-for-stock exchange, U.S. Trust will become a wholly owned subsidiary of
CSC and U.S. Trust's shareholders will receive 3.427 shares of CSC's common
stock for each common share of U.S. Trust. Based on CSC's closing stock price
immediately prior to announcement as of January 12, 2000 the transaction valued
each of U.S. Trust's shares at $129, resulting in a total transaction value of
approximately $2.7 billion. Assuming completion of the transaction and assuming
the completion of the CyBerCorp, Inc. (CyBerCorp) acquisition described below,
U.S. Trust's shareholders are expected to hold approximately 8% pro-forma
ownership of CSC's common stock as of February 1, 2000 on a fully-diluted basis.
Following the merger, the Company expects to become a financial holding company
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust's shareholder approval. If such regulatory and shareholder approvals are
obtained, the Company will be required to limit its business to financial
services. It may be required to maintain capital at certain levels which could
affect its ability to pay dividends. Under certain circumstances, the Company
may be required to provide additional capital to its subsidiaries, and such
subsidiaries may be prohibited from paying dividends. Additionally, Federal
Reserve Board approval will be required for certain changes in control of CSC.
The transaction, which is expected to be completed by July 2000, is intended to
qualify for pooling of interests accounting treatment.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, a closely-held electronic trading technology and
brokerage firm providing Internet-based services to highly active, online
investors. This acquisition is intended to utilize CyBerCorp's order entry,
routing and management technology to attract and retain actively trading
individual investors. The technology is also intended to benefit Schwab's
independent investment advisors' customers and other institutional and
international investors.
Under the terms of the agreement, which provides for a non-taxable
stock-for-stock exchange, CyBerCorp will become a wholly owned subsidiary of
CSC. Based on CSC's $35.50 closing stock price immediately prior to announcement
as of February 1, 2000, the total value of the transaction is approximately $488
million. Assuming completion of the transaction and assuming the completion of
the U.S. Trust acquisition described above, CyBerCorp's shareholders are
expected to hold approximately 1.5% pro-forma ownership of CSC's common stock as
of February 1, 2000 on a fully-diluted basis. CSC has agreed to register the
shares with the SEC after the closing. The acquisition has been approved by both
companies' Boards of Directors and is subject to various closing conditions,
including the
-4-
<PAGE>
approval of the transaction by CyBerCorp's shareholders. Agreements to vote in
favor of the acquisition have been entered into by holders of approximately 95%
of CyBerCorp's common stock. The acquisition, which is expected to be completed
in the first quarter of 2000, is intended to be accounted for as a purchase (see
note "16 - Subsequent Events" in the Notes to Consolidated Financial
Statements).
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that reflect management's beliefs, objectives and
expectations as of the date hereof. These statements relate to, among other
things, the Company's strategy (see Description of Business), acquisitions (see
Description of Business and Subsequent Events), average commission per revenue
trade (see Revenues - Commissions and Risk Management - Competition), Internet
trade pricing for independent investment managers and reduced pricing on equity
online trades for certain customers (see Revenues - Commissions), average
revenue per share traded (see Revenues - Principal Transactions), fee
adjustments related to minimum account balances (see Revenues - Other Revenues),
sources of liquidity (see Liquidity and Capital Resources - Liquidity),
development spending (see Liquidity and Capital Resources - Development
Spending), capital expenditures and capital structure (see Liquidity and Capital
Resources - Cash Flows and Capital Resources), market risk (see Risk Management
- - Market Risk), revenue growth, after-tax profit margin, and return on
stockholders' equity (see Results of Operations and Looking Ahead), the
Company's competitive position (see Looking Ahead), and contingent liabilities
(see note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements). Achievement of the expressed beliefs,
objectives and expectations described in these statements is subject to certain
risks and uncertainties that could cause actual results to differ materially
from the expressed objectives and expectations. Important factors that may cause
such differences include, but are not limited to: the effect of customer trading
patterns on Company revenues and earnings; the risk of not completing the above
described acquisitions; the inability to assimilate the acquired companies and
to achieve the anticipated benefits; the Company's inability to attract and
retain key personnel; changes in the Company's level of personnel hiring,
investment in new or existing technology, or utilization of public media for
advertising; changes in technology; computer system failures and security
breaches; the effects of competitors' pricing, product and service decisions and
intensified competition; evolving regulation and changing industry practices
adversely affecting the Company; adverse results of litigation; the inability to
obtain external financing; changes in revenues and profit margin due to cyclical
securities markets and interest rates; the level and volatility of equity
prices; a significant downturn in the securities markets over a short period of
time or a sustained decline in securities prices and trading volumes; and risks
associated with international expansion and operations. Certain of these factors
are discussed in greater detail in this Annual Report and in the Company's
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Financial Overview
The Company achieved record revenues for the tenth consecutive year and
record earnings for the ninth consecutive year in 1999. One of the factors
contributing to this record performance was strong trading volumes in the
securities markets during the year. The combined daily average share volume for
the New York Stock Exchange (NYSE) and Nasdaq reached an all-time high of 1,864
million shares in 1999, a 28% increase over 1998. The Standard & Poor's 500
Index (on a dividend reinvested basis) rose 21% during 1999.
(CHART OMITTED)
Other key factors that contributed to the Company's financial performance in
1999 include:
- Assets in Schwab customer accounts rose $234.1 billion, or 48%, to a record
$725.2 billion. This increase resulted from net new customer assets of
$106.9 billion and net market gains of $127.2 billion.
- A record 1,481,000 new Schwab customer accounts were opened, an increase
of 7% from 1,380,000 opened in 1998.
Trading activity reached record levels as shown in the following table (in
thousands):
-5-
<PAGE>
- --------------------------------------------------------------------------------
Daily Average Trades 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue Trades
Online 119.1 56.3 26.8
TeleBroker(R) and VoiceBroker(TM) 8.5 8.2 12.2
Regional customer telephone
service centers, branch offices
and other 35.5 32.7 32.8
- --------------------------------------------------------------------------------
Total 163.1 97.2 71.8
================================================================================
Mutual Fund OneSource(R) Trades
Online 23.3 18.0 12.8
TeleBroker and VoiceBroker 1.0 1.0 1.3
Regional customer telephone
service centers, branch offices
and other 21.3 21.3 20.1
- --------------------------------------------------------------------------------
Total 45.6 40.3 34.2
================================================================================
Total Daily Average Trades
Online 142.4 74.3 39.6
TeleBroker and VoiceBroker 9.5 9.2 13.5
Regional customer telephone
service centers, branch offices
and other 56.8 54.0 52.9
- --------------------------------------------------------------------------------
Total 208.7 137.5 106.0
================================================================================
Revenues increased mainly due to higher customer trading volume and an
increase in customer assets. Revenues of $3,945 million in 1999 grew 44% from
1998 due to increases in revenues of $829 million, or 42%, in the Individual
Investor segment, $215 million, or 64%, in the Capital Markets segment, and $165
million, or 37%, in the Institutional Investor segment. See note "14 - Segment
Information" in the Notes to Consolidated Financial Statements for financial
information by segment for the last three years.
The Company's 1999 earnings rose 69% to $589 million, or $.70 per share, up
from $348 million, or $.42 per share, in 1998. Share and per share information
throughout this report have been restated to reflect the July 1999 two-for-one
common stock split, effected in the form of a 100% stock dividend. All
references to earnings per share information in this report reflect diluted
earnings per share unless otherwise noted.
The Company's 1997 results include charges for the settlement of a
class-action lawsuit involving M&S and other firms engaged in making markets in
Nasdaq securities. These charges totaled $24 million after-tax, or $.03 per
share. Excluding these charges, the Company's 1998 earnings would have increased
18% from 1997.
The Company's operating expenses increased 38% during 1999 to $2,974 million,
primarily due to a 40% increase in compensation and benefits, a 56% increase in
advertising and market development, and a 33% increase in occupancy and
equipment expenses. The Company's after-tax profit margin for 1999 was 14.9%,
which was higher than the 12.7% margin in 1998, and above the Company's annual
long-term objective of 12%. During 1999, net income plus depreciation and
amortization increased 53% to $746 million and capital expenditures increased
53% to $283 million.
Return on stockholders' equity was 32% in 1999, exceeding the Company's
annual long-term objective of 20%.
REVENUES
Revenues grew $1,209 million, or 44%, in 1999, exceeding management's annual
long-term objective of 20%, due to a 42% increase in commission revenues, a 48%
increase in interest revenue, net of interest expense (referred to as net
interest revenue), a 75% increase in principal transaction revenues and a 34%
increase in mutual fund service fees. Non-trading revenues represented 40% of
total revenues for 1999, down from 42% for 1998 and up from 38% for 1997 as
shown in the table below.
- --------------------------------------------------------------------------------
Composition of Revenues 1999 1998 1997
- --------------------------------------------------------------------------------
Commissions 47% 48% 51%
Principal transactions 13 10 11
- --------------------------------------------------------------------------------
Total trading revenues 60 58 62
- --------------------------------------------------------------------------------
Mutual fund service fees 19 20 19
Net interest revenue 18 17 15
Other 3 5 4
- --------------------------------------------------------------------------------
Total non-trading revenues 40 42 38
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
Commissions
The Company earns commission revenues by executing customer trades primarily
through the Individual Investor and Institutional Investor segments. These
revenues are affected by the number of customer accounts that traded, the
average number of commission-generating trades per account, and the average
commission per trade. Commission revenues were $1,863 million in 1999, compared
to $1,309 million in 1998 and $1,174 million in 1997.
As illustrated in the following table below, from 1997 to 1999, the total
number of customer revenue trades executed by the Company has increased 126% as
the Company's customer base has grown and the average number of trades per
account has increased. From 1997 to 1999, average commission per revenue trade
decreased 29%. The 15% decrease from 1998 to 1999 was mainly due to an increase
in the proportion of trades placed through online channels, which have lower
commission rates than the Company's other channels. The 17% decrease from 1997
to 1998 was mainly due to the Company's integration of its online and
traditional brokerage services and the resulting reduction of the price of
online trades for most of its customers in 1998. However, the increase in
trading activity more than offset the effect of the lower average commission per
revenue trade. As more customers migrate to online channels, average
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<PAGE>
commission per revenue trade is expected to continue to decline.
In November 1999, the Company began to provide independent investment
managers with flat-fee pricing for Internet trades. This price reduction is
designed to enhance the Company's competitive position and to align the pricing
of Internet trades for independent investment managers with that offered to most
of the Company's individual customers. While the effect of this price reduction
cannot be predicted with certainty, management expects that the impact of this
reduction on the Company's results of operations will be offset by the lower
cost of processing Internet trades and by expected growth in customer assets and
trading volumes associated with independent investment managers. This price
reduction will only affect the Institutional Investor segment and, based on
management's expectations, it will not have a material impact on that segment's
revenues.
In February 2000, the Company announced a plan to provide customers who meet
certain online equity trading criteria with reduced pricing. This price
reduction is designed to enhance the Company's competitive position with
actively trading investors. While the effect of this price reduction cannot be
predicted with certainty, management expects that the impact of this reduction
on the Company's results of operations will be offset over time with increased
trading volume and increased fees related to minimum account balances (see Other
Revenues). This price reduction will only affect the Individual Investor segment
and, based on management's expectations, will not have a material impact on that
segment's revenues.
- --------------------------------------------------------------------------------
Commissions Earned on Customer Revenue Trades 1999 1998 1997
- --------------------------------------------------------------------------------
Customer accounts that traded during the year
(in thousands) 3,349 2,783 2,380
Average customer revenue trades per account 12.3 8.8 7.6
Total revenue trades (in thousands) 41,116 24,508 18,169
Average commission per revenue trade $45.55 $53.44 $64.27
Commissions earned on customer revenue trades
(in millions) (1) $1,873 $1,309 $1,168
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
customer trades totaling $39 million in 1999, $25 million in 1998 and $16
million in 1997. Excludes commissions on trades relating to specialist
operations totaling $29 million in 1999, $25 million in 1998 and $22
million in 1997.
Mutual Fund Service Fees
The Company earns mutual fund service fees for recordkeeping and shareholder
services provided to third-party funds, and for transfer agent services,
shareholder services, administration and investment management provided to its
proprietary funds. These fees are based upon the daily balances of customer
assets invested in third-party funds and upon the average daily net assets of
Schwab's proprietary funds. Mutual fund service fees are earned primarily
through the Individual Investor and Institutional Investor segments.
Mutual fund service fees were $750 million in 1999, compared to $559
million in 1998 and $428 million in 1997. The increases from 1997 to 1999 were
primarily due to significant increases in customer assets in Schwab's
proprietary funds, referred to as the SchwabFunds(R), and in funds purchased
through Schwab's Mutual Fund OneSource(R) service.
The SchwabFunds include money market funds, equity index funds, bond funds,
asset allocation funds, and funds that primarily invest in stock, bond and money
market funds. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money market
funds. Customer assets invested in the SchwabFunds were $107.9 billion, $81.5
billion and $55.8 billion at the end of 1999, 1998 and 1997, respectively.
At December 31, 1999, Schwab's Mutual Fund OneSource service enabled
customers to trade 1,143 mutual funds in 208 fund families without incurring
transaction fees. The service allows investors to access multiple mutual fund
companies, avoid brokerage transaction fees, and achieve investment diversity
among fund families. In addition, investors' recordkeeping and investment
monitoring are simplified through one consolidated statement. Customer assets
held by Schwab that have been purchased through the Mutual Fund OneSource
service, excluding SchwabFunds, were $102.3 billion, $69.9 billion and $56.6
billion at the end of 1999, 1998 and 1997, respectively.
Additionally, customer assets invested in the Mutual Fund Marketplace(R),
excluding the Mutual Fund OneSource service, were $74.3 billion, $59.2 billion
and $48.0 billion at the end of 1999, 1998 and 1997, respectively. Schwab
charges a transaction fee on trades placed in the funds included in the Mutual
Fund Marketplace (except on trades through the Mutual Fund OneSource service).
These fees are recorded as commission revenues.
Net Interest Revenue
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to customers and investments) and interest paid on
liabilities (mainly customer cash balances). Net interest revenue is affected by
changes in the volume and mix of these assets and liabilities, as well as by
fluctuations in interest rates.
Substantially all of the Company's net interest revenue is earned by Schwab
through the Individual Investor and Institutional Investor segments. In clearing
its customers' trades, Schwab holds cash balances payable to customers. In most
cases, Schwab pays its customers interest on cash balances awaiting investment,
and may invest these funds and earn interest revenue. Schwab also may lend funds
to customers on a secured basis to purchase qualified securities - a practice
commonly known as "margin lending." Pursuant to SEC regulations, customer cash
balances that are not used for margin lending are segregated into an
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investment account that is maintained for the exclusive benefit of customers.
When investing segregated customer cash balances, Schwab must adhere to SEC
regulations that restrict investments to U.S. government securities,
participation certificates and mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by U.S.
banks and thrifts, and resale agreements collateralized by qualified securities.
Schwab's policies for credit quality and maximum maturity requirements are more
restrictive than these SEC regulations. In each of the last three years, resale
agreements accounted for over 70% of Schwab's investments of segregated customer
cash balances. The average maturities of Schwab's total investments of
segregated customer cash balances were 62 days in 1999, 66 days in 1998 and 63
days in 1997.
Net interest revenue was $703 million in 1999, compared to $476 million in
1998 and $354 million in 1997, as shown in the following table (in millions):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 983 $ 671 $489
Investments, customer-related 404 400 376
Other 84 57 35
- --------------------------------------------------------------------------------
Total 1,471 1,128 900
- --------------------------------------------------------------------------------
Interest Expense
Customer cash balances 689 580 481
Stock-lending activities 32 37 37
Borrowings 28 25 20
Other 19 10 8
- --------------------------------------------------------------------------------
Total 768 652 546
- --------------------------------------------------------------------------------
Net interest revenue $ 703 $ 476 $354
================================================================================
The Company's interest-earning assets are financed primarily by
interest-bearing customer cash balances. Other funding sources include
noninterest-bearing customer cash balances, proceeds from stock-lending
activities, borrowings, and stockholders' equity. Customer-related daily average
balances, interest rates, and average net interest margin are summarized as
follows (dollars in millions):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $13,172 $ 8,772 $ 6,367
Average interest rate 7.46% 7.65% 7.68%
Investments:
Average balance outstanding $ 8,555 $ 7,687 $ 6,990
Average interest rate 4.72% 5.21% 5.38%
Average yield on interest-earning assets 6.38% 6.51% 6.48%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $17,344 $13,278 $10,661
Average interest rate 3.97% 4.37% 4.51%
Other interest-bearing sources:
Average balance outstanding $ 1,510 $ 1,299 $ 1,122
Average interest rate 3.85% 4.23% 4.44%
Average noninterest-bearing portion $ 2,873 $ 1,882 $ 1,574
Average interest rate on funding sources 3.44% 3.86% 3.97%
Summary:
Average yield on interest-earning assets 6.38% 6.51% 6.48%
Average interest rate on funding sources 3.44% 3.86% 3.97%
- --------------------------------------------------------------------------------
Average net interest margin 2.94% 2.65% 2.51%
================================================================================
The increases in net interest revenue from 1997 to 1999 were primarily due to
higher levels of margin loans to customers, partially offset by higher average
customer cash balances.
Since the Company establishes the rates paid on customer cash balances and
charged on margin loans, a substantial portion of its net interest margin is
managed by the Company. However, the margin is highly influenced by external
factors such as the interest rate environment and competition. The Company's
average net interest margin increased from 1998 to 1999 as the average interest
rate on funding sources declined more than the decline in the average yield on
interest-earning assets. The Company's average net interest margin increased
from 1997 to 1998 as the average yield on interest-earning assets increased and
the average interest rate on funding sources declined.
Principal Transactions
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq and other securities effected through the
Capital Markets segment. Factors that influence principal transaction revenues
include the volume of customer trades, market price volatility, average revenue
per share traded and changes in regulations and industry practices as discussed
below. As a market maker in Nasdaq and other securities, M&S generally executes
customer trades as principal. While substantially all Nasdaq security trades
originated by the customers of Schwab are directed to M&S, a substantial portion
of M&S' trading volume comes from parties other than Schwab. Orders handled by
M&S represented approximately 8% of
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the total shares traded on Nasdaq in 1999, up from 7% in 1998(d).
- --------
(d) Source: The Nasdaq Stock Market, Inc.
Principal transaction revenues were $500 million in 1999, compared to $287
million in 1998 and $258 million in 1997. The increases from 1997 to 1999 were
primarily due to significant increases in share volume handled by M&S. The
increase from 1997 to 1998 was partially offset by lower average revenue per
share traded.
Certain SEC rules and rule amendments, known as the Order Handling Rules,
have significantly altered the manner in which orders for both Nasdaq and
exchange-listed securities are handled. These rules were implemented in phases
between January 20, 1997 and October 13, 1997. Additionally, in June 1997, most
major U.S. securities markets, including Nasdaq and the NYSE, began quoting and
trading most securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share. Mainly as a result of these regulatory changes
and changes in industry practices, M&S' average revenue per share traded
declined from 3.3(cent) in 1997 to 2.5(cent) in 1998. However, M&S' average
revenue per share traded increased to 2.8(cent) in 1999. An increase in the
market price volatility of technology stocks in 1999 contributed to M&S' higher
average revenue per share traded. The major U.S. securities markets have
announced that beginning on July 3, 2000 for some stocks, they intend to begin
quoting and trading securities in decimal increments. This change is likely to
cause decreases in average revenue per share traded, will only affect the
Capital Markets segment and, based on management's expectations, will not have a
material impact on that segment's revenues.
See note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements regarding certain civil litigation relating to
principal transaction activities.
Revenues relating to Schwab's specialist operations were $41 million in 1999,
$29 million in 1998 and $21 million in 1997. Higher revenues related to Schwab's
specialist operations and gains from the sale of fixed income securities owned
by Schwab for the purpose of facilitating customer orders also contributed to
the increase in principal transaction revenues from 1997 to 1998.
Other Revenues
Other revenues include retirement plan services fees and other brokerage
fees (mainly minimum account balance fees and related financial services fees).
Other revenues are earned primarily through the Individual Investor and
Institutional Investor segments. These revenues were $128 million in 1999,
compared to $105 million in 1998 and $86 million in 1997. The increase from 1998
to 1999 was due to higher levels of trading volume-related revenues and customer
account-based fees, as well as higher revenue from 401(k) recordkeeping fees.
The increase from 1997 to 1998 was due to higher revenue from minimum account
balance and other brokerage fees, 401(k) recordkeeping fees, Schwab
AdvisorSource(TM) referral fees and software maintenance fees.
In February 2000, the Company announced a plan to increase fees related to
minimum account balances (effective April 1, 2000). This fee adjustment is
designed to more effectively align account fees with the expanded and improved
services currently available to Schwab customers. While the effect of this fee
adjustment cannot be predicted with certainty, management expects that the
impact of this adjustment on the Company's results of operations will be more
than offset by the price reduction related to online equity trades for customers
who meet certain criteria for such trades (see Commissions). This fee adjustment
will only affect the Individual Investor segment and, based on management's
expectations, it will not have a material impact on that segment's revenues.
EXPENSES EXCLUDING INTEREST
- --------------------------------------------------------------------------------
Expenses Excluding Interest as a Percentage
of Revenues 1999 1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits 41% 42% 42%
Occupancy and equipment 7 7 7
Communications 7 8 8
Advertising and market development 6 6 6
Depreciation and amortization 4 5 5
Professional services 4 3 3
Commissions, clearance and floor brokerage 2 3 4
Other 4 5 6
- --------------------------------------------------------------------------------
Total 75% 79% 81%
================================================================================
Compensation and Benefits
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. Employees receive
variable compensation that is tied to the achievement of specified objectives
relating primarily to revenue growth, profit margin and growth in customer
assets. Therefore, a significant portion of compensation and benefits expense
will fluctuate with these measures.
Compensation and benefits expense was $1,625 million in 1999, compared to
$1,163 million in 1998 and $962 million in 1997. The increases from 1997 to 1999
were generally due to a greater number of employees and higher variable
compensation expense resulting from the Company's financial performance. The
following table shows a comparison of certain compensation and benefits
components and employee data (in thousands):
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- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Variable compensation as a
% of compensation and benefits expense 30% 23% 23%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 12% 14% 14%
Full-time equivalent employees(1) 18.1 13.3 12.7
Revenues per average full-time equivalent employee $245 $208 $198
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
The Company encourages and provides for employee ownership of the Company's
common stock through its profit sharing and employee stock ownership plan, its
stock incentive plans and an automatic investment plan. The Company's overall
compensation structure is intended to attract, retain and reward highly
qualified employees, and to align the interests of employees with those of
stockholders. To further this alignment and in recognition of the Company's
financial performance, the Company awarded all non-officer employees stock
option grants in 1999 and 1998 for options to buy shares of common stock
totaling 3,783,000 and 3,478,000 shares, respectively. The Company expects to
grant such options annually with the size of the grant based on Company
performance.
At December 31, 1999, directors, management and employees, and their
respective families, trusts and foundations, owned, including stock held for
employees' benefit in the Company's profit sharing and employee stock ownership
plan, approximately 31% of the Company's outstanding common stock. In addition,
directors, management and employees held options to purchase common stock in an
amount equal to approximately 7% of the Company's outstanding common stock at
December 31, 1999.
Occupancy and Equipment
Occupancy and equipment expense includes the costs of leasing and maintaining
the Company's office space, four regional customer telephone service centers,
two online customer support centers, two primary data centers and 340 domestic
branch offices. It also includes lease and rental expenses on computer and other
equipment. Occupancy and equipment expense was $266 million in 1999, compared to
$201 million in 1998 and $154 million in 1997. This trend reflects the Company's
continued growth and expansion, and its commitment to customer service and
investment in technology. The Company expanded its office space in 1999, 1998
and 1997, and opened its second data center in 1998. Schwab opened 49 new branch
offices in 1999, 19 in 1998 and 40 in 1997. The increases in occupancy and
equipment expense from 1997 to 1999 also reflect higher lease and maintenance
expenses on information technology equipment.
Communications
Communications expense includes telephone, postage and printing, and news and
quotation costs. This expense was $266 million in 1999, compared to $206 million
in 1998 and $183 million in 1997. The increases from 1997 to 1999 primarily
resulted from higher customer trading volumes, higher postage and printing costs
in connection with the growth in customer accounts, increased customer use of
automated telephonic and online channel news, quotation and information
services, additional leased telephone lines related to online service offerings,
and new branch offices.
Advertising and Market Development
Advertising and market development expense includes media, print and direct
mail advertising expenses, and related production, printing and postage costs.
This expense was $242 million in 1999, compared to $155 million in 1998 and $130
million in 1997. The increases from 1997 to 1999 were primarily a result of the
Company's increased brand-focused media spending. Advertising and market
development expense was 6% of revenues in each of 1999, 1998 and 1997.
Depreciation and Amortization
Depreciation and amortization includes expenses relating to equipment and
office facilities, capitalized software, leasehold improvements, goodwill,
property and other intangibles. This expense was $157 million in 1999, compared
to $138 million in 1998 and $125 million in 1997. The increases from 1997 to
1999 were primarily due to newly acquired information technology equipment that
increased the Company's customer service capacity. The increases from 1997 to
1999 also reflect increased amortization of leasehold improvements for new
branches and expanded office space. Amortization expense related to intangible
assets was $8 million in 1999, compared to $10 million in 1998 and $15 million
in 1997. Amortization expense decreased from 1997 to 1999 due to certain
intangibles becoming fully amortized.
Professional Services
Professional services expense includes fees paid to consultants engaged to
support product, service and information technology projects, and legal and
accounting fees. This expense was $151 million in 1999, compared to $88 million
in 1998 and $70 million in 1997. The increases from 1997 to 1999 were primarily
due to higher levels of consulting fees in many areas, including new and
expanded products and services, information technology projects, and capacity
expansion.
Commissions, Clearance and Floor Brokerage
Commissions, clearance and floor brokerage expense includes fees paid to
stock and option exchanges for trade executions, fees paid by M&S to
broker-dealers for orders received for execution, and fees paid to clearing
entities for trade processing. This expense was $96 million in 1999, compared to
$83 million in 1998 and $92 million in 1997.
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<PAGE>
The increase from 1998 to 1999 was primarily due to an increase in trading
volume processed by M&S and Schwab. The decrease from 1997 to 1998 was primarily
due to a decrease in the fees paid per share traded by M&S to broker-dealers for
orders received for execution, partially offset by an increase in trading volume
processed by M&S and Schwab.
Other Expenses
Other expenses include trade-related errors, travel and entertainment,
regulatory fees and dues, and other miscellaneous expenses. These other expenses
were $171 million in 1999, compared to $126 million in 1998 and $137 million in
1997. The change from 1998 to 1999 was primarily due to higher levels of travel
and related costs, volume-related regulatory fees and dues, an increase in
reserves for uncollectible accounts and contingent liabilities, and increased
trade-related errors resulting from system downtime. The decrease from 1997 to
1998 was primarily due to the $39 million pre-tax litigation settlement charges
in 1997, partially offset by higher trade-related errors and other
volume-related expenses in 1998.
Taxes on Income
The Company's effective income tax rate was 39.4% in 1999 and 39.6% in both
1998 and 1997.
New Accounting Pronouncement
In 1999, the Company adopted a new accounting standard related to
internal-use software development costs (see note "2 - Significant Accounting
Policies" in the Notes to Consolidated Financial Statements). As required by the
standard, in 1999 certain of the Company's costs, primarily compensation and
benefits, were capitalized and will be amortized over the software's estimated
useful life of three years. In prior years, these costs were expensed as
incurred. The Company capitalized $68 million in software development costs in
1999.
LIQUIDITY AND CAPITAL RESOURCES
CSC operates as a holding company, conducting virtually all business through
its wholly owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity
consistent with its operations. A description of significant aspects of this
structure for CSC and three of its subsidiaries, Schwab, M&S and CSE, follows.
Liquidity
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. As discussed
below, Schwab, M&S and CSE are subject to regulatory requirements that may
restrict them from certain transactions with CSC. Management believes that funds
generated by the operations of CSC's subsidiaries will continue to be the
primary funding source in meeting CSC's liquidity needs and maintaining Schwab's
and M&S' net capital.
CSC has liquidity needs that arise from its issued and outstanding $455
million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from
the funding of cash dividends, acquisitions and other investments. The
Medium-Term Notes have maturities ranging from 2000 to 2009 and fixed interest
rates ranging from 5.96% to 7.50% with interest payable semiannually. The
Medium-Term Notes are rated A3 by Moody's Investors Service and A- by Standard &
Poor's Ratings Group.
In June 1999, the SEC declared effective CSC's registration statement
covering the issuance of $395 million in Senior or Senior Subordinated
Medium-Term Notes, Series A (including $145 million of unissued notes previously
included in CSC's registration statement). At December 31, 1999, $311 million of
these notes remained unissued.
CSC may borrow under its committed, unsecured credit facilities. CSC
maintains a $600 million facility with a group of fourteen banks which expires
in June 2000 and a $175 million facility with a group of nine banks which
expires in June 2001. CSC plans to renegotiate the terms for the facility that
is due to expire in June 2000. The funds under both of these facilities are
available for general corporate purposes and CSC pays a commitment fee on the
unused balance of these facilities. The financial covenants in these facilities
require CSC to maintain minimum levels of stockholders' equity, and Schwab and
M&S to maintain specified levels of net capital, as defined. The Company
believes that these restrictions will not have a material effect on its ability
to meet foreseeable dividend or funding requirements. Other than an overnight
borrowing to test the availability of the $600 million facility, these
facilities were unused in 1999.
CSC has access to $685 million of the $795 million uncommitted, unsecured
bank credit lines that are primarily utilized by Schwab to manage short-term
liquidity. These lines were not used by CSC in 1999.
Schwab
Most of Schwab's assets are liquid, consisting primarily of receivable from
customers, short-term (i.e., less than 90 days) investment-grade,
interest-earning investments (the majority of which are segregated for the
exclusive benefit of customers pursuant to regulatory requirements), and
receivable from brokers, dealers and clearing organizations. Customer margin
loans are demand loan obligations secured by readily marketable securities.
Receivable from and payable to brokers, dealers and clearing organizations
primarily represent current open transactions, which usually settle, or can be
closed out, within a few business days.
Liquidity needs relating to customer trading and margin borrowing activities
are met primarily through cash balances in customer accounts, which were $23.0
billion, $17.5 billion and $12.7 billion at December 31, 1999, 1998 and 1997,
respectively. Management believes that customer cash
-11-
<PAGE>
balances and operating earnings will continue to be the primary sources of
liquidity for Schwab in the future.
Schwab is subject to regulatory requirements that are intended to ensure the
general financial soundness and liquidity of broker-dealers. These regulations
prohibit Schwab from repaying subordinated borrowings to CSC, paying cash
dividends, or making unsecured advances or loans to its parent or employees if
such payment would result in net capital of less than 5% of aggregate debit
balances or less than 120% of its minimum dollar amount requirement of $1
million. At December 31, 1999, Schwab's net capital was $1,766 million (10% of
aggregate debit balances), which was $1,421 million in excess of its minimum
required net capital and $903 million in excess of 5% of aggregate debit
balances. Schwab has historically targeted net capital to be 10% of its
aggregate debit balances, which primarily consist of customer margin loans. To
achieve this target, as customer margin loans have grown, an increasing amount
of cash flows have been retained to support aggregate debit balances.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$1,400 million subordinated revolving credit facility maturing in September
2001, of which $905 million was outstanding at December 31, 1999. At year end,
Schwab also had outstanding $25 million in fixed-rate subordinated term loans
from CSC maturing in 2001. Borrowings under these subordinated lending
arrangements qualify as regulatory capital for Schwab.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank
credit lines totaling $795 million at December 31, 1999 ($685 million of these
lines are also available for CSC to use). The need for short-term borrowings
arises primarily from timing differences between cash flow requirements and the
scheduled liquidation of interest-bearing investments. Schwab used such
borrowings for twenty-six days in 1999, six days in 1998 and eleven days in
1997, with the daily amounts borrowed averaging $125 million, $87 million and
$85 million, respectively. These lines were unused at December 31, 1999.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with eleven banks in favor of the OCC aggregating $905 million at
December 31, 1999. Schwab pays a fee to maintain these letters of credit. No
funds were drawn under these letters of credit at December 31, 1999.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&S' assets are liquid, consisting primarily of marketable
securities, receivable from brokers, dealers and clearing organizations, and
cash and cash equivalents.
M&S' liquidity is affected by the same net capital regulatory requirements as
Schwab (see discussion above). At December 31, 1999, M&S' net capital was $13
million, which was $12 million in excess of its minimum required net capital.
M&S may borrow up to $35 million under a subordinated lending arrangement
with CSC maturing in 2001. Borrowings under this arrangement qualify as
regulatory capital for M&S. This facility was unused in 1999. In addition, CSC
provides M&S with a $25 million short-term credit facility. Borrowings under
this arrangement do not qualify as regulatory capital for M&S. This facility was
unused at December 31, 1999.
CSE
CSE's liquidity needs are generally met through earnings generated by its
operations. Most of CSE's assets are liquid, consisting primarily of cash and
investments required to be segregated, receivable from brokers, dealers and
clearing organizations, and receivable from customers and others.
CSE may borrow up to (pound)20 million, equivalent to $32 million at December
31, 1999, under subordinated lending arrangements with CSC. At December 31,
1999, CSE had outstanding (pound)18 million under these arrangements, equivalent
to $29 million, with (pound)5 million maturing in 2001 and (pound)13 million
maturing in 2003.
Development Spending
A significant portion of the Company's liquidity needs arises from ongoing
investments to support future growth. These investments, which the Company
refers to as development spending, are comprised of two categories: media
spending (including media and production expenses) and project spending. Project
spending is generally targeted towards enhancing future revenue growth, such as
improvements to the Company's Web site or branch expansion; enhancing the
Company's infrastructure, such as investments to improve customer statements or
its systems integration; and improving the firm's productivity, such as
enhancements to its telecommunications systems or operations processes. This
spending is imbedded throughout certain categories of the Company's non-interest
expenses.
Development spending in 1999 was approximately $448 million and management
currently anticipates an increase of approximately 30% in 2000, reflecting
management's belief that development spending is critical to strengthening the
Company's competitive advantages.
(CHART OMITTED)
As has been the case in recent years, the Company may adjust its development
spending from period to period as business conditions change. In general, the
level of future spending will be influenced by the rate of growth in customer
assets and trading activities, the opportunities to invest in technology that
improve capacity, productivity or the customer experience, and the expected
return on these investments as compared to the Company's financial objectives
and cost of capital. While development spending is discretionary and can be
altered in response to business
-12-
<PAGE>
conditions, the Company views its development spending as essential for future
growth and therefore prefers to avoid major adjustments in such spending unless
faced with a sustained slowdown in revenue growth.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $746 million in 1999, up
53% from $487 million in 1998, allowing the Company to finance the majority of
its growth with internally generated funds. Depreciation and amortization
expense related to equipment, office facilities and property was $149 million in
1999 and $128 million in 1998. Amortization expense related to intangible assets
was $8 million in 1999 and $10 million in 1998.
(CHART OMITTED)
The Company's capital expenditures were $286 million ($283 million net of
proceeds from the sale of fixed assets) in 1999 and $190 million ($185 million
net of proceeds) in 1998, or 7% of revenues in both years. In 1999, 75% of
capital expenditures were for information technology and 25% for facilities
expansion and improvements. Capital expenditures as described above exclude the
capitalized costs for developing internal-use software of $68 million in 1999.
The Company opened 49 new branch offices during 1999, compared to 19 branch
offices opened in 1998, and continues to view its branch office network as
important to pursuing its strategy of attracting customer assets.
Management currently anticipates that 2000 capital expenditures will be
approximately 70% higher than 1999 spending. Approximately 66% of the 2000
planned expenditures relate to facilities expansion and improvements and
approximately 34% relate to information technology. The significant increase in
2000 planned expenditures is primarily due to leasehold improvements to support
the Company's growth in employees, and the Company's plans to enhance systems
capacity and availability. As has been the case in recent years, the Company may
adjust its capital expenditures from period to period as business conditions
change.
During 1999, the Company:
- Issued $144 million and repaid $40 million of Medium-Term Notes;
- Paid common stock dividends of $46 million.
The Company monitors both the relative composition and absolute level of its
capital structure. The Company's total financial capital (borrowings plus
stockholders' equity) at December 31, 1999 was $2,729 million, up $949 million,
or 53%, from a year ago. At December 31, 1999, the Company had borrowings of
$455 million, or 17% of total financial capital, bearing interest at a
weighted-average rate of 6.7%. At December 31, 1999, the Company's stockholders'
equity was $2,274 million, or 83% of total financial capital. Management
currently anticipates that borrowings will remain below 30% of total financial
capital.
Share Repurchases
The Company did not repurchase any shares of its common stock in 1999 and
repurchased 12,509,000 shares for $150 million in 1998 and 2,460,000 shares for
$18 million in 1997. Since the inception of the repurchase plan in 1988, the
Company has repurchased 132,830,700 shares of its common stock for $314 million.
There is no current authorization for share repurchases.
Dividend Policy
Since the initial dividend in 1989, the Company has paid 43 consecutive
quarterly dividends and has increased the dividend 11 times. Since 1989,
dividends have increased by a 34% compounded annual growth rate. The Company
paid common stock dividends of $.0560 per share in 1999, $.0540 per share in
1998 and $.0467 per share in 1997. While the payment and amount of dividends are
at the discretion of the Company's Board of Directors, the Company targets its
cash dividend at approximately 5% to 10% of net income plus depreciation and
amortization.
YEAR 2000 CENTURY CHANGE
The Company's mission critical systems operated throughout the Year 2000
century change without material errors or interruptions when processing data and
transactions incorporating year 2000 dates, and the Company did not encounter
any material problems with any of its mission critical vendor-supplied systems,
services or products. Mission critical systems, services and products means
those systems, services and products critical to the ongoing operation of the
business.
Compliance Costs
As of December 31, 1999, the Company spent approximately $91 million of the
estimated cost for its Year 2000 project. The Company currently anticipates
spending approximately $3 million during the first quarter of 2000 to complete
the project.
The Company has funded all Year 2000 related costs through operating cash
flows and a reallocation of the Company's overall development spending. This
reallocation did not result in the delay of any critical information technology
projects. In accordance with generally accepted accounting principles, Year 2000
expenditures are expensed as incurred.
RISK MANAGEMENT
Overview
The Company's business and activities expose it to different types of risks
including, but not limited to, those discussed below. Proper identification,
assessment and management of these risks are essential to the success and
financial soundness of the Company. Managing risk at the
-13-
<PAGE>
Company begins with the expertise and experience of management at the business
unit level. To supplement risk management at the business unit level, the
Company has formed a Global Risk Steering Committee, and various other risk
committees consisting of members of senior management. The Global Risk Steering
Committee takes an active role in the oversight of the various risk committees
by reviewing risk exposures, leading in the continued development of the
Company's risk management practices, reviewing existing risk management programs
and policies, discussing changes in regulations and other risk-related
developments, and reporting regularly to the Audit Committee of the Company's
Board of Directors. Other risk committees include the Technology and Operations
Risk Committee, which focuses on the integrity of the Company's technology
systems and enhancements, and operating capacity; the Credit Oversight
Committee, which focuses on customer activity (i.e., margin lending activities
to customers and customer option activities), the investing activities of
certain of the Company's proprietary funds, and corporate credit activities
(i.e., counterparty and corporate investing activities); and the Financial Risk
Committee, which focuses on liquidity and capital resources, interest rate risk,
and securities owned. Additionally, the Finance, Compliance, and Internal Audit
Departments and the Office of Corporate Counsel assist management and the
various risk committees in evaluating and monitoring the Company's risk profile.
The following discussion highlights the Company's principal risks and some of
the policies and procedures for risk identification, assessment and mitigation.
See Liquidity and Capital Resources for a discussion on liquidity risk and note
"13 - Financial Instruments with Off-Balance-Sheet and Credit Risk" in the Notes
to Consolidated Financial Statements for additional discussion on credit risk.
Given the nature of the Company's revenues, expenses and risk profile, the
Company's earnings and CSC's common stock price may be subject to significant
volatility from period to period. The Company's results for any period are not
necessarily indicative of results for a future period. Risk is inherent in the
Company's business. Consequently, despite the Company's attempts to identify
areas of risk, oversee operational areas involving risk and implement policies
and procedures designed to mitigate risk, there can be no assurance that the
Company will not suffer unexpected losses due to operating or other risks.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including traditional brokerage firms (particularly
firms that have started providing online trading services), discount brokerage
firms, online brokerage firms, mutual fund companies and banks. Certain of these
competitors have greater financial resources than the Company. The consolidation
trend in the financial services industry is likely to increase in light of the
new financial modernization legislation that becomes effective in March 2000.
This new legislation allows banks, securities firms and insurance companies more
flexibility to affiliate under one holding company. These holding companies can
engage in activities and acquire companies engaged in activities that are
financial in nature. The expansion and customer acceptance of conducting
financial transactions online has also attracted competition from providers of
online services, software development companies and other providers of financial
services. Finally, the growth of online trading has led to the creation of new
ECNs and new exchanges, and is causing major existing markets to consider
converting to for-profit status, all of which may intensify competition. The
Company experienced declines in its average commission per revenue trade in 1998
mainly due to the Company's integration of its online and traditional brokerage
services and reduction of the price of online trades for most of its customers,
resulting in an increase in the proportion of trades placed through its online
channels. The Company's average commission per revenue trade declined in 1999
due to the continued increase in the proportion of trades placed through its
online channels. As the Company focuses on further enhancements to its
electronic service offering and online trades increase, average commission per
revenue trade is expected to continue to decline.
Business Environment
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. While the
Company's non-trading revenues have grown, transaction-based revenues continue
to represent a majority of the Company's revenues and the Company may experience
significant variations in revenues from period to period. The Company adjusts
its expenses in anticipation of and in response to changes in financial market
conditions and customer trading patterns. Certain of the Company's expenses
(including variable compensation, portions of communications, and commissions,
clearance and floor brokerage) vary directly with changes in financial
performance or customer trading activity. Expenses relating to the level of
contractors, temporary employees, overtime hours, advertising and market
development, and professional services are adjustable over the short term to
help the Company achieve its financial objectives. Additionally, development
spending is discretionary and can be altered in response to market conditions.
However, a significant portion of the Company's expenses such as salaries and
wages, occupancy and equipment, and depreciation and amortization do not vary
directly, at least in the short term, with fluctuations in revenues or
securities trading volumes. Also, the Company views its development spending as
essential for future growth and therefore prefers to avoid major adjustments in
such spending unless faced with a sustained slowdown in revenue growth.
-14-
<PAGE>
Technology and Operating Risk
Technology and operating risk is the potential for loss due to deficiencies
in control processes or technology systems that constrain the Company's ability
to gather, process and communicate information efficiently and securely, without
interruptions. The Company's operations are highly dependent on the integrity of
its technology systems and the Company's success depends, in part, on its
ability to make timely enhancements and additions to its technology in
anticipation of customer demands. To the extent the Company experiences system
interruptions, errors or downtime (which could result from a variety of causes,
including changes in customer use patterns, technological failure, changes to
its systems, linkages with third-party systems, and power failures), the
Company's business and operations could be significantly negatively impacted.
Additionally, rapid increases in customer demand may strain the Company's
ability to enhance its technology and expand its operating capacity. To minimize
business interruptions, the Company has two data centers intended, in part, to
further improve the recovery of business processing in the event of an
emergency. The Company attempts to mitigate technology and operating risk by
maintaining a comprehensive internal control system and by employing experienced
personnel. Also, the Company maintains backup and recovery functions, including
facilities for backup and communications, and conducts periodic testing of a
disaster recovery plan. The Company is committed to an ongoing process of
upgrading, enhancing and testing its technology systems. This effort is focused
on meeting customer demands, meeting market and regulatory changes, and
deploying standardized technology platforms.
Credit Risk
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company's exposure to credit
risk mainly results from its margin lending activities, securities lending
activities, role as a counterparty in financial contracts, investing activities,
and the investing activities of certain of the Company's proprietary funds. To
mitigate the risks of such losses, the Company has established policies and
procedures which include: establishing and reviewing credit limits, monitoring
of credit limits and quality of counterparties, and increasing margin
requirements for certain securities. In addition, most of the Company's credit
extensions, such as margin loans to customers, securities lending agreements,
and resale agreements, are supported by collateral arrangements. These
arrangements are subject to requirements to provide additional collateral in the
event that market fluctuations result in declines in the value of collateral
received.
Market Risk
Market risk is the potential for loss due to a change in the value of a
financial instrument held by the Company as a result of fluctuations in interest
and currency exchange rates, and equity prices.
The Company is exposed to interest rate risk primarily from changes in the
interest rates on its interest-earning assets (mainly margin loans to customers
and investments) and its funding sources (including customer cash balances,
proceeds from stock-lending activities, borrowings, and stockholders' equity)
which finance these assets. The Company attempts to mitigate this risk by
monitoring the net interest margin and average maturity of its investments. The
Company also has the ability to adjust the rates paid on customer balances and
charged on margin loans.
The Company is exposed to equity price risk through its role as a financial
intermediary in customer-related transactions, and by holding financial
instruments mainly in its capacity as a market maker and relating to its
specialists' operations. To mitigate the risk of losses, these financial
instruments are marked to market daily and are monitored by management to assure
compliance with limits established by the Company. Additionally, the Company
purchases from time to time exchange-traded option contracts to reduce market
risk on these inventories. The Company may also purchase futures contracts to
reduce this risk. The Company may enter into foreign currency contracts to
reduce currency exchange rate risk. However, the Company's exposure to currency
exchange risks through its international operations is not material.
Additional qualitative and quantitative disclosures about market risk are
summarized as follows.
Financial Instruments Held For Trading Purposes
The Company held government securities and certificates of deposit with a
fair value of approximately $22 million and $13 million at December 31, 1999 and
1998, respectively. These securities, and the associated interest rate risk, are
not material to the Company's financial position, results of operations or cash
flows.
Through Schwab and M&S, the Company maintains inventories in exchange-listed
and Nasdaq securities on both a long and short basis. The fair value of these
securities at December 31, 1999 was $107 million in long positions and $60
million in short positions. The fair value of these securities at December 31,
1998 was $60 million in long positions and $35 million in short positions. Using
a hypothetical 10% increase or decrease in prices, the potential loss or gain in
fair value is estimated to be approximately $5 million and $3 million at
December 31, 1999 and 1998, respectively, due to the offset of the change in
fair value in long and short positions. In addition, the Company generally
enters into exchange-traded option contracts to hedge against potential losses
in equity inventory positions, thus reducing this potential loss exposure. This
hypothetical 10% change in
-15-
<PAGE>
fair value of these securities at December 31, 1999 and 1998 would not be
material to the Company's financial position, results of operations or cash
flows. The notional amount of option contracts was approximately $103 million
and $74 million at December 31, 1999 and 1998, respectively. The fair value of
such option contracts was not material to the Company's consolidated balance
sheets at December 31, 1999 and 1998.
Financial Instruments Held For Purposes Other Than Trading
For its working capital and reserves required to be segregated under federal
or other regulations, the Company invests in money market funds, resale
agreements, certificates of deposit, and commercial paper. Money market funds do
not have maturity dates and do not present a material market risk. The other
financial instruments, as shown in the following table, are fixed rate
investments with short-term maturities and are not subject to material changes
in value due to interest rate movements (dollars in millions):
- --------------------------------------------------------------------------------
Principal Amount
by Maturity Date Fair Value
December 31, 2000 Thereafter 1999 1998
- --------------------------------------------------------------------------------
Resale agreements (1) $6,915 $6,915 $7,608
Weighted-average interest rate 5.05%
Certificates of deposit $1,659 $1,659 $2,004
Weighted-average interest rate 5.66%
Commercial paper $ 220 $ 220 $ 525
Weighted-average interest rate 4.18%
================================================================================
(1) Fair value at December 31, 1999 includes resale agreements of $6,165
million included in cash and investments required to be segregated under
federal or other regulations and $750 million included in cash and cash
equivalents.
At December 31, 1999, CSC had $455 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.96% to
7.50%. At December 31, 1998, CSC had $351 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.78% to
7.72%. The Company has fixed cash flow requirements regarding these Medium-Term
Notes due to the fixed rate of interest. The fair value of these Medium-Term
Notes at December 31, 1999 and 1998, based on estimates of market rates for debt
with similar terms and remaining maturities, approximated their carrying amount.
The table below presents the principal amount of these Medium-Term Notes by year
of maturity (dollars in millions):
- --------------------------------------------------------------------------------
Year Ending Weighted-Average Principal
December 31, Interest Rate Amount
- --------------------------------------------------------------------------------
2000 6.3% $ 48
2001 7.0% 39
2002 7.0% 53
2003 6.5% 49
2004 6.6% 81
Thereafter 6.8% 185
================================================================================
The Company maintains investments primarily in mutual funds, approximately
$60 million and $50 million at December 31, 1999 and 1998, respectively, to fund
obligations under its deferred compensation plan, which is available to certain
employees. Any decrease in the fair value of these investments would result in a
comparable decrease in the deferred compensation plan obligation and would not
affect the Company's financial position, results of operations or cash flows.
Legal and Compliance Risk
Legal and compliance risk refers to the possibility that the Company will be
found, by a court, arbitration panel or regulatory authority, not to have
complied with an applicable legal or regulatory requirement. The Company may be
subject to lawsuits or arbitration claims by customers, employees or other third
parties in the different jurisdictions in which it conducts business. In
addition, the Company is subject to extensive regulation by the SEC, the
National Association of Securities Dealers, Inc., the NYSE, and other federal,
state and market regulators, as well as certain foreign regulatory authorities.
The Company attempts to mitigate legal and compliance risk through policies and
procedures that it believes are reasonably designed to prevent or detect
violations of applicable statutory and regulatory requirements (see note "12 -
Commitments and Contingent Liabilities" in the Notes to Consolidated Financial
Statements).
LOOKING AHEAD
During 1999, the competitive environment in financial services intensified -
several traditional brokerage firms adjusted their pricing, enhanced their
online services and, along with a number of discount brokerage firms,
substantially increased their spending on advertising and marketing programs.
While this trend of intensified competition is expected to continue in 2000,
management believes that the Company's competitive advantages will enable the
firm to pursue its strategy of attracting and retaining customer assets. As
described more fully in the Description of Business section above, these
competitive advantages include: a nationally recognized brand, a broad line of
products and services offered at prices that management believes represent
superior value, multi-channel delivery systems, and the commitment and skills
necessary
-16-
<PAGE>
to invest in technology intended to empower customers and reduce
costs. Additionally, the Company's significant level of employee ownership
aligns the interests of management with those of stockholders.
During 2000, the Company expects to sustain its competitive advantages by
providing its customers with expanded and enhanced services, including a
broadened service offering for affluent investors. The acquisition of U.S. Trust
is designed to help complete the Company's offering to affluent investors, as
well as independent investment managers and their customers, by providing them
with access to an array of wealth management services. The Company's acquisition
of CyBerCorp is designed to help provide actively trading investors with access
to advanced order entry, routing and management technology, as well as to
support the Company's ongoing role as a leader in the evolution of customer
access to the capital markets. The Company also expects to continue its focus on
developing an enhanced help and advice offering for all customers, and to
continue its process of selective international expansion.
The Company's efforts to expand and enhance services are being driven by
evolving customer needs. A substantial portion of growth in investable assets in
coming years is anticipated to be concentrated with the "baby boom" generation.
As these investors continue to accumulate wealth, many will need more guidance
in managing their financial affairs, as well as access to more complex and
specialized services such as estate and tax planning, and trust and investment
management. As a result, the Company expects to continue evaluating the breadth
of its service offering relative to customer needs.
Management continues to believe that the key to sustaining the Company's
competitive advantages will be its ability to combine people and technology in
ways that provide investors with the access, information, guidance, advice and
control they expect - as well as superior service - all at a lower cost than
traditional providers of financial services. Accordingly, the Company expects to
remain in direct competition with traditional, online and discount brokerage
firms, banks and other providers of financial products and services.
Capitalizing on and strengthening the Company's competitive advantages
requires significant development spending and capital expenditures. Management
believes that these ongoing investments are critical to increasing the Company's
market share and achieving its long-term financial objectives, which include
annual growth in revenues of 20%, an after-tax profit margin of 12%, and a
return on stockholders' equity of 20%.
-17-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income The Charles Schwab Corporation
(In Thousands, Except Per Share Amounts)
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Commissions $1,863,306 $1,309,383 $1,174,023
Mutual fund service fees 750,141 559,241 427,673
Interest revenue, net of interest expense of $768,403 in 1999,
$651,881 in 1998 and $546,483 in 1997 702,677 475,617 353,552
Principal transactions 500,496 286,754 257,985
Other 128,202 105,226 85,517
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,944,822 2,736,221 2,298,750
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 1,624,526 1,162,823 961,824
Occupancy and equipment 266,382 200,951 154,181
Communications 265,914 206,139 182,739
Advertising and market development 241,895 154,981 129,550
Depreciation and amortization 156,678 138,477 124,682
Professional services 151,081 87,504 69,583
Commissions, clearance and floor brokerage 96,012 82,981 91,933
Other 171,095 125,821 137,011
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,973,583 2,159,677 1,851,503
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 971,239 576,544 447,247
Taxes on income 382,362 228,082 176,970
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 588,877 $ 348,462 $ 270,277
====================================================================================================================================
Weighted-Average Common Shares Outstanding - Diluted* 843,090 823,005 817,726
====================================================================================================================================
Earnings Per Share*
Basic $ .73 $ .44 $ .34
Diluted $ .70 $ .42 $ .33
====================================================================================================================================
Dividends Declared Per Common Share* $ .0560 $ .0540 $ .0467
====================================================================================================================================
* All periods have been restated for the July 1999 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet The Charles Schwab Corporation
(In Thousands, Except Per Share Amounts)
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,079,128 $ 1,155,928
Cash and investments required to be segregated under federal or other regulations
(including resale agreements of $6,165,043 in 1999 and $7,608,067 in 1998) 8,465,528 10,242,943
Receivable from brokers, dealers and clearing organizations 482,657 334,334
Receivable from customers - net 17,060,222 9,646,140
Securities owned - at market value 339,634 242,115
Equipment, office facilities and property - net 597,761 396,163
Intangible assets - net 45,149 46,274
Other assets 228,982 200,493
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,299,061 $22,264,390
====================================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 467,758 $ 324,597
Payable to brokers, dealers and clearing organizations 1,748,765 1,422,300
Payable to customers 23,422,592 18,119,622
Accrued expenses and other liabilities 931,011 618,249
Borrowings 455,000 351,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 27,025,126 20,835,768
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value per share;
none issued
Common stock - 2,000,000 and 500,000 shares authorized in 1999 and 1998,
respectively; $.01 par value per share; 822,249 and 803,765 shares issued
and outstanding in 1999 and 1998, respectively* 8,224 4,019
Additional paid-in capital 539,408 213,312
Retained earnings 1,794,282 1,254,953
Deferred compensation stock trust 2,405
Unearned ESOP shares (967) (1,088)
Unamortized restricted stock compensation (70,926) (43,882)
Common stock issued to deferred compensation trust (2,405)
Foreign currency translation adjustment 3,914 1,308
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,273,935 1,428,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,299,061 $22,264,390
====================================================================================================================================
* All periods have been restated for the July 1999 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows The Charles Schwab Corporation
(In Thousands)
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 588,877 $ 348,462 $ 270,277
Noncash items included in net income:
Depreciation and amortization 156,678 138,477 124,682
Compensation payable in common stock 27,865 28,189 24,385
Deferred income taxes (3,570) (6,219) (29,074)
Other 4,659 4,714 3,047
Change in securities owned (97,519) 40,454 (154,699)
Change in other assets (8,785) 16,547 (25,934)
Change in accrued expenses and other liabilities 528,758 208,783 153,234
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 1,196,963 779,407 365,918
- ------------------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Cash and investments required to be segregated under
federal or other regulations 1,765,328 (3,466,062) 456,662
Receivable from brokers, dealers and clearing organizations (152,287) (65,978) (37,449)
Receivable from customers - net (7,419,482) (1,893,821) (2,741,796)
Drafts payable 144,006 56,028 43,908
Payable to brokers, dealers and clearing organizations 329,423 298,411 245,327
Payable to customers 5,317,093 5,010,081 1,935,507
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (15,919) (61,341) (97,841)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,181,044 718,066 268,077
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (282,973) (185,494) (139,416)
Capitalized costs of developing software for internal use (68,002)
Cash payments for businesses acquired, net of cash received (5,657) (1,400) (1,200)
Cash payments for investments in businesses (17,102)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (373,734) (186,894) (140,616)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 144,000 30,000 111,000
Repayment of borrowings (40,080) (40,049) (33,649)
Dividends paid (45,502) (43,068) (37,091)
Purchase of treasury stock (150,180) (18,234)
Proceeds from stock options exercised and other 55,090 30,766 14,530
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 113,508 (172,531) 36,556
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 2,382 (160) 113
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 923,200 358,481 164,130
Cash and cash equivalents at beginning of year 1,155,928 797,447 633,317
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,079,128 $ 1,155,928 $ 797,447
====================================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Equity The Charles Schwab Corporation
(In Thousands)
Common
Un- Stock Foreign
Deferred amortized Issued to Currency
Add- Compen- Un- Restricted Deferred Trans-
Common Stock itional sation earned Stock Compen- lation
--------------- Paid-In Retained Stock Treasury ESOP Compen- sation Adjust-
Shares* Amount Capital Earnings Trust Stock Shares sation Trust ment Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,1996 787,805 $1,785 $200,857 $ 723,085 $ (60,277) $(5,517) $ (8,658) $ 3,280 $ 854,555
Comprehensive income:
Net income 270,277 270,277
Foreign currency
translation adjustment (2,360) (2,360)
---------
Total comprehensive
income 267,917
Dividends declared on
common stock (37,091) (37,091)
Purchase of treasury
stock (2,460) (18,234) (18,234)
Stock options exercised
and restricted stock
compensation awards 12,460 25,830 43,110 (14,179) 54,761
Three-for-two stock
split effected in the
form of a 50% stock
dividend 892 (892)
Amortization of
restricted stock
compensation awards 5,609 5,609
ESOP shares released
for allocation 14,735 117 2,748 17,600
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 797,805 2,677 241,422 955,496 (35,401) (2,769) (17,228) 920 1,145,117
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 348,462 348,462
Foreign currency
translation adjustment 388 388
---------
Total comprehensive
income 348,850
Dividends declared on
common stock (43,068) (43,068)
Purchase of treasury
stock (12,509) (150,180) (150,180)
Stock options exercised
and restricted stock
compensation awards 18,489 4 (40,872) (4,375) 185,581 (42,153) 98,185
Three-for-two stock
split effected in the
form of a 50% stock
dividend 1,338 (1,338)
Cash paid in lieu of
fractional shares as
a result of the
stock split (20) (364) (364)
Amortization of
restricted stock
compensation awards 15,499 15,499
ESOP shares released
for allocation 12,762 140 1,681 14,583
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 803,765 4,019 213,312 1,254,953 (1,088) (43,882) 1,308 1,428,622
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 588,877 588,877
Foreign currency
translation adjustment 2,606 2,606
---------
Total comprehensive
income 591,483
Dividends declared on
common stock (45,502) (45,502)
Deferred compensation
liability settled by
issuing common stock 74 1 2,404 $2,405 $(2,405) 2,405
Stock options exercised
and restricted stock
compensation awards 18,389 118 319,815 (54,072) 265,861
Two-for-one stock
split effected in
the form of a 100%
stock dividend 4,086 (4,086)
Issuance of common
stock in connection
with Canadian-
based acquisitions 21 714 714
Amortization of
restricted stock
compensation awards 27,028 27,028
ESOP shares released
for allocation 3,163 40 121 3,324
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 822,249 $8,224 $539,408 $1,794,282 $2,405 $ (967) $(70,926) $(2,405) $ 3,914 $2,273,935
====================================================================================================================================
* Share amounts are presented net of treasury shares and all periods have been restated for the July 1999 two-for-one common
stock split.
See Notes to Consolidated Financial Statements.
</TABLE>
-21-
<PAGE>
The Charles Schwab Corporation
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Per Share and Option Price Amounts)
1. Basis of Presentation
The consolidated financial statements include The Charles Schwab Corporation
(CSC) and its subsidiaries (collectively referred to as the Company). CSC is a
holding company engaged, through its subsidiaries, in securities brokerage and
related financial services. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer with 340 domestic branch offices in
48 states, as well as branches in the Commonwealth of Puerto Rico and the U.S.
Virgin Islands. Another subsidiary, Charles Schwab Europe (CSE), is a retail
securities brokerage firm located in the United Kingdom. Other subsidiaries
include Charles Schwab Investment Management, Inc., the investment advisor for
Schwab's proprietary mutual funds, and Mayer & Schweitzer, Inc. (M&S), a market
maker in Nasdaq and other securities providing trade execution services to
broker-dealers and institutional customers.
Certain items in prior years' financial statements have been reclassified to
conform to the 1999 presentation. All material intercompany balances and
transactions have been eliminated.
2. Significant Accounting Policies
Securities transactions: Customers' securities transactions are recorded on the
date that they settle, while the related commission revenues and expenses are
recorded on the date that the trade occurs. Principal transactions are recorded
on a trade date basis.
Use of estimates: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts in the accompanying
financial statements. Such estimates relate to useful lives of equipment, office
facilities, buildings and intangible assets, fair value of financial
instruments, allowance for doubtful accounts, future tax benefits and legal
reserves. Actual results could differ from such estimates.
Estimated fair value of financial instruments: The Company considers the amounts
recorded for financial instruments on the consolidated balance sheet to be
reasonable estimates of fair value.
Cash and investments required to be segregated under federal or other
regulations consist primarily of securities purchased under agreements to resell
(resale agreements) and certificates of deposit. Certificates of deposit are
stated at cost, which approximates market.
Securities financing activities: Resale agreements are accounted for as
collateralized financing transactions and are recorded at their contractual
amounts. The Company obtains possession of collateral with a market value equal
to or in excess of the principal amount loaned under resale agreements.
Collateral is valued daily by the Company, with additional collateral obtained
or refunded when necessary.
Securities borrowed and securities loaned are reported as collateralized
financing transactions. Securities borrowed require the Company to deposit cash
with the lender and are included in receivable from brokers, dealers and
clearing organizations. For securities loaned, the Company receives collateral
in the form of cash in an amount generally equal to the market value of
securities loaned. Securities loaned are included in payable to brokers, dealers
and clearing organizations. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded when necessary.
Receivable from customers that remain unsecured for more than 30 days or
partially secured for more than 90 days are fully reserved for, and are stated
net of allowance for doubtful accounts of $11 million and $8 million at December
31, 1999 and 1998, respectively.
Equipment, office facilities and property: Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the asset
of three to seven years. Buildings are depreciated on a straight-line basis over
twenty years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the estimated useful life of the asset or the life of the lease.
Equipment, office facilities and property are stated at cost net of accumulated
depreciation and amortization of $575 million and $452 million at December 31,
1999 and 1998, respectively.
Intangible assets, including goodwill and customer lists, are amortized on a
straight-line basis over three to fifteen years. Intangible assets are stated at
cost net of accumulated amortization of $203 million and $196 million at
December 31, 1999 and 1998, respectively.
Derivatives: The Company's derivatives activities primarily consist of
exchange-traded option contracts to reduce market risk on inventories in Nasdaq
and exchange-listed securities. The notional amount of such derivatives was $103
million and $74 million at December 31, 1999 and 1998, respectively. The fair
value of such derivatives was not
-22-
<PAGE>
material to the Company's consolidated balance sheets at December 31, 1999 and
1998.
Foreign currency translation: Assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date, while
revenues and expenses are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as other comprehensive
income.
Income taxes: The Company files a consolidated U.S. federal income tax return
and uses the asset and liability method in providing for income tax expense.
Under this method, deferred tax assets and liabilities are recorded for
temporary differences between the tax basis of assets and liabilities and their
recorded amounts for financial reporting purposes, using currently enacted tax
law.
Common stock split: Share and per share information presented in the financial
statements and related notes have been restated to reflect the July 1999
two-for-one common stock split, effected in the form of a 100% stock dividend.
Cash flows: For purposes of reporting cash flows, the Company considers all
highly liquid investments (including resale agreements) with maturities of three
months or less that are not required to be segregated under federal or other
regulations to be cash equivalents.
Accounting change: Statement of Position 98-1 - Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, was adopted by the
Company effective January 1, 1999. This statement requires that certain costs
incurred for purchasing or developing software for internal use be capitalized
and amortized over the software's estimated useful life of three years. In prior
years, the Company capitalized costs incurred for purchasing internal-use
software, but expensed costs incurred for developing internal-use software. In
accordance with this statement, prior years' financial statements were not
adjusted to reflect this accounting change. Adoption of this statement resulted
in the capitalization of $68 million of internal-use software development costs
during 1999, which increased net income by $41 million, or $.05 diluted earnings
per share.
New accounting standard: Statement of Financial Accounting Standards (SFAS) No.
137, which amended the effective date of SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1999. The
Company is required to adopt SFAS No. 133 by January 1, 2001. This statement
establishes accounting and reporting standards requiring that all derivative
instruments are recorded on the balance sheet as either an asset or a liability,
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met and such hedge accounting treatment is
elected. While the Company is currently evaluating the effects of this
statement, its adoption is not expected to have a material impact on the
Company's financial position, results of operations, earnings per share or cash
flows.
3. Securities Owned
Securities owned are recorded at market value and consist of the following:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Equity and other securities $129,830 $ 73,226
SchwabFunds(R) money market funds 117,289 88,131
Equity and bond mutual funds 92,515 80,758
- --------------------------------------------------------------------------------
Total securities owned $339,634 $242,115
================================================================================
Equity and other securities include M&S' inventories in Nasdaq and other
securities and Schwab's inventories in exchange-listed securities relating to
its specialist operations. The Company's positions in SchwabFunds money market
funds arise from certain overnight funding of customers' redemption,
check-writing and debit card activities. Equity and bond mutual funds include
investments made by the Company for funding obligations under its deferred
compensation plan and for overnight funding of certain SchwabFunds customers'
transactions.
Securities sold, but not yet purchased, of $60 million and $35 million at
December 31, 1999 and 1998, respectively, consist of equity and other
securities, and are recorded at market value in accrued expenses and other
liabilities.
4. Payable to Brokers, Dealers and Clearing Organizations
Payable to brokers, dealers and clearing organizations consist primarily of
securities loaned of $1,421 million and $1,201 million at December 31, 1999 and
1998, respectively. The market value of securities pledged by counterparties
under securities lending transactions approximated amounts due.
5. Payable to Customers
The principal source of funding for Schwab's margin lending is cash balances
in customer accounts. At December 31, 1999, Schwab was paying interest at 4.5%
on $19,565 million of cash balances in customer brokerage accounts, which were
included in payable to customers. At December 31, 1998, Schwab was paying
interest at 4.1% on $15,143 million of such cash balances.
-23-
<PAGE>
6. Borrowings
Borrowings consist of Senior Medium-Term Notes, Series A (Medium-Term Notes).
At December 31, 1999, CSC had $455 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.96% to
7.50% and maturities ranging from 2000 to 2009 as follows:
- --------------------------------------------------------------------------------
2000 $ 48,000
2001 39,000
2002 53,000
2003 49,000
2004 80,500
Thereafter 185,500
================================================================================
The Medium-Term Notes carry a weighted-average interest rate of 6.73%. The
fair value of the Medium-Term Notes at December 31, 1999 and 1998, based on
estimates of market rates for debt with similar terms and remaining maturities,
approximated their carrying amounts.
At December 31, 1999, CSC had $311 million in Senior or Senior Subordinated
Medium-Term Notes, Series A available to be issued.
CSC may borrow under its committed, unsecured credit facilities. CSC
maintains a $600 million facility with a group of fourteen banks which expires
in June 2000 and a $175 million facility with a group of nine banks which
expires in June 2001. The funds under both of these facilities are available for
general corporate purposes and CSC pays a commitment fee on the unused balance
of these facilities. The financial covenants in these facilities require CSC to
maintain minimum levels of stockholders' equity, and Schwab and M&S to maintain
specified levels of net capital, as defined. The Company believes that these
restrictions will not have a material effect on its ability to meet foreseeable
dividend or funding requirements. Other than an overnight borrowing to test the
availability of the $600 million facility, these facilities were unused in 1999.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank
credit lines which total $795 million and $545 million at December 31, 1999 and
1998, respectively. CSC has access to $685 million and $545 million of these
credit lines at December 31, 1999 and 1998, respectively. There were no
borrowings outstanding under these lines at December 31, 1999 and 1998.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with eleven banks in favor of the OCC aggregating $905 million at
December 31, 1999. Schwab pays a fee to maintain these letters of credit. No
funds were drawn under these letters of credit at December 31, 1999 and 1998.
7. Taxes on Income
Income tax expense is as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $334,720 $206,500 $179,110
State 51,212 27,801 26,934
- --------------------------------------------------------------------------------
Total current 385,932 234,301 206,044
- --------------------------------------------------------------------------------
Deferred:
Federal (2,828) (6,343) (26,484)
State (742) 124 (2,590)
- --------------------------------------------------------------------------------
Total deferred (3,570) (6,219) (29,074)
- --------------------------------------------------------------------------------
Total taxes on income $382,362 $228,082 $176,970
================================================================================
The above amounts do not include tax benefits from the exercise of stock
options and the vesting of restricted stock awards, which for accounting
purposes are credited directly to additional paid-in capital. Such tax benefits
reduced income taxes paid by $213 million in 1999, $69 million in 1998 and $34
million in 1997.
The temporary differences that created deferred tax assets and liabilities,
included in other assets, and accrued expenses and other liabilities, are
detailed below:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Deferred compensation $ 60,049 $40,963
Reserves and allowances 30,185 22,264
Asset valuation differences 3,248 3,017
Other 2,128 3,081
- --------------------------------------------------------------------------------
Total deferred assets 95,610 69,325
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation and amortization (24,366) (1,713)
State and local taxes (2,469) (2,407)
- --------------------------------------------------------------------------------
Total deferred liabilities (26,835) (4,120)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 68,775 $65,205
================================================================================
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1999 and 1998 was necessary.
The effective income tax rate differs from the amount computed by applying
the federal statutory income tax rate as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.4 3.2 3.5
Other 1.0 1.4 1.1
- --------------------------------------------------------------------------------
Effective income tax rate 39.4% 39.6% 39.6%
================================================================================
-24-
<PAGE>
8. Employee Incentive and Deferred Compensation Plans
The Company's stock incentive plans provide for granting options to
employees, officers and directors, and restricted stock awards to employees and
officers. The Company also sponsors deferred compensation plans for both
officers and non-employee directors.
The Company granted to all non-officer employees 3,783,000 options in 1999
and 3,478,000 options in 1998. The Company expects to grant such options
annually with the size of the grant based on Company performance.
Options are granted for the purchase of shares of common stock at an exercise
price not less than market value on the date of grant, and expire within either
eight or ten years from the date of grant. Options generally vest over a
four-year period from the date of grant. A summary of option activity follows:
<TABLE>
<CAPTION>
------------------------- ------------------------- -------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 66,736 $ 7.65 65,151 $ 4.06 64,717 $ 2.52
Granted(1) 12,520 $40.65 20,141 $15.04 12,100 $10.01
Exercised (17,255) $ 3.22 (15,919) $ 2.00 (10,421) $ 1.40
Canceled (1,745) $18.27 (2,637) $ 9.61 (1,245) $ 4.40
- ---------------------------------------------------------------------------------------------------------
Outstanding at
end of year 60,256 $15.46 66,736 $ 7.65 65,151 $ 4.06
=========================================================================================================
Exercisable at
end of year 26,706 $ 5.56 34,535 $ 3.24 40,078 $ 2.10
=========================================================================================================
Available for
future grant at
end of year 24,752 34,761 47,944
=========================================================================================================
Weighted-average
fair value of
options granted
during the year(1) $18.51 $5.48 $4.44
=========================================================================================================
(1) In 1998, 3,600,000 options were granted with an exercise price greater than
the fair market value of the Company's common stock on the date of grant. The
weighted-average exercise price of these options is $25.00 and the
weighted-average fair value is $4.26. The remaining 16,541,000 options were
granted with an exercise price equal to the fair market value of the
Company's common stock on the date of grant. The weighted-average exercise
price of these options is $12.88 and the weighted-average fair value is
$5.74.
</TABLE>
The fair value of each option granted is estimated as of the grant date using
the Black-Scholes option-pricing model with the following assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield .50% .65% .75%
Expected volatility 46% 45% 44%
Risk-free interest rate 5.5% 5.6% 6.2%
Expected life (in years) 5 5-8 5
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding and
exercisable:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
December 31, 1999
- ------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Options Life (in years) Price of Options Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to $ 5.00 11,725 2.8 $ 1.86 11,624 $ 1.83
$ 5.01 to $ 8.00 11,119 6.2 $ 5.90 9,072 $ 5.73
$ 8.01 to $13.00 12,102 7.8 $10.84 4,156 $10.66
$13.01 to $21.00 10,802 8.2 $14.24 1,727 $14.05
$21.01 to $35.00 6,533 8.9 $32.28 6 $32.56
$35.01 to $58.00 7,975 9.5 $43.70 121 $53.19
- ------------------------------------------------------------------------------------------------------
$ 1.00 to $58.00 60,256 6.9 $15.46 26,706 $ 5.56
======================================================================================================
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 - Accounting
for Stock Issued to Employees, and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
the Company's options. Had compensation expense for the Company's options been
determined based on the fair value at the grant dates for awards under those
plans consistent with the fair value method of SFAS No. 123 - Accounting for
Stock-Based Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts presented below:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net Income: As reported $588,877 $348,462 $270,277
Pro forma $531,832 $320,779 $255,850
================================================================================
Basic Earnings
Per Share: As reported $ .73 $ .44 $ .34
Pro forma $ .66 $ .40 $ .32
Diluted Earnings
Per Share: As reported $ .70 $ .42 $ .33
Pro forma $ .63 $ .39 $ .31
================================================================================
Restricted stock awards are restricted from sale and generally vest over a
four-year period, but some vest based upon the Company achieving certain
financial or other measures. The fair market value of shares associated with the
restricted stock awards is recorded as unamortized restricted stock compensation
in stockholders' equity and is amortized to compensation expense over the
vesting periods.
Restricted stock information is as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Restricted stock awards 1,448 3,065 2,316
Average market price of awarded shares $ 37.49 $ 13.75 $ 8.47
Restricted stock cancellations 322 402 256
Restricted shares outstanding (at year end) 5,850 5,279 4,649
Restricted stock expense and amortization $24,617 $19,765 $10,296
================================================================================
-25-
<PAGE>
The Company's unfunded deferred compensation plan for officers permits
participants to defer the payment of certain cash compensation. The deferred
compensation liability was $106 million and $82 million at December 31, 1999 and
1998, respectively. The Company's unfunded deferred compensation plan for
non-employee directors permits participants to defer receipt of all or a portion
of their directors' fees and to receive either a grant of stock options, or upon
ceasing to serve as a director, the amount that would have resulted from
investing the deferred fee amount into CSC's common stock.
In 1999, the Company issued 74,000 shares of CSC's common stock and placed
such shares into a trust to settle the directors' deferred compensation
liability. In accordance with the Emerging Issues Task Force Issue 97-14 -
Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held
in a Rabbi Trust and Invested, assets of the trust are consolidated with those
of the Company and the value of CSC's common stock held in the stock trust is
classified in stockholders' equity in a manner similar to treasury stock. The
shares and the corresponding obligation to directors are shown as separate
components of stockholders' equity in the Company's consolidated balance sheet.
9. Employee Benefit Plans
The Company has a profit sharing and employee stock ownership plan (Profit
Sharing Plan), including a 401(k) salary deferral component, for eligible
employees who have met certain service requirements. The Company matches certain
employee contributions; additional contributions to this plan are at the
discretion of the Company. Total Company contribution expense was $74 million in
1999, $46 million in 1998 and $44 million in 1997.
In 1993, the Profit Sharing Plan borrowed $15 million from the Company to
purchase approximately 10 million shares of CSC's common stock. The note
receivable from the Profit Sharing Plan had a balance of $1 million at both
December 31, 1999 and 1998, bears interest at 7.9% and is due in annual
installments through 2007. Shares are released for allocation to eligible
employees' accounts based on the proportion of principal and interest payments
made during the year as compared to the total of these payments and the
remaining principal and interest. In accordance with Statement of Position No.
93-6 - Employers' Accounting for Employee Stock Ownership Plans (the Statement),
the fair value of shares released for allocation to employees through the
employee stock ownership plan (ESOP) is recognized by the Company as
compensation and benefits expense - $3 million in 1999, $15 million in 1998 and
$17 million in 1997. At December 31, 1999, a $25 million accrued liability was
recorded for 1999 retirement benefits and will be contributed to the ESOP during
the first half of 2000 for the purchase from CSC of newly issued shares of CSC's
common stock. Only released ESOP shares are considered outstanding for basic and
diluted earnings per share computations. Dividends on allocated shares and
unallocated shares are charged to retained earnings and are used to make
principal and interest payments on the ESOP note receivable, respectively. The
unallocated shares are recorded as unearned ESOP shares on the consolidated
balance sheet. Under the "grandfather" provisions of the Statement, the Company
did not apply the Statement to shares purchased by the ESOP prior to 1993.
The ESOP share information is as follows:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Allocated shares:
Purchased prior to 1993 19,216 31,723
Purchased in 1993 and after 12,100 10,892
Shares released for allocation:
Purchased in 1993 and after 96 1,208
Unreleased shares:
Purchased in 1993 and after 634 713
- --------------------------------------------------------------------------------
Total ESOP shares 32,046 44,536
================================================================================
Fair value of unreleased shares $24,239 $20,028
================================================================================
The Company is the beneficiary of a life insurance program covering some of
its employees. Under the program, the cash surrender value of insurance policies
is recorded net of policy loans in other assets. During 1999, the Company repaid
$65 million on the policy loans and received $65 million cash surrender value on
the insurance policies. At December 31, 1999 and 1998, policy loans with
interest rates of 8.2% and 7.1% totaled $15 million and $80 million,
respectively.
10. Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential reduction in EPS that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Earnings per share under the basic and diluted computations
are as follows:
-26-
<PAGE>
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net income $588,877 $348,462 $270,277
================================================================================
Weighted-average common
shares outstanding - basic 809,997 794,050 787,641
Common stock equivalent shares
related to stock incentive plans 33,093 28,955 30,085
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - diluted 843,090 823,005 817,726
================================================================================
Basic earnings per share $ .73 $ .44 $ .34
================================================================================
Diluted earnings per share $ .70 $ .42 $ .33
================================================================================
The computation of diluted EPS for the years ended December 31, 1999, 1998
and 1997, respectively, excludes outstanding stock options to purchase
5,335,000, 20,205,000 and 5,271,000 shares, respectively, because the exercise
prices for those options were greater than the average market price of the
common shares, and therefore the effect would be antidilutive.
11. Regulatory Requirements
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method permitted by this Rule, which requires the maintenance of
minimum net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar amount, which is
based on the type of business conducted by the broker-dealer. The minimum dollar
amount for both Schwab and M&S is $1 million. Under the alternative method, a
broker-dealer may not repay subordinated borrowings, pay cash dividends, or make
any unsecured advances or loans to its parent or employees if such payment would
result in net capital of less than 5% of aggregate debit balances or less than
120% of its minimum dollar amount requirement. At December 31, 1999, Schwab's
net capital was $1,766 million (10% of aggregate debit balances), which was
$1,421 million in excess of its minimum required net capital and $903 million in
excess of 5% of aggregate debit balances. Aggregate debit balances as of
December 29, 1999 were used to calculate Schwab's minimum required net capital
at December 31, 1999, in accordance with applicable regulations. At December 31,
1999, M&S' net capital was $13 million, which was $12 million in excess of its
minimum required net capital.
Schwab, M&S and CSE had portions of their cash and investments segregated for
the exclusive benefit of customers at December 31, 1999, in accordance with
applicable regulations. Schwab elected to compute its reserve requirement, in
accordance with applicable regulations as of December 29, 1999 rather than
December 31, 1999. The amount held on deposit in the reserve bank account at
December 31, 1999 exceeded cash and investments required to be segregated under
federal or other regulations by approximately $200 million. This excess is
included in cash and cash equivalents.
12. Commitments and Contingent Liabilities
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at December 31,
1999 are as follows:
- --------------------------------------------------------------------------------
2000 $126,434
2001 120,439
2002 106,657
2003 72,605
2004 76,969
Thereafter 337,482
================================================================================
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was
$188 million in 1999, $138 million in 1998 and $104 million in 1997.
The Company may, under certain circumstances, be required to make additional
capital contributions pursuant to joint venture agreements with The Tokio Marine
Fire Insurance Co., Limited and certain of its related companies, including
contributions to assure that Charles Schwab Tokio Marine Securities Co., Ltd. is
in compliance with regulatory requirements regarding capital adequacy.
On November 9, 1998, the United States District Court for the Southern
District of New York granted final approval of the settlement agreement in the
consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation. The
settlement fully resolves alleged claims on behalf of certain persons who
purchased or sold Nasdaq securities during the period May 1, 1989 through July
17, 1996 concerning the width of spreads between the bid and ask prices of
certain Nasdaq securities. The Company recognized settlement charges in 1997 of
$39 million ($24 million after-tax), and does not expect to incur any further
charges relating to this settlement.
In the first half of 2000, a federal district court in New Orleans, Louisiana
is expected to hold a fairness hearing on a settlement between Schwab and
plaintiffs in two class action lawsuits. The lawsuits were filed on behalf of a
class consisting of all individuals nationwide who purchased or sold securities
through Schwab from 1985 until July 1999. These lawsuits alleged that Schwab
improperly retained monetary payments for routing orders to market makers and
other third parties, and did not provide best execution to customer orders.
Schwab vigorously contested the allegations and had successfully obtained
dismissal of many of the plaintiffs' claims. However, in the interests of
avoiding the expense of further litigation, Schwab agreed to settle the cases on
the following terms: plaintiffs will dismiss
-27-
<PAGE>
the complaints with prejudice in return for certain non-monetary relief from
Schwab, including commitments to implement various systems changes relating to
trade handling and execution; to adopt certain internal procedures to review
order routing arrangements and execution quality; and to conduct a one-year
investor education campaign on trading and execution-related issues. In
addition, Schwab agreed to pay plaintiffs' attorneys' fees and costs. The
settlement would preclude any other claims on best execution or payment for
order flow issues during the class period, except for claimants who
affirmatively opt out of the settlement. Schwab believes that all claims in four
purported class action lawsuits on best execution issues, consolidated for
pretrial proceedings in the federal district court in San Francisco but in which
no classes have been certified, would be precluded as a result of the Louisiana
settlement. The plaintiffs in the San Francisco cases are opposing the Louisiana
settlement and have moved to transfer the Louisiana case to San Francisco. The
Company recognized the cost of the Louisiana settlement, which was not material,
in the second quarter of 1999.
The ultimate outcome of the legal proceedings described above and the various
other lawsuits, arbitration proceedings, and claims pending against the Company
cannot be determined at this time, and the results of these legal proceedings
cannot be predicted with certainty. There can be no assurance that these legal
proceedings will not have a material adverse effect on the Company's results of
operations in any future period, depending partly on the results for that
period, and a substantial judgment could have a material adverse impact on the
Company's financial condition and results of operations. However, it is the
opinion of management, after consultation with outside legal counsel, that the
ultimate outcome of these actions will not have a material adverse impact on the
financial condition or operating results of the Company.
13. Financial Instruments with Off-Balance-Sheet and Credit Risk
Through Schwab and M&S, the Company loans customer securities temporarily to
other brokers in connection with its securities lending activities. The Company
receives cash as collateral for the securities loaned. Increases in security
prices may cause the market value of the securities loaned to exceed the amount
of cash received as collateral. In the event the counterparty to these
transactions does not return the loaned securities, the Company may be exposed
to the risk of acquiring the securities at prevailing market prices in order to
satisfy its customer obligations. The Company mitigates this risk by requiring
credit approvals for counterparties, by monitoring the market value of
securities loaned on a daily basis and by requiring additional cash as
collateral when necessary.
The Company is obligated to settle transactions with brokers and other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on settlement
date, generally three business days after trade date. If customers do not
fulfill their contractual obligations, the Company may incur losses. The Company
has established procedures to reduce this risk by requiring deposits from
customers in excess of amounts prescribed by regulatory requirements for certain
types of trades.
In the normal course of its margin lending activities, Schwab may be liable
for the margin requirement of customer margin securities transactions. As
customers write option contracts or sell securities short, the Company may incur
losses if the customers do not fulfill their obligations and the collateral in
customer accounts is not sufficient to fully cover losses which customers may
incur from these strategies. To mitigate this risk, the Company monitors
required margin levels daily and customers are required to deposit additional
collateral, or reduce positions, when necessary.
In its capacity as market maker, M&S maintains inventories in Nasdaq
securities on both a long and short basis. While long inventory positions
represent M&S' ownership of securities, short inventory positions represent M&S'
obligations to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. Also, Schwab
maintains inventories in exchange-listed securities on both a long and short
basis relating to its specialist operations and could incur losses or gains as a
result of changes in the market value of these securities. To mitigate the risk
of losses, long and short positions are marked to market daily and are monitored
by management to assure compliance with limits established by the Company.
Additionally, the Company may purchase exchange-traded option contracts to
reduce market risk on these inventories.
Schwab enters into collateralized resale agreements principally with other
broker-dealers, which could result in losses in the event the counterparty to
the transaction does not purchase the securities held as collateral for the cash
advanced and the market value of these securities declines. To mitigate this
risk, Schwab requires that the counterparty deliver securities to a custodian,
to be held as collateral, with a market value in excess of the resale price.
Schwab also sets standards for the credit quality of the counterparty, monitors
the market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where
deemed appropriate.
-28-
<PAGE>
14. Segment Information
Segments are defined as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company structures its segments
according to its various types of customers and the services provided to those
customers. These segments have been aggregated based on similarities in economic
characteristics, types of customers, services provided, distribution channels
and regulatory environment, into three reportable segments - Individual
Investor, Institutional Investor and Capital Markets. The Individual Investor
segment includes Schwab's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. (The Company's mutual fund services are considered a
product and not a segment. Mutual fund service fees are included in both the
Individual Investor and Institutional Investor segments.) The Capital Markets
segment provides trade execution services in Nasdaq, exchange-listed and other
securities primarily to broker-dealers and institutional customers.
The accounting policies of the segments are the same as those described in
note 2 - Significant Accounting Policies. The Company evaluates the performance
of its segments based on income before taxes on income. Segment assets are not
disclosed because they are not used for evaluating segment performance and
deciding how to allocate resources to segments. However, capital expenditures
are used in evaluating segment performance and are therefore disclosed.
Intersegment revenues, defined as revenues from transactions with other segments
within the Company, are immaterial and are therefore not disclosed. Technology,
corporate and general administrative expenses are allocated to segments
generally in proportion to either their respective revenues or average full-time
equivalent employees.
Fees received from Schwab's proprietary mutual funds represented
approximately 13% of the Company's consolidated revenues in 1999, 14% in 1998
and 12% in 1997. No single customer, except for Schwab's proprietary mutual
funds, accounted for more than 10% of the Company's consolidated revenues in
1999, 1998 and 1997. Substantially all of the Company's revenues and assets are
attributed to or located in the U.S. The percentage of Schwab's total customer
accounts located in California were approximately 25% as of both December 31,
1999 and 1998, and 28% as of December 31, 1997.
Financial information for the Company's reportable segments is presented in
the table below, and the totals are equal to the Company's consolidated amounts
as reported in the consolidated financial statements. Capital expenditures are
reported in total, as opposed to net of proceeds from the sale of fixed assets.
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues
Individual investor $2,782,790 $1,954,053 $1,675,424
Institutional investor 610,965 445,899 328,895
Capital markets 551,067 336,269 294,431
- --------------------------------------------------------------------------------
Total $3,944,822 $2,736,221 $2,298,750
================================================================================
Interest Revenue, Net of Interest Expense
Individual investor $ 598,136 $ 397,334 $ 300,741
Institutional investor 100,380 65,968 43,662
Capital markets 4,161 12,315 9,149
- --------------------------------------------------------------------------------
Total $ 702,677 $ 475,617 $ 353,552
================================================================================
Income Before Taxes on Income
Individual investor $ 683,250 $ 395,009 $ 332,808
Institutional investor 164,523 99,613 48,111
Capital markets 123,466 81,922 66,328
- --------------------------------------------------------------------------------
Total $ 971,239 $ 576,544 $ 447,247
================================================================================
Capital Expenditures (1)
Individual investor $ 221,376 $ 145,394 $ 110,047
Institutional investor 34,166 24,944 18,633
Capital markets 30,050 19,905 11,518
- --------------------------------------------------------------------------------
Total $ 285,592 $ 190,243 $ 140,198
================================================================================
Depreciation and Amortization
Individual investor $ 116,394 $ 102,279 $ 91,727
Institutional investor 22,192 21,469 18,836
Capital markets 18,092 14,729 14,119
- --------------------------------------------------------------------------------
Total $ 156,678 $ 138,477 $ 124,682
================================================================================
(1) Excludes capitalized costs for developing internal-use software of $68
million in 1999.
15. Supplemental Cash Flow Information
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Cash paid:
Income taxes $135,863 $128,723 $166,773
================================================================================
Interest:
Customer cash balances $700,518 $579,406 $479,504
Stock-lending activities 30,905 38,118 36,939
Borrowings 25,290 24,114 18,790
Other 11,530 12,934 10,749
- --------------------------------------------------------------------------------
Total interest $768,243 $654,572 $545,982
================================================================================
-29-
<PAGE>
16. Subsequent Events
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust). Under the terms of the
agreement, U.S. Trust will become a wholly owned subsidiary of CSC and U.S.
Trust shareholders will receive 3.427 shares of CSC's common stock for each
common share of U.S. Trust. Based on the number of common shares of U.S. Trust
and options and other equity rights to acquire common shares of U.S. Trust
outstanding on January 12, 2000, the Company anticipates that U.S. Trust's
shareholders will receive approximately 73,000,000 shares (net of shares for
employees' payroll tax withholding) of CSC's common stock in the merger.
Following the merger, the Company expects to become a financial holding company
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust shareholder approval. The transaction, which is expected to be completed
by July 2000, is intended to be a non-taxable stock-for-stock exchange and to
qualify for pooling of interests accounting treatment.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, Inc. (CyBerCorp). Under the terms of the
agreement, CyBerCorp will become a wholly owned subsidiary of CSC and
approximately 13,767,000 unregistered shares of CSC's common stock will be
exchanged for all of the outstanding shares, options and equity rights of
CyBerCorp. CSC has agreed to register the shares with the SEC after the closing.
The acquisition has been approved by both companies' Boards of Directors and is
subject to various closing conditions, including the approval of the transaction
by CyBerCorp's shareholders. Agreements to vote in favor of the acquisition have
been entered into by holders of approximately 95% of CyBerCorp's common stock.
The transaction, which is expected to be completed in the first quarter of 2000,
is intended to be a non-taxable stock-for-stock exchange and to be accounted for
using the purchase method. Under this accounting method, the net assets acquired
are recorded at fair value and the excess of the purchase price over the fair
value of net assets acquired is recorded as goodwill. Based on the $36.64
average of the closing prices of CSC's common stock for the seven-day period
from three days before to three days after the February 2, 2000 acquisition
announcement date, the purchase price is approximately $510 million. CSC would
record intangible assets acquired of approximately $500 million, including
approximately $470 million of goodwill. The goodwill is expected to be amortized
over a period of approximately ten years. The other intangible assets acquired,
which consist primarily of purchased technology, are expected to be amortized
over a period of approximately three years.
-30-
<PAGE>
The Charles Schwab Corporation
Management's Report
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and the other financial
information presented in this annual report. To meet these responsibilities we
maintain a system of internal control that is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of Company and customer assets from unauthorized use, and the
execution and recording of transactions in accordance with management's
authorization. The system is augmented by careful selection of our managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring that employees
adhere to the highest standards of personal and professional integrity. The
Company's internal audit function monitors and reports on the adequacy of and
compliance with our internal controls, policies and procedures. Although no
cost-effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal control is adequate
to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Deloitte & Touche LLP,
who were given unrestricted access to all the Company's financial records and
related data. We believe that all representations made to Deloitte & Touche LLP
during their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically meets
with Deloitte & Touche LLP, our internal auditors and Company management to
discuss accounting, auditing, internal controls over financial reporting and
other matters.
/s/Charles R. Schwab
- --------------------
Charles R. Schwab
Chairman of the Board and Co-Chief Executive Officer
/s/David S. Pottruck
- --------------------
David S. Pottruck
President and Co-Chief Executive Officer
/s/Christopher V. Dodds
- -----------------------
Christopher V. Dodds
Executive Vice President and Chief Financial Officer
-31-
<PAGE>
Independent Auditors' Report
To the Stockholders and Board of Directors of The Charles Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles
Schwab Corporation and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Charles Schwab Corporation
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1999
the Company changed its method of accounting for certain internal-use software
development costs to conform with Statement of Position 98-1.
/s/DELOITTE & TOUCHE LLP
- ------------------------
Deloitte & Touche LLP
San Francisco, California
February 16, 2000
-32-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Information (Unaudited) The Charles Schwab Corporation
(In Millions, Except Per Share Data and Ratios)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Dividends
Average Basic Diluted Declared Range Range
Expenses Common Earnings Earnings Per of Common of Price/
Excluding Net Shares- Per Per Common Stock Price Earnings
Revenues(1) Interest Income(2) Diluted Share(2) Share(2) Share Per Share Ratio(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 by Quarter
Fourth $1,127.4 $845.7 $170.5 843.7 $.21 $.20 $.0140 $46.75 - 26.94 67 - 38
Third stock split 883.7 679.8 124.5 844.5 .16 .15 .0140 56.50 - 32.00 91 - 52
Second 982.1 732.5 151.0 845.6 .18 .18 .0140 77.50 - 40.00 131 - 68
First 951.6 715.5 142.9 838.5 .18 .17 .0140 49.00 - 25.44 98 - 51
- ------------------------------------------------------------------------------------------------------------------------------------
1998 by Quarter
Fourth dividend increase/stock split $ 788.6 $612.8 $106.4 827.7 $.13 $.12 $.0140 $34.25 - 10.54 81 - 25
Third 705.2 542.7 97.8 820.4 .13 .12 .0134 15.33 - 9.25 41 - 25
Second 638.0 512.2 76.3 819.4 .09 .09 .0133 13.33 - 9.88 39 - 29
First 604.4 492.0 68.0 824.5 .09 .09 .0133 13.98 - 11.38 42 - 34
- ------------------------------------------------------------------------------------------------------------------------------------
1997 by Quarter (4)
Fourth dividend increase $ 620.6 $516.3 $ 63.1 823.2 $.08 $.08 $.0134 $14.75 - 9.75 45 - 30
Third stock split 611.8 484.9 76.5 819.0 .09 .09 .0111 12.19 - 8.89 37 - 27
Second 530.7 424.9 64.0 814.9 .08 .08 .0111 9.53 - 6.75 31 - 22
First 535.7 425.4 66.7 813.7 .09 .08 .0111 9.33 - 6.75 30 - 22
- ------------------------------------------------------------------------------------------------------------------------------------
1996 by Quarter
Fourth $ 482.3 $383.1 $ 59.7 809.4 $.08 $.07 $.0111 $ 7.31 - 5.00 25 - 17
Third dividend increase 430.0 333.4 57.1 808.1 .07 .07 .0111 5.97 - 4.42 22 - 16
Second 491.8 373.1 70.1 806.6 .09 .09 .0089 5.89 - 4.86 23 - 19
First 446.8 367.2 46.9 805.0 .06 .06 .0089 6.08 - 4.14 27 - 18
- ------------------------------------------------------------------------------------------------------------------------------------
1995 by Quarter
Fourth $ 394.8 $332.4 $ 42.6 809.5 $.05 $.05 $.0089 $ 5.93 - 3.69 28 - 17
Third dividend increase/stock split 385.5 307.5 47.2 808.6 .06 .06 .0089 6.44 - 4.61 32 - 23
Second 342.7 269.4 44.4 801.6 .06 .05 .0067 5.08 - 3.28 27 - 18
First dividend increase/stock split 296.9 233.5 38.4 792.7 .05 .05 .0066 3.67 - 2.45 21 - 14
- ------------------------------------------------------------------------------------------------------------------------------------
1994 by Quarter
Fourth $ 270.4 $214.4 $ 33.8 788.2 $.05 $.04 $.0052 $ 2.74 - 2.05 16 - 12
Third 248.1 196.5 31.2 784.0 .04 .04 .0052 2.29 - 1.88 14 - 11
Second 258.2 205.1 32.1 787.8 .04 .04 .0052 2.51 - 1.83 16 - 12
First dividend increase 287.9 224.3 38.2 793.8 .05 .05 .0051 2.44 - 1.93 16 - 13
- ------------------------------------------------------------------------------------------------------------------------------------
All share and per share data have been restated for the July 1999 two-for-one common stock split.
(1) Revenues are presented net of interest expense.
(2) 1999 reflects an accounting change, which increased net income by $41 million ($.05 per share for both basic and diluted
earnings per share), for certain internal-use software development costs to conform with Statement of Position 98-1.
(3) Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per share for the 12-month
period ended on the last day of the quarter presented.
(4) 1997 includes charges for a litigation settlement of $23.6 million after-tax ($.03 per share for both basic and diluted
earnings per share).
</TABLE>
-33-
<PAGE>
THE CHARLES SCHWAB CORPORATION
Chart Appendix List
In this appendix, the following descriptions of certain charts in portions
of the Company's 1999 Annual Report to Stockholders that are omitted from the
EDGAR Version are more specific with respect to the actual numbers, amounts and
percentages than is determinable from the charts themselves. The Company submits
such more specific descriptions only for the purpose of complying with the
requirements for transmitting portions of this Annual Report on Form 10-K
electronically via EDGAR; such more specific descriptions are not intended in
any way to provide information that is additional to the information otherwise
provided in portions of the Company's 1999 Annual Report to Stockholders.
EDGAR
Version
Page Number Chart Description
2 Bar chart titled "Assets in Schwab Customer Accounts" representing
total assets in Schwab customer accounts at year end 1999, 1998,
1997, 1996 and 1995 (years shown on the bottom axis) as follows
(billions of dollars) (bar labeled): $725.2, $491.1, $353.7, $253.2
and $181.7, respectively; and annual growth rate for 1999, 1998,
1997 and 1996 (percentages shown in shaded area between bars) as
follows: 48%, 39%, 40% and 39%, respectively.
5 Stacked bar chart titled "Revenues by Segment" representing the
composition of revenues by segment for the years ended December 31,
1999, 1998 and 1997 (years shown on the bottom axis) as follows
(millions of dollars): Individual Investor $2,783, $1,954 and
$1,676, respectively; Institutional Investor $611, $446 and $329,
respectively; Capital Markets $551, $336 and $294, respectively;
Revenues by Segment (bar labeled) $3,945, $2,736 and $2,299,
respectively.
12 Pie chart titled "Development Spending for 2000" representing the
composition of estimated development spending for the year ended
December 31, 2000 as follows (percentage of total): (pie pieces
labeled) Project Spending 52% and Media Spending 48%.
13 Bar chart titled "Net Income Plus Depreciation and Amortization"
representing the net income plus depreciation and amortization for
the years ended December 31, 1999, 1998 and 1997 (years shown
on the bottom axis) as follows (millions of dollars) (bar labeled):
$746, $487 and $395, respectively.
-34-
Exhibit 21.1
THE CHARLES SCHWAB CORPORATION
Subsidiaries of the Registrant
The following is a listing of the significant subsidiaries of the Registrant:
Schwab Holdings, Inc. (holding company for Charles Schwab & Co., Inc.),
a Delaware corporation
Charles Schwab & Co., Inc., a California corporation
Mayer & Schweitzer, Inc. (holding company for Schwab Associates & Co.),
a New Jersey corporation
Schwab Associates & Co. (99% limited partner of Schwab Capital Markets L.P.),
a Delaware corporation
Schwab Capital Markets L.P., a New Jersey limited partnership
The following is a listing of certain other subsidiaries of the Registrant:
Charles Schwab Investment Management, Inc., a Delaware corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of The Charles Schwab Corporation of our reports dated February 16,
2000, appearing in and incorporated by reference in this Annual Report on Form
10-K of The Charles Schwab Corporation for the year ended December 31, 1999. Our
report on the consolidated financial statements expresses an unqualified opinion
and includes an explanatory paragraph related to an accounting change to conform
with Statement of Position 98-1.
Filed on Form S-3:
Registration Statement No. 333-77381 (Debt Securities)
Registration Statement No. 333-47107 (The Charles Schwab Corporation
Employee Stock Incentive Plan)
Filed on Form S-8:
Registration Statement No. 333-44793 (Charles Schwab Profit Sharing and
Employee Stock Ownership Plan)
Registration Statement No. 333-48335 (The Charles Schwab Corporation
Employee Stock Incentive Plan)
Registration Statement No. 333-93125 (The Charles Schwab Corporation
Employee Stock Incentive Plan)
Registration Statement No. 333-32058 (The Charles Schwab Corporation
Employee Stock Incentive Plan)
/s/DELOITTE & TOUCHE LLP
- -------------------------
San Francisco, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and Consolidated Balance Sheet of the Company's
1999 Annual Report to Stockholders, which are incorporated herein by reference
to Exhibit No. 13.1 of this report, for the period ended December 31, 1999, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,379,613
<RECEIVABLES> 17,542,879
<SECURITIES-RESALE> 6,165,043
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 339,634
<PP&E> 597,761
<TOTAL-ASSETS> 29,299,061
<SHORT-TERM> 467,758
<PAYABLES> 25,171,357
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 455,000
0
0
<COMMON> 8,224
<OTHER-SE> 2,265,711
<TOTAL-LIABILITY-AND-EQUITY> 29,299,061
<TRADING-REVENUE> 500,496
<INTEREST-DIVIDENDS> 1,471,080
<COMMISSIONS> 1,863,306
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 750,141
<INTEREST-EXPENSE> 768,403
<COMPENSATION> 1,624,526
<INCOME-PRETAX> 971,239
<INCOME-PRE-EXTRAORDINARY> 588,877
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588,877
<EPS-BASIC> 0.73 <F1>
<EPS-DILUTED> 0.70 <F1>
<FN>
<F1>
Reflects the July 1999 two-for-one common stock split and prior Financial Data
Schedules have not been restated for the recapitalization. The information has
been prepared in accordance with SFAS No. 128. Basic and diluted EPS have been
entered in place of primary and fully diluted, respectively.
</FN>
</TABLE>
