<PAGE>
PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(2)
(To Prospectus dated May 19, 2000) File No. 333-36410
$750,000,000
The Charles Schwab Corporation
MEDIUM-TERM NOTES, SERIES A
----------------
We, The Charles Schwab Corporation, may offer medium-term notes from time to
time. The specific terms of any notes that we offer will be included in a
pricing supplement. The notes will have the following general terms:
. Maturity . Payments
The notes will mature more than nine Unless otherwise specified in the
months from the date of issue. applicable pricing supplement, the
fixed rate notes will pay interest
. Interest Rate each March 1 and September 1 and at
maturity and the amortizing notes
The notes will bear interest at will pay principal and interest
either a fixed rate, which may be semiannually each March 1 and
zero, or a floating rate. Floating September 1 or quarterly each March 1,
rates will be based on one or more of June 1, September 1 and December 1
the following: and at maturity. Please see
. CD rate "Description of Notes--Floating Rate
. commercial paper rate Notes--When Interest Is Paid" on page
. federal funds rate S-8 for when floating rate notes will
. LIBOR pay interest.
. prime rate
. Treasury rate Payments on the notes may be linked
. CMT rate to currency prices, commodity prices,
. any other rate or interest rate single securities, baskets of
formula specified in the securities or indices, as specified
applicable pricing supplement. in the pricing supplement.
. Types of Notes . Redemption and Repayment
The notes will be either senior or We may redeem the notes or you may
senior subordinated. require us to repay the notes in the
manner stated in the pricing
supplement.
----------------
<TABLE>
<CAPTION>
Price to Agents' Proceeds to
Public Commissions Charles Schwab
-------- ----------- --------------
<S> <C> <C> <C>
Per Note............ 100% .125%-.875% 99.875-99.125%
Total............... $750,000,000 $937,500-$6,562,500 $749,062,500-$743,437,500
</TABLE>
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and Charles Schwab & Co., Inc. have agreed to use reasonable
efforts to solicit offers to purchase these securities as our agents. The
agents may also purchase these securities as principals at prices to be agreed
upon at the time of sale. The agents may resell any securities they purchase at
prevailing market prices, or at other prices, that they determine.
Charles Schwab & Co., Inc., which is our wholly owned subsidiary, may use this
prospectus supplement and the accompanying prospectus in connection with offers
and sales of the securities in market-making transactions.
----------------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
CHARLES SCHWAB & CO., INC.
May 19, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Prospectus Supplement Page
<S> <C>
Summary......................... S-3
Description of Notes............ S-5
The Depositary.................. S-18
United States Federal Taxation.. S-19
Plan of Distribution............ S-24
Legal Matters................... S-25
</TABLE>
<TABLE>
<CAPTION>
Prospectus Page
<S> <C>
The Charles Schwab Corporation..... 4
Consolidated Ratio of Earnings to
Fixed Charges..................... 4
Use of Proceeds.................... 4
Description of Debt Securities..... 5
Plan of Distribution............... 12
Legal Matters...................... 14
Experts............................ 14
</TABLE>
----------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement, the prospectus and the applicable
pricing supplement. We have not authorized anyone else to provide you with
different or additional information. We are offering to sell these securities
and seeking offers to buy these securities only in jurisdictions where offers
and sales are permitted.
S-2
<PAGE>
SUMMARY
All references to "we," "us," "our" or to "Charles Schwab" in this
prospectus summary are to The Charles Schwab Corporation. The following summary
describes the notes we are offering in general terms only. You should read the
summary together with the more detailed information contained in this
prospectus supplement, in the accompanying prospectus and in the applicable
pricing supplement.
We may offer up to $750,000,000 of the medium-term notes described in this
prospectus supplement from time to time. We refer to the notes offered under
this prospectus supplement as our Series A medium-term notes. We refer to the
offering of the Series A medium-term notes as our "Series A program."
<TABLE>
<C> <S>
Total amount of notes offered......... $750,000,000 of Series A medium-term
notes. The notes may be either senior
or senior subordinated.
Maturity.............................. The notes will mature more than nine
months from the date of issuance and
will pay interest, if any, on the
dates specified in the pricing
supplement.
Interest rate......................... The notes will bear interest at either
a fixed rate, which may be zero, or a
floating rate.
Currency.............................. The notes will be issued in U.S.
dollars.
Redemption and repayment.............. The pricing supplement will specify
any right that we may have to redeem
the notes or that you may have to
require us to repay the notes prior to
their maturity.
Payments.............................. Payments of principal and/or interest
on the notes may be linked to currency
prices, commodity prices, single
securities, baskets of securities or
indices.
Amortization.......................... We may issue amortizing notes that pay
a level amount in respect of both
interest and principal amortized over
the life of the note.
Listing............................... The notes will not be listed on any
securities exchange, unless we specify
otherwise in the pricing supplement.
Forms of notes........................ The notes that we offer under our
Series A program will be issued in
fully registered form and will be
represented either by a global
security registered in the name of a
nominee of The Depository Trust
Company, as depositary, or by
certificates issued in definitive
form, as discussed in the pricing
supplement. We will not issue book-
entry securities as certificated
securities except under the
circumstances described in
"Description of Debt Securities--
Global Securities" beginning on page 6
of the prospectus. For information on
The Depository Trust Company's book-
entry system, see "The Depositary"
beginning on page S-17 of this
prospectus supplement.
</TABLE>
S-3
<PAGE>
<TABLE>
<C> <S>
How to reach us....................... You may contact us at our offices at
101 Montgomery Street, San Francisco,
California 94104 (telephone number
(415) 636-2787). Our website is
http://www.schwab.com. This reference
to our website address does not
constitute incorporation by reference
of the information contained in the
website.
</TABLE>
S-4
<PAGE>
DESCRIPTION OF NOTES
Investors should carefully read the general terms and provisions of our debt
securities in "Description of Debt Securities" beginning on page 5 of the
prospectus. This section supplements that description. The pricing supplement
will add specific terms for each issuance of notes and may modify or replace
any of the information in this section and in "Description of Debt Securities"
in the prospectus.
General Terms of Notes
We may issue notes under the senior debt indenture or the senior
subordinated debt indenture. The Series A medium-term notes issued under each
indenture will constitute a single series under that indenture. In addition,
the series may include notes which we issued in the past and which we may issue
in the future under the same indenture. Neither indenture limits the amount of
additional indebtedness that we may incur.
Ranking. Notes issued under the senior debt indenture will rank on a parity
with all of our other senior indebtedness and with all of our other unsecured
and unsubordinated indebtedness, subject to statutory exceptions in the event
of liquidation upon insolvency. Notes issued under the senior subordinated debt
indenture will rank equally with all of our other subordinated indebtedness and
will be subordinated in right of payment to the prior payment in full of our
senior indebtedness. As of May 19, 2000, we had outstanding approximately $766
million of senior indebtedness and no senior subordinated indebtedness. See
"Description of Debt Securities--Senior Subordinated Debt" beginning on page 7
of the prospectus.
Terms Specified in Pricing Supplements. A pricing supplement will specify
the following terms of any issuance of our Series A medium-term notes to the
extent applicable:
. the issue price;
. the aggregate principal amount;
. the denominations or minimum denominations;
. the original issue date;
. whether the notes are senior or senior subordinated;
. the stated maturity date and any terms related to any extension of the
maturity date;
. whether the notes are fixed rate notes or floating rate notes, and
whether they are notes with original issue discount and/or amortizing
notes;
. for fixed rate notes, the annual rate at which the notes will bear
interest, if any, or the method of calculating that rate and the dates
on which interest will be payable;
. for floating rate notes, the base rate, the index maturity, the spread,
the spread multiplier, the initial interest rate, the interest reset
periods, the interest payment dates, the maximum interest rate, the
minimum interest rate and any other terms relating to the particular
method of calculating the interest rate for the note;
. if the note is an amortizing note, the amortization schedule;
. whether the notes may be redeemed, in whole or in part, at our option or
repaid at your option, prior to the stated maturity date, and the terms
of any redemption or repayment;
. whether the notes are linked to commodity prices, single securities,
baskets of securities or indices;
. whether the notes will be issued in book-entry or certificated form; and
. any other terms on which we will issue the notes.
S-5
<PAGE>
Some Definitions
We have defined some of the terms that we use frequently in this prospectus
supplement below:
A "business day" means any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law or regulation to close in New York City, and, with respect
to LIBOR notes, is also a London banking day.
"Depositary" means The Depository Trust Company, New York, New York.
An "interest payment date" for any note means a date on which, under the
terms of the note, regularly scheduled interest is payable.
"London banking day" means any day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
The "record date" for any interest payment date is the date 15 calendar days
prior to that interest payment date, whether or not that date is a business
day.
Interest and Principal Payments
Payments, Exchanges and Transfers. Holders of certificated notes may:
. present notes for payment of principal, premium, if any, and interest,
if any;
. register the transfer of the notes; and
. exchange the notes at the agency maintained by us in the Borough of
Manhattan, New York, New York.
Holders of global notes may transfer and exchange global notes only in the
manner and to the extent discussed under "Description of Debt Securities--
Global Securities" beginning on page 6 of the prospectus.
On the date of this prospectus supplement, the agent for the payment,
transfer and exchange of the notes is The Chase Manhattan Bank, formerly
Chemical Bank, acting through its corporate trust office at 450 West
33rd Street, New York, New York 10001. We refer to The Chase Manhattan Bank,
acting in this capacity, as the paying agent.
We will not be required to:
. register the transfer of or exchange notes to be redeemed for a period
of 15 calendar days preceding the mailing of the notice of redemption;
or
. register the transfer of or exchange any registered note selected for
redemption, in whole or in part, except the unredeemed or unpaid portion
of the registered note being redeemed in part.
No service charge will be made for any registration or transfer or exchange
of notes, but we may require payment sufficient to cover any tax or other
governmental charge payable in connection with the registration of transfer or
exchange of notes.
Recipients of Payments. The paying agent will pay interest to the person in
whose name the note is registered at the close of business on the applicable
record date. However, upon maturity, redemption or repayment, the paying agent
will pay any interest due to the person to whom it pays the principal of the
note. The paying agent will pay interest on the date of maturity, redemption or
repayment, even if that date is not an interest payment date. The initial
interest payment on a note will be the first interest payment date after the
date of issuance, unless the date of issuance is less than 15 calendar days
before an interest payment date. In that case, the paying agent will pay
interest on the second interest payment date.
S-6
<PAGE>
Book-Entry Notes. The paying agent will make payments of principal, premium,
if any, and interest, if any, to the account of the Depositary, as the holder
of book-entry notes, by wire transfer of immediately available funds. We expect
that the Depositary, upon receipt of any payment, will immediately credit its
participants' accounts in amounts proportionate to the participants' respective
beneficial interests in the notes as shown on the records of the Depositary. We
also expect that payments by the Depositary's participants to owners of
beneficial interests in the book-entry notes will be governed by standing
customer instructions and customary practices and will be the responsibility of
those participants.
Certificated Notes. Except for payments at maturity, redemption or
repayment, the paying agent will make U.S. dollar payments of interest to
holders of certificated notes either:
. by check mailed to the address of the person as shown on the note
register; or
. for a holder of at least $10,000,000 in aggregate principal amount of
certificated notes having the same interest payment date, by wire
transfer of immediately available funds, if the holder has given written
notice to the paying agent not later than 15 calendar days prior to the
interest payment date.
Payments upon maturity, redemption or repayment on a note will be made in
immediately available funds against presentation and surrender of the note.
Fixed Rate Notes
Each fixed rate note will bear interest from the date of issuance at the
annual rate stated on its face until the principal is paid or made available
for payment.
How Interest Is Calculated. Interest will be computed on the basis of a 360-
day year of twelve 30-day months.
How Interest Accrues. Interest will accrue from and including the earlier
of:
. the most recent interest payment date to which interest has been paid or
provided for; or
. the issue date or any other date specified in the pricing supplement on
which interest begins to accrue.
Interest will accrue to the day prior to next interest payment date, or, if
earlier, the date on which the principal has been paid or made available for
payment, except as described below under "If a Payment Date is Not a Business
Day."
When Interest Is Paid. Unless otherwise specified in the pricing supplement,
payments of interest will be made each March 1 and September 1 and at maturity
or upon any earlier redemption or repayment. However, if the first interest
payment date is less than 15 days after the date of issuance, interest will not
be paid on the first interest payment date, but will be paid on the second
interest payment date.
Amount of Interest Payable. Interest payments will include accrued interest
from and including the date of issue or from and including the last date in
respect of which interest has been paid, as the case may be, to but excluding
the relevant interest payment date or date of maturity or earlier redemption or
repayment, as the case may be.
If a Payment Date is Not a Business Day. If any scheduled interest payment
date is not a business day, we will pay interest on the next business day, but
interest on that payment will not accrue during the period beginning on the
scheduled interest payment date. If the scheduled maturity date or date of
redemption or repayment is not a business day, we may pay interest and
principal and premium, if any, on the next business day, but interest on that
payment will not accrue during the period beginning on the scheduled maturity
date or date of redemption or repayment.
S-7
<PAGE>
Amortizing Notes. A fixed rate note may pay the same amount over the life
of the note. Payments of principal and interest on amortizing notes will be
made either quarterly on each March 1, June 1, September 1 and December 1 or
semiannually on each March 1 and September 1, as provided in the pricing
supplement, and at maturity or upon any earlier redemption or repayment.
Payments on amortizing notes will be applied first to interest due and payable
and then to the reduction of the unpaid principal amount. We will provide to
the original purchaser, and will furnish to subsequent holders upon request to
us, a table containing repayment information for each amortizing note.
Floating Rate Notes
Each floating rate note will mature on the date specified in the pricing
supplement.
Each floating rate note will bear interest at a floating rate determined by
reference to an interest rate or interest rate formula, which we refer to as
the "base rate." The base rate may be one or more of the following:
. the certificate of deposit, or CD, rate;
. the commercial paper rate;
. the federal funds rate;
. the London interbank offered rate, or LIBOR;
. the prime rate;
. the Treasury rate;
. the constant maturity Treasury, or CMT, rate; or
. any other rate or interest rate formula specified in the pricing
supplement and in the floating rate note.
Formula for Interest Rates. The interest rate on each floating rate note
will be calculated by reference to:
. the specified base rate based on the index maturity;
. plus or minus the spread, if any; and/or
. multiplied by the spread multiplier, if any.
For any floating rate note, "index maturity" means the period of maturity
of the instrument or obligation from which the base rate is calculated and
will be specified in the pricing supplement. The "spread" is the number of
basis points, one one-hundredth of a percentage point, specified in the
pricing supplement to be added to or subtracted from the base rate for a
floating rate note. The "spread multiplier" is the percentage specified in the
pricing supplement to be multiplied by the base rate for a floating rate note.
Limitations on Interest Rate. A floating rate note may also have either or
both of the following limitations on the interest rate:
. a maximum limitation, or ceiling, on the rate of interest which we are
required to pay during any interest period, which we refer to as the
"maximum interest rate;" and
. a minimum limitation, or floor, on the rate of interest that we are
required to pay during any interest period, which we refer to as the
"minimum interest rate."
Any maximum interest rate or minimum interest rate will be included in the
pricing supplement.
When Floating Interest Rates Are Reset. The initial interest rate for a
floating rate note will be the initial interest rate specified in the pricing
supplement. We refer to this rate as the "initial interest rate" and it will
be the interest rate until the first interest reset date. The interest rate on
each floating rate note may be reset daily, weekly, monthly, quarterly,
semiannually or annually. The period from an interest reset date until the day
prior
S-8
<PAGE>
to the next interest reset date is the "interest reset period" and the first
day of each interest reset period is the "interest reset date." The interest
reset date will be as follows:
. for notes which reset daily, each business day;
. for notes, other than Treasury rate notes, which reset weekly, the
Wednesday of each week;
. for Treasury rate notes which reset weekly, the Tuesday of each week;
. for notes which reset monthly, the third Wednesday of each month;
. for notes which reset quarterly, the third Wednesday of each March,
June, September and December;
. for notes which reset semiannually, the third Wednesday of two months
each year as specified in the pricing supplement; and
. for notes which reset annually, the third Wednesday of one month each
year as specified in the pricing supplement.
Unless the pricing supplement specifies otherwise, the interest rate in
effect for the ten days immediately before maturity, redemption or repayment
will be the rate in effect on the tenth day preceding the maturity, redemption
or repayment date.
If an interest reset date for any floating rate note falls on a day that is
not a business day, it will be postponed until the following business day,
except that, in the case of a LIBOR note, if that business day is in the next
calendar month, the interest reset date will be the business day immediately
preceding the interest reset date.
The Dates When Interest Rates Are Determined. The "interest determination
date" is the day the calculation agent will refer to when determining the new
interest rate for an interest reset period, and is determined as follows:
. for CD rate notes, commercial paper rate notes, federal funds rate
notes, prime rate notes and CMT rate notes, the interest determination
date will be the second business day prior to the interest reset date;
. for LIBOR notes, the interest determination date will be the second
London banking day prior to the interest reset date; and
. for Treasury rate notes, the interest determination date will be the day
of the week in which the interest reset date falls on which Treasury
bills would normally be auctioned.
Treasury bills are normally sold at auction on Monday of each week, unless
that day is a legal holiday, in which case the auction is normally held on the
following Tuesday, but the auction may be held on the preceding Friday. If, as
the result of a legal holiday, the auction is held on the preceding Friday,
that Friday will be the interest determination date for the interest reset date
occurring in the next week. If an auction falls on a day that is an interest
reset date, the interest reset date will be the next business day.
When Interest Is Paid. Unless the pricing supplement specifies otherwise, we
will pay interest on floating rate notes on the interest payment dates as
follows:
. for notes with a daily, weekly or monthly interest reset date, on the
third Wednesday of each month or on the third Wednesday of March, June,
September and December, as specified in the pricing supplement;
. for notes with a quarterly interest reset date, on the third Wednesday
of March, June, September and December;
. for notes with a semiannual interest reset date, on the third Wednesday
of two months specified in the pricing supplement;
S-9
<PAGE>
. for notes with an annual interest reset date, on the third Wednesday of
a month specified in the pricing supplement; and
. for all notes, at maturity or on any earlier redemption or repayment
date.
However, if the first interest payment date is less than 15 days after the
date of issuance, interest will not be paid on the first interest payment date,
but will be paid on the second interest payment date.
If a Payment Date is Not a Business Day. If any scheduled interest payment
date, other than the maturity date or any earlier redemption or repayment date,
is not a business day, we will pay interest on the following business day,
except that, in the case of a LIBOR note, if the business day is in the next
calendar month, the interest payment date will be the business day immediately
preceding the scheduled interest payment date. The amount of interest paid will
be the same amount as if interest had been paid on the scheduled interest
payment date. If the scheduled maturity date or any earlier redemption or
repayment date of a floating rate note falls on a day that is not a business
day, the payment of principal, premium, if any, and interest, if any, will be
made on the next business day, but interest on the payment will not accrue
during the period from and after the maturity, redemption or repayment date.
How Interest Is Calculated. Interest on floating rate notes will accrue from
and including the most recent interest payment date to which interest has been
paid or provided for, or, if no interest has been paid or provided for, from
and including the issue date or any other date specified in a pricing
supplement on which interest begins to accrue. Interest will accrue to the day
prior to the next interest payment date or, if earlier, the date on which the
principal has been paid or made available for payment, except as described
above under "If a Payment Date is Not a Business Day."
The pricing supplement will specify a calculation agent for any issue of
floating rate notes. If requested by the holder of any floating rate note, the
calculation agent will provide the interest rate then in effect and, if
determined, the interest rate that will become effective on the next interest
reset date.
For a floating rate note, accrued interest will be calculated by multiplying
the principal amount of the floating rate note by an accrued interest factor.
This accrued interest factor will be computed by adding the interest factors
calculated for each day in the period for which interest is being paid. The
interest factor for each day is computed by dividing the interest rate
applicable to that day:
. by 360, in the case of CD rate notes, commercial paper rate notes,
federal funds rate notes, LIBOR notes and prime rate notes; or
. by the actual number of days in the year, in the case of Treasury rate
notes and CMT rate notes.
For these calculations, the interest rate in effect on any interest reset
date will be the rate as reset on that date. The interest rate applicable to
any other day is the interest rate from the immediately preceding interest
reset period or, if none, the initial interest rate.
All percentages used in or resulting from any calculation of the rate of
interest on a floating rate note will be rounded, if necessary, to the nearest
one hundred-thousandth of a percentage point (.0000001), with five one-
millionths of a percentage point rounded upward, and all dollar amounts used in
or resulting from these calculations on floating rate notes will be rounded to
the nearest cent, with one-half cent rounded upward.
Base Rates
In the detailed descriptions of the various base rates which follow, the
"calculation date" for an interest determination date means the earlier of:
. the tenth calendar day after that interest determination date, or, if
that day is not a business day, the next business day; or
S-10
<PAGE>
. the business day preceding the applicable interest payment date or
maturity date or, for any principal amount to be redeemed or repaid, any
redemption or repayment date.
CD Rate Notes
CD rate notes will bear interest at the interest rates specified in the CD
rate notes and in the pricing supplement. Those interest rates will be based on
the CD rate and any specified spread and/or spread multiplier and will be
subject to any specified minimum interest rate and maximum interest rate.
The "CD rate," for any interest determination date, is the rate on that date
for negotiable certificates of deposit having the index maturity specified in
the pricing supplement as published by the Board of Governors of the Federal
Reserve System in "Statistical Release H.15(519), Selected Interest Rates," or
any successor publication of the Board of Governors of the Federal Reserve
System ("H.15(519)") under the heading "CDs (Secondary Market)."
The following procedures will be followed if the CD rate cannot be
determined in the manner described above:
. If the above rate is not published in H.15(519) by 9:00 a.m., New York
City time, on the calculation date, the CD rate will be the rate on that
interest determination date included in the daily update of H.15(519),
available through the website of the Board of Governors of the Federal
Reserve System at http://www.bog.frb.fed.us/releases/h15/update, or any
successor site or publication, which is commonly referred to as the
"H.15 Daily Update," for the interest determination date for
certificates of deposit having the index maturity specified in the
pricing supplement, under the caption "CDs (Secondary Market)."
. If the above rate is not published in either H.15(519) or the H.15 Daily
Update by 3:00 p.m., New York City time, on the calculation date, the
calculation agent will determine the CD rate to be the arithmetic mean
of three secondary market offered rates, as of 10:00 a.m., New York City
time, on the interest determination date for negotiable certificates of
deposit of major United States money center banks of the highest credit
standing in the market for negotiable certificates of deposit with a
remaining maturity closest to the index maturity specified in the
pricing supplement in an amount that is representative for a single
transaction in that market at that time. The three offered rates will be
those of three leading nonbank dealers or negotiable U.S. dollar
certificates of deposit in New York City selected by the calculation
agent.
. If the dealers selected by the calculation agent are not making quotes,
the CD rate will remain the same as the CD rate for the preceding
interest reset period, or, if there was no interest reset period, the
rate of interest payable will be the initial interest rate.
Commercial Paper Rate Notes
Commercial paper rate notes will bear interest at the interest rates
specified in the commercial paper rate notes and in the pricing supplement.
Those interest rates will be based on the commercial paper rate and any
specified spread and/or spread multiplier and will be subject to any specified
minimum interest rate and maximum interest rate.
The "commercial paper rate," for any interest determination date, is the
money market yield, calculated as described below, on that date for commercial
paper having the index maturity specified in the pricing supplement as that
rate is published in H.15(519) under the heading "Commercial Paper--
Nonfinancial."
The following procedures will be followed if the commercial paper rate
cannot be determined in the manner described above:
. If the above rate is not published by 9:00 a.m., New York City time, on
the calculation date, then the commercial paper rate will be the money
market yield on that interest determination date for
S-11
<PAGE>
commercial paper of the index maturity specified in the pricing
supplement as published in the H.15 Daily Update under the heading
"Commercial Paper--Nonfinancial."
. If by 3:00 p.m., New York City time, on that calculation date the rate
is not published in either H.15(519) or the H.15 Daily Update, then the
calculation agent will determine the commercial paper rate to be the
money market yield of the arithmetic mean of three offered rates, as of
11:00 a.m., New York City time, on the interest determination date, for
commercial paper of the index maturity specified in the pricing
supplement, placed for an industrial issuer whose bond rating is "AA,"
or the equivalent, from a nationally recognized statistical rating
agency. The three offered rates will be those of three leading dealers
of commercial paper in New York City selected by the calculation agent.
. If the dealers selected by the calculation agent are not making quotes,
the commercial paper rate for that interest determination date will
remain the same as the commercial paper rate for the preceding interest
reset period, or, if there was no interest reset period, the rate of
interest payable will be the initial interest rate.
The "money market yield" will be a yield calculated in accordance with the
following formula:
money market yield = D X 360 X 100
-------------
360 - (D X M)
where "D" refers to the applicable per year rate for commercial paper quoted on
a bank discount basis and expressed as a decimal and "M" refers to the actual
number of days in the interest period for which interest is being calculated.
Federal Funds Rate Notes
Federal funds rate notes will bear interest at the interest rates specified
in the federal funds rate notes and in the pricing supplement. Those interest
rates will be based on the federal funds rate and any specified spread and/or
spread multiplier and will be subject to any specified minimum interest rate
and the maximum interest rate.
The "federal funds rate," for any interest determination date, is the rate
on that date for federal funds as published in H.15(519) under the heading
"Federal Funds (Effective)" as displayed on Bridge Telerate, Inc., or any
successor service, on page 120 or any other page as may replace the applicable
page on that service, which is commonly referred to as "Telerate Page 120."
The following procedures will be followed if the federal funds rate cannot
be determined in the manner described above:
. If the above rate is not published by 9:00 a.m., New York City time, on
the calculation date, the federal funds rate will be the rate on that
interest determination date as published in the H.15 Daily Update under
the heading "Federal Funds/Effective Rate."
. If the rate is not published in either H.15(519) or the H.15 Daily
Update by 3:00 p.m., New York City time, on the calculation date, the
calculation agent will determine the federal funds rate to be the
arithmetic mean of the rates for the last transaction in overnight
federal funds by each of three leading brokers of federal funds
transactions in New York City selected by the calculation agent, after
consultation with us, prior to 9:00 a.m., New York City time, on that
interest determination date.
. If the brokers selected by the calculation agent are not marketing
quotes as mentioned above, the federal funds rate relating to interest
determination date will remain the same as the federal funds rate for
the preceding interest reset period, or, if there was no interest reset
period, the rate of interest payable will be the initial interest rate.
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LIBOR Notes
LIBOR notes will bear interest at the interest rates specified in the LIBOR
notes and in the pricing supplement. That interest rate will be based on LIBOR
and any specified spread and/or spread multiplier and will be subject to any
specified minimum interest rate and the maximum interest rate.
The calculation agent will determine "LIBOR" for each interest determination
date as follows:
. As of the interest determination date, LIBOR will be either:
. if "LIBOR Reuters" is specified in the pricing supplement, the
arithmetic mean of the offered rates for deposits in U.S. dollars
having the index maturity designated in the pricing supplement,
commencing on the second London banking day following the interest
determination date, that appear on the Designated LIBOR Page, as
defined below, as of 11:00 a.m., London time, on the interest
determination date, if at least two offered rates appear on the
Designated LIBOR Page, except that if the specified Designated LIBOR
Page provides only for a single rate, that single rate will be used,
or
. if "LIBOR Telerate" is specified in the pricing supplement, the rate
for deposits in U.S. dollars having the index maturity designated in
the pricing supplement, commencing on the second London banking day
following that interest determination date that appears on the
Designated LIBOR Page at approximately 11:00 a.m., London time, on
the interest determination date.
. If (1) fewer than two offered rates appear and "LIBOR Reuters" is
specified in the pricing supplement, or (2) no rate appears and the
applicable pricing supplement specifies either (x) "LIBOR Telerate" or
(y) "LIBOR Reuters" and the Designated LIBOR Page by its terms provides
only for a single rate, then the calculation agent will request the
principal London offices of each of four major reference banks in the
London interbank market, as selected by the calculation agent, to
provide the calculation agent with its offered quotation for deposits in
U.S. dollars for the period of the index maturity specified in the
pricing supplement commencing on the second London banking day following
the interest determination date, to prime banks in the London interbank
market at approximately 11:00 a.m., London time, on the interest
determination date and in a principal amount that is representative of a
single transaction in U.S. dollars in that market at that time.
. If at least two quotations are provided, LIBOR for that interest
determination date will be the arithmetic mean of those quotations. If
fewer than two quotations are provided, LIBOR will be determined for the
applicable interest reset date as the arithmetic mean of the rates
quoted at approximately 11:00 a.m., New York City time, on that interest
reset date, by three major banks in New York City selected by the
calculation agent for loans in U.S. dollars to leading European banks,
having the index maturity specified in the applicable pricing supplement
and in a principal amount that is representative of a single transaction
in U.S. dollars in that market at that time.
. If the banks so selected by the calculation agent are not making quotes
as mentioned in the previous bullet point, LIBOR in effect for the
applicable period will be the same as LIBOR for the preceding interest
reset period, or, if there was no interest reset period, the rate of
interest payable will be the initial interest rate.
"Designated LIBOR Page" means either (a) if "LIBOR Reuters" is designated in
the pricing supplement, the display on the Reuters Monitor Money Rates Service
for the purpose of displaying the London interbank offered rates of major banks
for U.S. dollars or its designated successor, or (b) if "LIBOR Telerate" is
designated in the pricing supplement, the display on Bridge Telerate Inc., or
any successor service, on page 3750, or any other page as may replace that page
on that service, for the purpose of displaying the London interbank offered
rates for U.S. dollar deposits.
If neither LIBOR Reuters nor LIBOR Telerate is specified in the pricing
supplement, LIBOR will be determined as if LIBOR Telerate were specified.
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Prime Rate Notes
Prime rate notes will bear interest at the interest rates specified in the
prime rate notes and in the pricing supplement. That interest rate will be
based on the prime rate and any specified spread and/or spread multiplier and
will be subject to any specified minimum interest rate and maximum interest
rate.
The "prime rate," for any interest determination date, is the rate on that
date as published in H.15(519) under the heading "Bank Prime Loan."
The following procedures will be followed if the prime rate cannot be
determined in the manner described above:
. If the rate is not published prior to 9:00 a.m., New York City time, on
the calculation date, then the prime rate will be the rate on the
interest determination date as published in H.15 Daily Update under the
heading "Bank Prime Loan."
. If the rate is not published prior to 3:00 p.m., New York City time, on
the calculation date in either H.15(519) or the H.15 Daily Update, then
the calculation agent will determine the prime rate to be the arithmetic
mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME 1 Page, as defined below, as each
bank's prime rate or base lending rate as in effect for that interest
determination date.
. If fewer than four rates appear on the Reuters Screen USPRIME 1 Page for
the interest determination date, the calculation agent will determine
the prime rate to be the arithmetic mean of the prime rates quoted on
the basis of the actual number of days in the year divided by 360 as of
the close of business on the interest determination date by at least two
of the three major money center banks in New York City selected by the
calculation agent from which quotations are requested.
. If fewer than four quotations are provided, then the calculation agent
will determine the prime rate to be the arithmetic mean of the prime
rates of at least three major banks selected by the calculation agent,
after consultation with us.
. If the banks selected are not making quotes as mentioned above, the
prime rate will remain the same as the prime rate for the preceding
interest reset period, or, if there was no interest reset period, the
rate of interest payable will be the initial interest rate.
"Reuters Screen USPRIME 1 Page" means the display designated as page
"USPRIME 1" on the Reuters Monitor Money Rates Service, or any successor
service, or any other page as may replace the USPRIME 1 Page on that service
for the purpose of displaying prime rates or base lending rates of major United
States banks.
Treasury Rate Notes
Treasury rate notes will bear interest at the interest rates specified in
the Treasury rate notes and in the pricing supplement. The interest rate will
be based on the Treasury rate and any specific spread and/or spread multiplier
and will be subject to any specified minimum interest rate and maximum interest
rate.
"Treasury rate" is the rate from the auction held on the applicable interest
determination date, which we refer to as the "auction," of direct obligations
of the United States, which are commonly referred to as "Treasury Bills,"
having the index maturity specified in the applicable pricing supplement as
that rate appears under the caption "INVESTMENT RATE" on the display on Bridge
Telerate, Inc., or any successor service, on page 56 or any other page as may
replace page 56 on that service, which we refer to as "Telerate Page 56," or
page 57 or any other page as may replace page 57 on that service, which we
refer to as "Telerate Page 57."
The following procedures will be followed if the Treasury rate cannot be
determined in the manner described above:
. If the rate described above is not published by 3:00 p.m., New York City
time, on the calculation date, the Treasury rate will be the bond
equivalent yield of the rate for the applicable Treasury Bills as
published in the H.15 Daily Update, or other recognized electronic
source used for the purpose of
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displaying the applicable rate, under the caption "U.S. Government
Securities/Treasury Bills/Auction High."
. If the rate described in the previous bullet point is not published by
3:00 p.m., New York City time, on the calculation date, the Treasury
rate will be the bond equivalent yield of the auction rate of the
applicable Treasury Bills, announced by the United States Department of
the Treasury.
. In the event that the rate referred to in the immediately preceding
bullet point is not announced by the United States Department of the
Treasury, or if the auction is not held, the Treasury rate will be the
same as the bond equivalent yield of the rate on the applicable interest
determination date of Treasury Bills having the index maturity specified
in the applicable pricing supplement published in H.15(519) under the
caption "U.S. Government Securities/Treasury Bills/Secondary Market."
. If the rate referred to in the immediately preceding bullet point is not
published by 3:00 p.m., New York City time, on the related calculation
date, the Treasury rate will be the same as the rate on the interest
determination date of the applicable Treasury Bills as published in H.15
Daily Update, or other recognized electronic source used for the purpose
of displaying the applicable rate, under the caption "U.S. Government
Securities/Treasury Bills/Secondary Market."
. If the rate referred to in the preceding bullet point is not published
by 3:00 p.m., New York City time, on the related calculation date, the
Treasury rate will be the same as the rate on the interest determination
date calculated by the calculation agent as the bond equivalent yield of
the arithmetic mean of the secondary market bid rates, as of
approximately 3:30 p.m., New York City time, on the interest
determination date, of three primary United States government securities
dealers, which may include the agent or its affiliates, selected by the
calculation agent, for the issue of Treasury Bills with a remaining
maturity closest to the index maturity specified in the applicable
pricing supplement.
. If the dealers selected by the calculation agent are not making quotes
as mentioned in the preceding bullet point, the Treasury rate will be
the same as the Treasury rate for the preceding interest reset period,
or, if there was no interest reset period, the rate of interest payable
will be the initial interest rate.
The "bond equivalent yield" means a yield calculated in accordance with the
following formula and expressed as a percentage:
Bond Equivalent Yield = D X N
-------------
360 - (D X M)
where "D" refers to the applicable per annum rate for Treasury Bills quoted on
a bank discount basis and expressed as a decimal, "N" refers to 365 or 366,
depending on the number of days in the applicable year, and "M" refers to the
actual number of days in the interest period for which interest is being
calculated.
CMT Rate Notes
CMT rate notes will bear interest at the interest rates specified in the
CMT rate notes and in the pricing supplement. The interest rate will be based
on the CMT rate and any specified spread and/or spread multiplier and will be
subject to any specified minimum interest rate and the maximum interest rate.
The "CMT rate," for any interest determination date, is the rate displayed
on the Designated CMT Telerate Page, as defined below, under the caption " . .
. Treasury Constant Maturities . . . Federal Reserve Board Release H.15" under
the column for the Designated CMT Maturity Index, as defined below, for:
. the rate on the interest determination date, if the Designated CMT
Telerate Page is 7051; and
. the week or the month, as applicable, ended immediately preceding the
week in which the related interest determination date occurs, if the
Designated CMT Telerate Page is 7052.
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The following procedures will be followed if the CMT rate cannot be
determined in the manner described above:
. If the rate is no longer displayed on the relevant CMT Telerate page, or
if not displayed by 3:00 p.m., New York City time, on the calculation
date, then the CMT rate will be the Treasury Constant Maturity rate for
the Designated CMT Maturity Index as published in the relevant
H.15(519).
. If the rate described in the immediately preceding bullet point is no
longer published, or if not published by 3:00 p.m., New York City time,
on the calculation date, then the CMT rate will be the Treasury Constant
Maturity rate for the Designated CMT Maturity Index or other United
States Treasury rate for the Designated CMT Maturity Index on the
interest determination date as may then be published by either the Board
of Governors of the Federal Reserve System or the United States
Department of the Treasury that the calculation agent determines to be
comparable to the rate formerly displayed on the Designated CMT Telerate
Page and published in the relevant H.15(519).
. If the information described in the preceding bullet point is not
provided by 3:00 p.m., New York City time, on the related calculation
date, then the calculation agent will determine the CMT rate to be a
yield to maturity, based on the arithmetic mean of the secondary market
closing offer side prices as of approximately 3:30 p.m., New York City
time, on the interest determination date, reported, according to their
written records, by three leading primary United States government
securities dealers, which we refer to as a "reference dealer," in New
York City, which may include an agent or other affiliates of ours,
selected by the calculation agent as described in the following
sentence. The calculation agent will select five reference dealers,
after consultation with us, and will eliminate the highest quotation or,
in the event of equality, one of the highest, and the lowest quotation
or, in the event of equality, one of the lowest, for the most recently
issued direct noncallable fixed rate obligations of the United States,
which are commonly referred to as "Treasury notes," with an original
maturity of approximately the Designated CMT Maturity Index and a
remaining term to maturity of not less than that Designated CMT Maturity
Index minus one year. If two Treasury notes with an original maturity as
described above have remaining terms to maturity equally close to the
Designated CMT Maturity Index, the quotes for the Treasury note with the
shorter remaining term to maturity will be used.
. If the calculation agent cannot obtain three Treasury notes quotations
as described in the immediately preceding bullet point, the calculation
agent will determine the CMT rate to be a yield to maturity based on the
arithmetic mean of the secondary market offer side prices as of
approximately 3:30 p.m., New York City time, on the interest
determination date of three reference dealers in New York City, selected
using the same method described in the immediately preceding sentence,
for Treasury notes with an original maturity equal to the number of
years closest to but not less than the Designated CMT Maturity Index and
a remaining term to maturity closest to the Designated CMT Maturity
Index and in an amount of at least $100,000,000.
. If three or four (and not five) of the reference dealers are making
quotes as described above, then the CMT rate will be based on the
arithmetic mean of the offer prices obtained and neither the highest nor
the lowest of those quotes will be eliminated.
. If fewer than three reference dealers selected by the calculation agent
are making quotes as described above, the CMT rate will be the same as
the CMT rate for the preceding interest reset period, or, if there was
no interest reset period, the rate of interest payable will be the
initial interest rate.
"Designated CMT Telerate Page" means the display on Dow Jones Telerate
Service or any successor service, on the page designated in the applicable
pricing supplement or any other page as may replace that page on that service
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519). If no page is specified in the pricing supplement, the Designated
CMT Telerate Page will be 7052, for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the
U.S. Treasury securities, which is either 1, 2, 3, 5, 7, 10, 20 or 30 years,
specified in the pricing supplement for which the CMT rate will
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be calculated. If no maturity is specified in the applicable pricing
supplement, the Designated CMT Maturity Index will be two years.
Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or
Indices
We may issue notes with the principal amount payable on any principal
payment date and/or the amount of interest payable on any interest payment date
determined by reference to one or more commodity prices, securities of entities
not affiliated with us, a basket of those securities or an index or indices of
those securities. These notes may include other terms, which will be specified
in the pricing supplement.
Redemption and Repurchase of Notes
Optional Redemption. The pricing supplement will indicate either that the
notes cannot be redeemed prior to maturity or the terms of our option to redeem
the notes. We will mail a notice of redemption to each holder by first-class
mail, postage prepaid, at least 30 days and not more than 60 days prior to the
date fixed for redemption, or within the redemption notice period designated in
the pricing supplement, to the address of each holder as that address appears
upon the books maintained by the paying agent. The notes, except for amortizing
notes, will not be subject to any sinking fund.
Repayment at Option of Holder. If applicable, the pricing supplement will
indicate that the holder has the option to have us repay the note on a date or
dates specified prior to its maturity date. The repayment price will be equal
to 100% of the principal amount of the note, together with accrued interest to
the date of repayment. For notes issued with original issue discount, the
pricing supplement will specify the amount payable upon repayment.
We will not repay a note unless the paying agent receives at least 15 days
but not more than 30 days prior to the repayment date:
. the note with the form entitled "Option to Elect Repayment" on the
reverse of the note duly completed; or
. a telegram, telex, facsimile transmission or a letter from a member of a
national securities exchange, or the National Association of Securities
Dealers, Inc. or a commercial bank or trust company in the United
States, setting forth the name of the holder of the note, the principal
amount of the note, the principal amount of the note to be repaid, the
certificate number or a description of the tenor and terms of the note,
a statement that the option to elect repayment is being exercised and a
guarantee that the note to be repaid, together with the duly completed
form entitled "Option to Elect Repayment" on the reverse of the note,
will be received by the paying agent not later than the fifth business
day after the date of the telegram, telex, facsimile transmission or
letter. However, the telegram, telex, facsimile transmission or letter
will only be effective if the note and form duly completed are received
by the paying agent by the fifth business day after the date of the
telegram, telex, facsimile transmission or letter.
Exercise of the repayment option by the holder of a note will be
irrevocable. The holder may exercise the repayment option for less than the
entire principal amount of the note if the principal amount of the note
remaining outstanding after repayment is an authorized denomination.
Special Requirements for Optional Repayment of Global Notes. If a note is
represented by a global note, the Depositary or the Depositary's nominee will
be the holder of the note and will be the only entity that can exercise a right
to repayment. In order to ensure that the Depositary's nominee will timely
exercise a right to repayment of a particular note, the beneficial owner of the
note must instruct the broker or other direct or indirect participant through
which it holds an interest in the note to notify the Depositary of its desire
to exercise a right to repayment. Different firms have different cut-off times
for accepting instructions from their customers and, accordingly, each
beneficial owner should consult the broker or other direct or indirect
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participant through which it holds an interest in a note in order to ascertain
the cut-off time by which an instruction must be given in order for timely
notice to be delivered to the Depositary.
Open Market Purchases. We may purchase notes at any price in the open market
or otherwise. Notes so purchased by us may, at our discretion, be held or
resold or surrendered for cancellation.
Replacement of Notes
At the expense of the holder, we will replace any notes that become
mutilated, destroyed, lost or stolen or are apparently destroyed, lost or
stolen. The mutilated notes must be delivered to the applicable trustee, the
paying agent and the registrar, in the case of registered notes, or
satisfactory evidence of the destruction, loss or theft of the notes must be
delivered to us, the paying agent, the registrar, in the case of registered
notes, and the applicable trustee. At the expense of the holder, an indemnity
that is satisfactory to us, the principal paying agent, the registrar, in the
case of registered notes, and the applicable trustee may be required before a
replacement note will be issued.
THE DEPOSITARY
The Depository Trust Company, New York, New York, will be designated as the
depositary for any registered global security. Each registered global security
will be registered in the name of Cede & Co., the Depositary's nominee.
The Depositary has advised us as follows: The Depositary is a limited-
purpose trust company organized under the New York Banking Law, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Securities Exchange Act of 1934, as
amended. The Depositary holds securities deposited with it by its participants,
and it facilitates the settlement of transactions among its participants in
those securities through electronic computerized book-entry changes in
participants' accounts, eliminating the need for physical movement of
securities certificates. The Depositary's participants include securities
brokers and dealers, including the agents listed on the front cover of this
prospectus supplement, banks, trust companies, clearing corporations and other
organizations, some of whom and/or their representatives own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
According to the Depositary, the foregoing information relating to the
Depositary has been provided to the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
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UNITED STATES FEDERAL TAXATION
The following summary describes the principal United States federal income
tax consequences of ownership and disposition of the notes. This summary is
based on the Internal Revenue Code of 1986, as amended, which we refer to as
the "Code," and existing and proposed Treasury regulations, revenue rulings,
administrative interpretations and judicial decisions, all as currently in
effect and all of which are subject to change, possibly with retroactive
effect. Except as specifically discussed in this section, this summary deals
only with notes purchased by a United States holder and held as capital assets
within the meaning of Section 1221 of the Code.
As used in this section, the term "United States holder" means a beneficial
owner of a note who or that is:
. a citizen or resident of the United States for United States federal
income tax purposes;
. a corporation or partnership, including an entity, such as a limited
liability company, treated as a corporation or partnership for United
States federal income tax purposes, created or organized in or under the
laws of the United States, any state of the United States or the
District of Columbia;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust if both:
. a United States court is able to exercise primary supervision over
the administration of the trust, and
. one or more United States persons have the authority to control all
substantial decisions of the trust.
Alternatively, a United States holder may be the beneficial holder of a
note whose income from that note is treated as effectively connected with his
conduct of a United States trade or business. The term "United States holder"
also includes certain former citizens and certain former long-term residents
of the United States whose interest and gain on the notes will be subject to
United States federal income taxation. In addition, some trusts treated as
United States persons before August 20, 1996 may elect to continue to be so
treated to the extent provided in Treasury regulations.
This summary does not discuss all of the tax consequences that may be
relevant to you in light of your particular circumstances or to holders
subject to special rules, such as persons other than United States holders,
insurance companies, dealers in securities or foreign currencies, persons
holding the notes as part of a hedging transaction, "straddle," conversion
transaction, or other integrated transaction, or United States holders whose
functional currency, as defined in Section 985 of the Code, is not the U.S.
dollar. Persons considering the purchase of the notes should consult with
their own tax advisors concerning the application of the United States federal
income tax laws to their particular situations as well as any tax consequences
arising under the laws of any state, local or foreign jurisdiction.
Payments of Interest on Non-Discount Notes
Interest paid on a note that is not a discount note will generally be
taxable to a United States holder as ordinary interest income at the time it
accrues or is received, in accordance with the United States holder's normal
method of tax accounting.
Discount Notes
Special rules govern the treatment of interest paid with respect to
discount notes. A note that has an "issue price" that is less than its "stated
redemption price at maturity" will generally be considered to have been issued
bearing original issue discount for United States federal income tax purposes.
We refer to such discount
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as "OID" and such a note as a "discount note," unless the discount is less than
a specified de minimis amount. Generally, the discount is de minimis if it is
less than 0.0025 multiplied by the product of the stated redemption price at
maturity and the number of complete years to maturity of the note.
Issue Price
The issue price of each note in an issue of notes sold for cash generally
will equal the first price at which a substantial amount of those notes is sold
to the public, ignoring sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers. The issue price of a note does not change even if part of the
issue is subsequently sold at a different price.
Stated Redemption Price
The stated redemption price at maturity of a note is the total of all
payments required to be made under the note other than "qualified stated
interest" payments.
Qualified Stated Interest
"Qualified stated interest" is stated interest that is unconditionally
payable in cash or property, other than debt instruments of the issuer, at
least annually at a single fixed rate of interest. In addition, qualified
stated interest generally includes, among other things, stated interest on a
variable rate debt instrument that is unconditionally payable at least annually
at a single qualified floating rate or a rate that is determined using a single
fixed formula that is based on objective financial or economic information. A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous fluctuations in the cost of newly borrowed
funds in the currency in which the note is denominated. No payment of interest
on a note that matures one year or less from its date of issuance will be
considered qualified stated interest, and accordingly that note will be treated
as a discount note.
Inclusion In Income
A United States holder of a discount note with a maturity of more than one
year from the date of issuance is required to include:
. qualified stated interest with respect to the note in income at the time
it is received or accrued, in accordance with the holder's normal method
of accounting; and
. OID in income for United States federal income tax purposes as it
accrues, in accordance with a constant yield method based on a
compounding of interest, before the receipt of cash payments
attributable to that income.
A holder will not be required to include separately in income cash payments
received on discount notes, even if denominated as interest, to the extent they
do not constitute qualified stated interest.
The amount of OID includable in income for a taxable year by a United States
holder of a discount note will generally equal the sum of the "daily portions"
of the total OID on the discount note for each day during the taxable year in
which that holder held the discount note, which we refer to as "accrued OID."
Generally, the daily portion of OID is determined by allocating to each day in
any "accrual period" a ratable portion of the OID allocable to that accrual
period. The term "accrual period" means an interval of time of one year or
less, and generally will correspond to the intervals between scheduled payments
of principal or interest.
The amount of OID allocable to an accrual period is generally equal to the
excess of the product of the "adjusted issue price" of the discount note at the
beginning of that accrual period and its "yield to maturity" adjusted to
reflect the length of the accrual period over the amount of any qualified
stated interest allocable to the accrual period.
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The "adjusted issue price" of a discount note at the beginning of an accrual
period will equal:
. the issue price of the discount note; plus
. the amount of OID previously includable in the gross income of any
United States holder; less
. any prior payments made on the discount note that were not qualified
stated interest payments.
The "yield to maturity" of the discount note will be computed on the basis
of a constant annual interest rate compounded at the end of each accrual
period.
United States holders of discount notes will generally be required to
include in income increasingly greater amounts of OID in successive accrual
periods.
Call and Put Options
Discount notes may be redeemable prior to maturity at our option, which we
refer to as a "call option," and/or repayable prior to maturity at the option
of the holder, which we refer to as a "put option." Discount notes containing
either or both of these features may be subject to rules that differ from the
general rules discussed above. Holders intending to purchase discount notes
with either or both of these features should carefully examine the applicable
pricing supplement and should consult with their own tax advisors about either
or both of these features since the tax consequences for OID will depend, in
part, on the particular terms and the particular features of the purchased
note.
Short-Term Discount Notes
In general, a United States holder who uses the cash method of tax
accounting and who holds a discount note that matures one year or less from the
date of its issuance, which we refer to as a "short-term discount note," is not
required to accrue OID for United States federal income tax purposes unless the
holder elects to do so. United States holders who report income for United
States federal income tax purposes on the accrual method and other holders,
including banks and dealers in securities, are required to include OID, or
alternatively acquisition discount, on those short-term discount notes on a
straight-line basis, unless an election is made to accrue the OID according to
a constant yield method based on daily compounding.
In the case of a United States holder who is not required, and does not
elect, to include OID in income currently, any gain realized on the sale,
exchange or retirement of a short-term discount note will be ordinary interest
income to the extent of the OID accrued on a straight-line basis or, if elected
by the holder, under the constant yield method through the date of sale,
exchange or retirement. In addition, non-electing United States holders who are
not subject to the current inclusion requirement described in the second
sentence of the previous paragraph may be required to defer the deduction of
all or a portion of any interest paid on indebtedness incurred to purchase
short-term discount notes until OID is included in the holder's income.
Constant Yield Method Election
United States holders are permitted to elect to include all interest on a
note using the constant yield method. For this purpose, interest includes
stated interest, acquisition discount, OID, de minimis OID, market discount, de
minimis market discount, and unstated interest, as adjusted by any amortizable
bond premium or acquisition premium. Special rules apply to elections made for
notes with amortizable bond premium or market discount and United States
holders considering this election should consult their own tax advisors. The
election cannot be revoked without the approval of the Internal Revenue
Service.
Market Discount and Premium
If a United States holder purchases a note, other than a discount note, for
an amount that is less than its issue price or, in the case of a subsequent
purchaser, its stated redemption price at maturity or, in the case of a
discount note, its adjusted issue price, the amount of the difference will be
treated as "market discount" for United States federal income tax purposes,
unless this difference is less than a specified de minimis amount.
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Under the market discount rules of the Code, a United States holder will be
required to treat any partial principal payment or, in the case of a discount
note, any payment that does not constitute qualified stated interest, on, or
any gain realized on the sale, exchange, retirement or other disposition of, a
note as ordinary income to the extent of the lesser of:
. the amount of the payment or realized gain; or
. the market discount that has not previously been included in income and
is treated as having accrued on the note at the time of payment or
disposition.
Disposal
If the note is disposed of in a nontaxable transaction, other than a
nonrecognition transaction described in Code Section 1276(c), the amount of
gain realized on the disposition for purposes of the market discount rules will
be determined as if the holder had sold the note at its then fair market value.
Market discount will be considered to accrue ratably during the period from the
date of acquisition to the maturity date of the note, unless the United States
holder elects to accrue on the basis of a constant interest rate.
Currently Included Market Discount
A United States holder may be required to defer the deduction of all or a
portion of the interest paid or accrued on any indebtedness incurred or
maintained to purchase or carry a note until the maturity of the note or its
earlier disposition, except for certain nonrecognition transactions. A United
States holder may elect to include market discount in income currently as it
accrues, on either a ratable or a constant interest rate basis, in which case
the rules described above regarding the treatment as ordinary income of gain
upon the disposition of the note and upon the receipt of cash payments on the
note and regarding the deferral of interest deductions will not apply.
Generally, this currently included market discount is treated as ordinary
interest. The election will apply to all debt instruments acquired by the
United States holder on or after the first day of the first taxable year to
which that election applies and may be revoked only with the consent of the
Internal Revenue Service.
Acquisition Premium
A United States holder who purchases a discount note for an amount that is
greater than its adjusted issue price, but less than or equal to the sum of all
amounts payable on the note after the purchase date, other than payments of
qualified stated interest, will be considered to have purchased the note at an
"acquisition premium" within the meaning of the Code. Under the acquisition
premium rules, the amount of OID which the holder must include in its gross
income for the note for any taxable year, or for the part of a taxable year in
which the United States holder holds the discount note, will be reduced by a
fraction the numerator of which is the excess of the cost of the note over its
adjusted issue price and the denominator of which is the excess of the sum of
all amounts payable on the note after the purchase date, other than qualified
stated interest, over the note's adjusted issue price.
Premium Purchases
A United States holder who purchases a discount note for an amount that is
greater than the sum of all amounts payable on the note after the purchase
date, other than qualified stated interest, will be considered to have
purchased that note at a "premium" within the meaning of the OID regulations.
In that case, the holder is not required to include any OID in gross income.
Amortizable Bond Premium
If a United States holder purchases a note for an amount that is greater
than the amount payable at maturity, or on the earlier call date, in the case
of a note that is redeemable at our option, that holder will be considered to
have purchased the note with "amortizable bond premium" equal in amount to that
excess, and
S-22
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may elect, in accordance with applicable Code provisions, to amortize this
premium, using a constant yield method over the remaining term of the note and
to offset interest otherwise required to be included in income in respect of
the note during any taxable year by the amortized amount of that excess for the
taxable year. However, if the note may be optionally redeemed after the United
States holder acquires it at a price in excess of its stated redemption price
at maturity, special rules would apply that could result in a deferral of the
amortization of some bond premium until later in the term of the note. Any
election to amortize bond premium applies to all debt instruments acquired by
the United States holder on or after the first day of the first taxable year to
which the election applies and may be revoked only with the consent of the
Internal Revenue Service.
Sale, Exchange or Retirement of the Notes
Upon the sale, exchange or retirement of a note, a United States holder will
generally recognize taxable gain or loss equal to the difference between the
amount realized on the sale, exchange or retirement and the United States
holder's adjusted tax basis in the note. For these purposes, the amount
realized on the sale, exchange or retirement of a note does not include any
amount attributable to accrued interest or, in the case of a discount note,
accrued qualified stated interest, which will be taxable as interest unless
previously taken into account. A United States holder's adjusted tax basis in a
note generally will equal the cost of the note to that holder, increased by the
amounts of any market discount, OID and de minimis OID previously included in
income by the holder with respect to the note and reduced by any amortized bond
premium and any principal payments received by the United States holder and, in
the case of a discount note, by the amounts of any other payments that do not
constitute qualified stated interest.
Gain or loss recognized on the sale, exchange or retirement of a note will
be capital gain or loss, except to the extent of any accrued market discount
or, in the case of a short-term discount note, any accrued OID which the United
States holder has not previously included in income. For these purposes,
holders of amortizing notes will be treated upon receiving each principal
payment as though they had sold a proportionate amount of the related
amortizing note. Generally, capital gain, which certain noncorporate holders
realize, may be taxable at lower maximum rates than ordinary income if the
holder has held the note for more than one year. The distinction between
capital gain or loss and ordinary income or loss is also relevant for purposes
of, among other things, limitations on the deductibility of capital losses.
A United States holder generally will not recognize gain or loss upon the
election or revocation of the election or failure to elect to terminate the
automatic extension of maturity of a renewable note.
Backup Withholding
Certain "backup" withholding and information reporting requirements may
apply to payments on, and to proceeds of the sale before maturity of, the
notes. We, our agent, a broker, the relevant trustee or any paying agent, as
the case may be, will generally withhold tax at a rate of 31% from any payments
to a United States holder who:
. fails to furnish his taxpayer identification number, i.e. social
security number or employer identification number;
. furnishes an incorrect taxpayer identification number;
. is notified by the Internal Revenue Service that it has not properly
reported interest and dividend payments; or
. fails to certify that the holder has furnished a correct taxpayer
identification number and has not been notified that it is subject to
backup withholding.
Some holders, including corporations, are generally not subject to the
backup withholding and information reporting requirements. You should consult
with a tax advisor as to whether you qualify for exemption from backup
withholding and the procedure for obtaining such an exemption if you do
qualify.
S-23
<PAGE>
Any amounts withheld under the backup withholding rules from a payment to a
United States holder would be allowed as a refund or a credit against the
holder's United States federal income tax as long as the required information
is furnished to the Internal Revenue Service.
On October 6, 1997, the Treasury Department issued new regulations which
make modifications to the withholding, backup withholding and information
reporting rules described above. The new regulations attempt to unify
certification requirements and modify reliance standards. The new regulations
will generally be effective for payments made after December 31, 2000, subject
to transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
The preceding federal income tax discussion is included for general
information only and may not be applicable depending upon a holder's particular
situation. Holders should consult their own tax advisors for the tax
consequences to them of the ownership and disposition of the notes, including
the tax consequences under state, local, foreign and other tax laws and the
possible effects of changes in federal or other tax laws.
PLAN OF DISTRIBUTION
We are offering the notes on a continuing basis through Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co., Credit Suisse First Boston Corporation and
Charles Schwab & Co., Inc., which we refer to individually as an "agent" and,
together, as the "agents," who have agreed to use reasonable efforts to solicit
offers to purchase these securities. We may appoint additional agents to
solicit sales of the notes. Any such solicitation and sale of the notes will be
on the same terms and conditions to which the current agents have agreed. We
will have the sole right to accept offers to purchase these securities and may
reject any offer in whole or in part. Each agent may reject, in whole or in
part, any offer it solicited to purchase securities. Unless otherwise specified
in the pricing supplement, we will pay an agent, in connection with sales of
these securities resulting from a solicitation that the agent made or an offer
to purchase that the agent received, a commission ranging from .125% to .875%
of the initial offering price of the securities to be sold, depending upon the
maturity of the securities. We may also sell notes directly to investors. In
that case, we will pay no commission.
We may also sell the notes to an agent as principal for its own account at a
discount equal to the commission which applies to an agent's sale of a note
with the same maturity, unless the applicable pricing supplement specifies
otherwise. That agent may resell these securities to investors and other
purchasers at a fixed offering price or at prevailing market prices, or prices
related to such prices at the time of resale or otherwise, as that agent
determines and as we specify in the pricing supplement. An agent may offer the
notes it has purchased as principal to other dealers. That agent may sell the
securities to any dealer at a discount and, unless otherwise specified in the
pricing supplement, the discount allowed to any dealer will not be in excess of
the discount that the agent will receive from us. After the initial public
offering of securities that an agent is to resell on a fixed public offering
price basis, the agent may change the public offering price, concession and
discount.
Each of the agents may be deemed to be an "underwriter" within the meaning
of the Securities Act of 1933. We and the agents have agreed to indemnify each
other against specified liabilities, including liabilities under the Securities
Act, or to contribute to payments made for those liabilities. We have also
agreed to reimburse the agents for some expenses.
Unless otherwise provided in the applicable pricing supplement, we do not
intend to apply for the listing of these securities on a national securities
exchange, but we have been advised by the agents that they intend to make a
market in these notes, as applicable laws and regulations permit. The agents
are not obligated to do so, however, and the agents may discontinue making a
market at any time without notice. No assurance can be given as to the
liquidity of any trading market for these securities.
S-24
<PAGE>
Charles Schwab & Co., Inc. is our wholly owned subsidiary. Charles Schwab &
Co., Inc. will conduct each offering of these securities in compliance with the
requirements of Rule 2720 of the NASD regarding an
NASD member firm's distributing the securities of an affiliate. Following the
initial distribution of these securities, Charles Schwab & Co., Inc. may offer
and sell the securities in the course of its business as a broker-dealer.
Charles Schwab & Co., Inc. may act as principal or agent in those transactions
and will make any sales at varying prices related to prevailing market prices
at the time of sale or otherwise. Charles Schwab & Co., Inc. may use this
prospectus supplement for any of those transactions. Charles Schwab & Co., Inc.
is not obligated to make a market in any of these securities and may
discontinue any market-making activities at any time without notice.
Neither the agents nor any dealer used in the initial offering of these
securities will confirm sales to accounts over which it exercises discretionary
authority without the prior specific written approval of its customer.
In order to facilitate the offering of these securities, the agents may
engage in transactions that stabilize, maintain or otherwise affect the price
of these securities or of any other securities the prices of which may be used
to determine payments on these securities. Specifically, the agents may
overallot in connection with any offering of these securities, creating a short
position in these securities for their own accounts. In addition, to cover
overallotments or to stabilize the price of these securities or of any other
securities, the agents may bid for, and purchase, these securities or any other
securities in the open market. Finally, in any offering of these securities
through a syndicate of underwriters, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing
these securities in the offering if the syndicate repurchases previously
distributed securities in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of these securities above independent market
levels. The agents are not required to engage in these activities, and may end
any of these activities at any time.
Concurrently with the offering of these securities through the agents, we
may issue other debt securities under the indentures referred to in this
prospectus supplement.
LEGAL MATTERS
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
will pass on the validity of the notes. Directors of that firm beneficially own
an aggregate of less than 1% of our common stock. Davis Polk & Wardwell will
pass upon some legal matters relating to the notes.
S-25
<PAGE>
PROSPECTUS
$750,000,000
THE CHARLES SCHWAB CORPORATION
DEBT SECURITIES
We will provide the specific terms of the debt securities in supplements to
this prospectus. You should carefully read this prospectus and the applicable
prospectus supplement before you invest.
Unless we state otherwise in a prospectus supplement, we will not list any
of these securities on any securities exchange.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
Our wholly owned subsidiary, Charles Schwab & Co., Inc., may use this
prospectus to make offers and sales of our debt securities in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale or otherwise. Charles Schwab & Co., Inc. has advised us that it
intends to make a market in our debt securities; however, it is not obligated
to do so. Charles Schwab & Co., Inc. may discontinue such market-making
activity at any time, and we cannot assure you of the liquidity of, or trading
market for, our debt securities. Charles Schwab & Co., Inc. may act as
principal or agent in such transactions, as discussed in "Plan of Distribution"
beginning on page 12. This prospectus may not be used to confirm sales of any
debt securities unless it is attached to a prospectus supplement.
May 19, 2000
<PAGE>
Table of Contents
<TABLE>
<S> <C>
The Charles Schwab Corporation........ 4
Consolidated Ratio of Earnings to
Fixed Charges........................ 4
Use of Proceeds....................... 4
</TABLE>
<TABLE>
<S> <C>
Description of Debt Securities........ 5
Plan of Distribution.................. 12
Legal Matters......................... 14
Experts............................... 14
</TABLE>
----------------
Note Regarding Forward-Looking Statements
This prospectus, including the information incorporated by reference, may
contain "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 are necessarily
estimates reflecting the best judgment of our senior management. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this prospectus or, in the case of documents
incorporated by reference, as of the date of those documents.
There are a variety of factors and risks that could cause actual results to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements or that could affect the decision to invest
in our securities, including, but not limited to, those contained in our Annual
Report on Form 10-K for the year ended December 31, 1999, and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000, which are
incorporated into this document by reference.
About This Prospectus
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this shelf process, we may sell any combination of the securities
described in this prospectus in one or more offerings up to a total amount of
$750,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and the prospectus supplement together with the additional information about us
as described below under the heading "Where You Can Find More Information."
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC file number is
1-9700. Our SEC filings are available to the public through commercial document
retrieval services and over the Internet at the SEC's website at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
We encourage you to review the documents and reports to be filed by us after
the date of this prospectus as required by Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act.
2
<PAGE>
Incorporation of Certain Documents by Reference
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference into this prospectus:
. Our Annual Report on Form 10-K for the year ended December 31, 1999.
. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.
Each future filing we make with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act until the later of the date we sell all of the
securities or the date that our subsidiary Charles Schwab & Co., Inc. ceases
offering and/or selling previously issued debt securities shall be incorporated
into this prospectus on the date of filing.
We will furnish without charge to each person to whom this prospectus is
delivered, on the written or oral request of the person, a copy of any or all
of the documents incorporated by reference into this prospectus, except for the
exhibits to such documents. Requests should be made to:
The Charles Schwab Corporation
Investor Relations Department
101 Montgomery Street
San Francisco, California 94104
(415) 636-2787
Any statement contained in a document or information incorporated by
reference into this prospectus will be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this prospectus or
in any subsequently filed document that also is incorporated by reference,
modifies or supersedes the statement. Any modified or superseded statement
shall not, except as so modified or superseded, constitute a part of this
prospectus. The modification or superseding of a statement does not mean that
the statement, when made, was untrue or misleading.
Our common stock is listed on the New York Stock Exchange under the symbol
"SCH" as well as on the Boston, Cincinnati, Chicago, Pacific and Philadelphia
stock exchanges and a facility of the National Association of Securities
Dealers, Inc.
You should rely only on the information incorporated by reference or
provided in this prospectus or the prospectus supplement. We have not
authorized anyone else to provide you with different information. We are not
making an offer of the debt securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of these documents.
3
<PAGE>
THE CHARLES SCHWAB CORPORATION
The Charles Schwab Corporation, through its subsidiaries, engages in
securities brokerage and related financial services, including retail
brokerage, mutual funds, support services for independent investment managers,
equity securities market making and 401(k) defined contribution plans. Charles
Schwab & Co., Inc., our principal operating subsidiary, provides brokerage and
related investment services nationwide and in Puerto Rico and the U.S. Virgin
Islands. Charles Schwab Europe is our retail securities brokerage firm located
in the United Kingdom. Another of our subsidiaries, Schwab Capital Markets L.P.
(formerly Mayer & Schweitzer, Inc.), a market maker in Nasdaq and other
securities, provides trade execution services to broker-dealers and
institutional customers. Charles Schwab Investment Management, Inc. is the
investment adviser for our proprietary mutual funds.
We were incorporated in Delaware in November 1986. Charles Schwab & Co.,
Inc. was incorporated in California in 1971 and merged in 1983 with a
subsidiary of BankAmerica Corporation. We acquired Charles Schwab & Co., Inc.
in a management-led leveraged buyout in March 1987 and became a publicly held
company in September 1987. Our principal executive offices are located at 120
Kearny Street, San Francisco, CA 94108 (telephone number (415) 627-7000). Our
website is http://www.schwab.com. This reference to our website address does
not constitute incorporation by reference of the information contained in the
website.
All references to "we," "us," "our" or to "Charles Schwab" in this
prospectus are to The Charles Schwab Corporation.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table lists our consolidated ratio of earnings to fixed
charges for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
------------- ------------------------
2000 1999 1999 1998 1997 1996 1995
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
(unaudited)........................ 2.7 2.3 2.2 1.8 1.8 1.9 1.7
Ratio of earnings to fixed charges
as adjusted (unaudited)............ 12.4 9.5 8.9 6.5 5.9 5.9 5.9
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges:
. earnings consist of earnings before taxes on income and fixed charges;
and
. fixed charges consist of interest expense incurred on payables to
customers, borrowings and one-third of rental expense, which we estimate
is representative of the interest factor.
For the purpose of calculating the ratio of earnings to fixed charges as
adjusted, interest expense incurred on payables to customers is eliminated as a
fixed charge. We consider interest expense incurred in connection with payables
to customers to be an operating expense because such interest is completely
offset by interest revenue on related investments and margin loans.
USE OF PROCEEDS
We will use the net proceeds from the sale of the debt securities for
general corporate purposes, which may include additions to working capital,
investing in or extending credit to subsidiaries, capital expenditures,
repayment of indebtedness or acquisitions. We may provide additional details
relating to the use of net proceeds in the applicable prospectus supplement.
4
<PAGE>
DESCRIPTION OF DEBT SECURITIES
We may issue either senior debt securities or senior subordinated debt
securities. Senior debt securities and senior subordinated debt securities will
be issued in one or more series under either the senior indenture or the senior
subordinated indenture between us and The Chase Manhattan Bank, formerly
Chemical Bank, as Trustee. In the following discussion, we sometimes refer to
the senior indenture and the senior subordinated indenture as the "indentures."
We are a holding company and we are dependent upon the earnings and cash
flow of our subsidiaries to meet our obligations under the debt securities.
Because the creditors of any of our subsidiaries would generally have a right
to receive payment before we would receive payment from the assets of a
subsidiary, holders of our debt securities will be effectively subordinated to
creditors of our subsidiaries. In addition, the Exchange Act and the rules of
some exchanges and regulatory bodies impose net capital requirements on some of
our subsidiaries that limit their ability to pay dividends and make loans and
advances to us.
This prospectus briefly outlines the provisions of the indentures. The
indentures have been filed as exhibits to the registration statement and you
should read them for provisions that may be important to you. The indentures
are substantially identical except for the subordination and negative pledge
provisions described below.
In the summary below, we have included references to section numbers of the
indentures so that you can easily locate these provisions.
General
The indentures do not limit the amount of additional indebtedness that we
may incur. We may issue debt securities from time to time in one or more series
with the same or various maturities. The debt securities will not be secured by
any of our property or assets.
The prospectus supplement for each series of debt securities that we sell
will contain the specific terms for that series. These terms will include some
or all of the following:
. whether the debt securities are senior or senior subordinated;
. the total principal amount of the debt securities;
. the authorized denominations;
. whether the debt securities will be issued at a discount or a premium
from the stated principal amount and whether the debt securities will be
"original issue discount" securities for U.S. federal income tax
purposes. If we issue original issue discount debt securities, we will
describe the special United States federal income tax and other
considerations in the prospectus supplement. Original issue discount debt
securities are securities that are issued at a substantial discount below
their principal amount because they pay no interest or pay interest that
is below market rates at the time of issuance;
. the date on which principal will be payable and whether the debt
securities will be payable on demand by the holders on any date;
. interest rate or rates or the method by which we will determine the rate
or rates and whether the interest rate or rates are fixed or floating;
. the interest payment dates;
. the place or places where we will make payments on the debt securities;
. any applicable redemption, repayment or sinking fund provisions;
5
<PAGE>
. any applicable United States federal income tax consequences; and
. any other specific terms of the debt securities, including any additional
events of default or covenants, and any terms that may be legally
required or advisable.
Debt securities may be presented for exchange and registration of transfer
in the manner, at the places and subject to the restrictions listed in the debt
securities and the applicable prospectus supplement. Subject to the limitations
provided in the indenture, the services will be provided without charge, other
than any tax or other governmental charges which may be payable.
Global Securities
We may issue debt securities under a book-entry system in the form of one or
more global securities. We will describe the specific terms of the depositary
arrangement for any portion of a series of debt securities represented by a
global security in the prospectus supplement for the series. We anticipate that
the following description will apply to all depositary arrangements.
We will register the global securities in the name of a depositary or its
nominee and deposit the global securities with that depositary. Following the
issuance of a global security in registered form, the depositary will credit
the accounts of its participants with the debt securities upon our
instructions. Only persons who hold interests directly or indirectly through
financial institutions that are participants in the depositary can hold
beneficial interests in the global securities. Because the laws of some
jurisdictions require certain types of purchasers to take physical delivery of
securities in definitive form, you may encounter difficulties in your ability
to own, transfer or pledge beneficial interests in a global security.
So long as the depositary or its nominee is the registered owner of a global
security, Charles Schwab and the Trustee will treat the depositary as the sole
owner or holder of the debt securities for purposes of the applicable
indenture. Therefore, except as set forth below, you will not be entitled to
have debt securities registered in your name or to receive physical delivery of
certificates representing the debt securities. Accordingly, you will have to
rely on the procedures of the depositary and the participant in the depositary
through whom you hold your beneficial interest in order to exercise any rights
of a holder. We understand that under existing practices, the depositary acts
upon the instructions of a participant or authorizes the participant to take
any action that the holder is entitled to take.
We will make all payments of principal, premium and interest on the debt
securities to the depositary. We expect that the depositary will then credit
participants' accounts proportionately with these payments on the payment date
and that the participants will in turn credit their customers in accordance
with their customary practices. Neither Charles Schwab nor the Trustee will be
responsible for making any payments to participants or customers of
participants, or for maintaining any records relating to the holdings of
participants and their customers, and you will have to rely on the procedures
of the depositary and its participants.
Global securities are generally not transferable. We will issue physical
certificates to beneficial owners of a global security if:
. the depositary notifies us that it is unwilling or unable to continue as
depositary and we do not appoint a successor within 90 days;
. the depositary ceases to be a clearing agency registered under the
Exchange Act and we do not appoint a successor within 90 days; or
. we decide in our sole discretion that we do not want to have the debt
securities of that series represented by global securities.
6
<PAGE>
Senior Debt
Our senior debt securities will be issued under the senior debt indenture
and will rank equally with all of our other unsecured and unsubordinated debt.
Senior Subordinated Debt
We may issue senior subordinated debt securities under the senior
subordinated debt indenture. Senior subordinated debt securities will be
subordinate and junior in right of payment to all of our "Senior Indebtedness."
The holders of all of our Senior Indebtedness will be entitled to be paid in
full, or we must provide for payment to them, before the holders of any of the
senior subordinated debt securities are entitled to receive any payment in the
event:
. of any insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings involving
Charles Schwab or a substantial part of our property;
. that we default on the payment of any amount due and payable on any
Senior Indebtedness;
. that an event of default exists, other than a default in the payment of
any amount due and payable, on any Senior Indebtedness that permits the
holder or holders to accelerate the maturity of the Senior Indebtedness
and the event of default continues beyond any grace period without being
cured, waived or ceasing to exist; or
. that the principal of and accrued interest on the senior subordinated
debt securities has been declared due and payable upon an "Event of
Default" and the declaration has not been rescinded and annulled.
Holders of senior subordinated debt would, however, have the right, even if we
have not paid or provided for the payment of the Senior Indebtedness, to accept
a payment in shares of our stock, as we may be reorganized or readjusted, or
securities of the corporation provided for by a plan of reorganization or
readjustment. Any securities received, however, will be subordinated to the
payment of the Senior Indebtedness. (Senior subordinated debt indenture,
Section 13.1).
"Senior Indebtedness" includes the principal of and premium, if any, and
interest on our indebtedness, whether outstanding on the date of the senior
subordinated debt indenture or later created, that is:
. for money that we borrowed, including capitalized lease obligations;
. for money borrowed by others and guaranteed, directly or indirectly, by
us; or
. secured and unsecured purchase money indebtedness or indebtedness secured
by property at the time of our acquisition of the property for the
payment of which we are directly or contingently liable.
Senior Indebtedness also includes all deferrals, renewals, extensions and
refundings of, and amendments, modifications and supplements to the Senior
Indebtedness described in the preceding sentence.
Senior Indebtedness does not include:
. our indebtedness to any of our subsidiaries for money borrowed or
advances from any subsidiary;
. the senior subordinated debt securities; or
. any indebtedness if the terms creating or evidencing the indebtedness
expressly provide that the indebtedness is not superior in right of
payment to the senior subordinated debt securities and/or that the
indebtedness is itself subordinated to any of our other indebtedness.
(Senior subordinated debt indenture, Section 1.1).
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Certain Covenants
We are subject to the following restrictions, unless the terms of the debt
securities provide otherwise:
Negative Pledge. As long as any senior debt securities are outstanding, we
will not, and will not permit any of our subsidiaries to, create, assume, incur
or guarantee any indebtedness for borrowed money secured by a pledge, lien or
other encumbrance on the voting securities of Charles Schwab & Co., Inc., Mayer
& Schweitzer, Inc. (now doing business through Schwab Capital Markets L.P.) or
Schwab Holdings, Inc. without securing the senior debt securities to the same
extent. (Senior debt indenture, Section 3.6). Schwab Holdings, Inc. is our
wholly owned subsidiary that owns all of the common stock of Charles Schwab &
Co., Inc. However, the senior debt indenture permits liens on the voting stock
of Charles Schwab & Co., Inc., Mayer & Schweitzer, Inc. and Schwab Holdings,
Inc. without securing the senior debt securities if the liens arise because of:
. claims against us for taxes or other governmental charges that we are
contesting in good faith or that are for less than $1 million;
. legal proceedings that we are contesting in good faith or that involve
claims against us for less than $1 million;
. deposits to secure, or in place of any, surety, appeals or customs bonds;
or
. any other reason if our Board of Directors determines that the lien will
not materially detract from or interfere with the present value or
control by us of the voting stock subject to the lien.
Merger, Consolidation, Sale, Lease or Conveyance. As long as any debt
securities are outstanding, we will not be permitted to merge or consolidate
with any other corporation and will not be permitted to sell, lease or convey
all or substantially all our assets to any person, unless:
. we are the continuing corporation or our successor or the person that
acquires or leases all or substantially all of our assets is a
corporation organized under the laws of the United States or one of the
states of the United States or the District of Columbia and the successor
corporation expressly assumes all of our obligations under the applicable
indenture and the related debt securities; and
. immediately after any merger, consolidation, sale, lease or conveyance,
we or our successor is not in default in the performance or observance of
the covenants and conditions of the applicable indenture. (Senior and
senior subordinated debt indentures, Section 9.1).
This covenant would not apply to a recapitalization transaction, a change of
control of Charles Schwab or a highly leveraged transaction unless such
transaction or change of control is structured to include a merger or
consolidation or a sale, lease or conveyance of all or substantially all of our
assets. Except as may be described in the prospectus supplement applicable to a
particular series of debt securities, there are no covenants or other
provisions in the indentures requiring us to repurchase the debt securities or
that would afford holders of debt securities additional protection or economic
benefits in the event of a recapitalization or a change of control of Charles
Schwab or a highly leveraged transaction.
Events of Default
Unless otherwise specified in the applicable prospectus supplement, an Event
of Default will occur for any series of debt securities if:
. we fail to pay when due any principal of that series of debt securities;
. we fail to pay any interest on that series of debt securities within 30
days after the interest is due;
. we fail to cure our default of any other covenant or agreement to which
that series of debt securities is subject within 60 days after we receive
written notice of the default;
. specified events of bankruptcy, insolvency or reorganization occur;
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. we fail to pay at maturity, including any applicable grace period, any of
our "Indebtedness" in an amount due and payable at maturity in excess of
$10,000,000 and our failure continues for more than 30 days after we
receive written notice; or
. we default on any of our Indebtedness, the default results in the
acceleration of the Indebtedness in an amount in excess of $10,000,000
and we fail to discharge the Indebtedness or cure the acceleration within
30 days after we receive written notice.
To be valid, the written notice discussed in the preceding bullet points
must be provided to us by the Trustee or the holders of not less than 25% in
aggregate principal amount of the outstanding debt securities affected by the
default.
"Indebtedness" means obligations of, or guaranteed or assumed by, us for
borrowed money or evidenced by bonds, debentures, notes or other similar
instruments, including capitalized lease obligations. Indebtedness does not
include any of our non-recourse obligations or the debt securities of the
applicable series.
If an Event of Default occurs and continues, the Trustee or the holders of
25% of the aggregate principal amount of each affected series of debt
securities, voting together as a single class, may require us to repay
immediately the entire principal of the debt securities of each affected series
and any accrued interest. For example, if an Event of Default relates to our
failure to pay interest on two series of senior debt securities and we have
issued ten series of outstanding senior debt securities, the holders of 25% of
the two affected series, voting together as a single class, would have the
right to require us to immediately repay the senior debt securities that are
part of those two series. However, if the Event of Default were to affect all
ten series such as our failure to pay Indebtedness in excess of $10,000,000 for
over 30 days after we receive written notice, then 25% of all senior debt
securities outstanding under the senior debt indenture, voting together as a
single class, would have the right to require us to immediately repay all
outstanding series of senior debt securities.
The holders of a majority of the aggregate principal amount of the debt
securities of all affected series, voting as one class, can rescind any
acceleration or waive any past default or Event of Default or allow us to not
comply with any provision of the indenture. However, they cannot waive a
default in payment of principal of, premium, if any, or interest on, any of the
debt securities.
Other than its duties in case of a default, the Trustee is not obligated to
exercise any of its rights or powers under the indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. (Senior and senior subordinated debt indentures, Section 6.2). If
they provide this reasonable indemnity, the holders of a majority in principal
amount of all affected series of debt securities, voting as one class, may
direct the time, method and place of conducting any proceeding or any remedy
available to the Trustee, or exercising any power conferred upon the Trustee,
for any series of debt securities. (Senior and senior subordinated debt
indentures, Section 5.9).
A holder of a debt security may not institute any action against us under
the indenture unless:
. the holder gives the Trustee written notice that a default has occurred
and is continuing;
. the holders of at least 25% of the outstanding principal amount of each
affected series request that the Trustee institute the action while
offering the Trustee reasonable indemnity; and
. the Trustee fails to institute the action within 60 days after receiving
the request.
Even if these three conditions are met, the holder may not institute an
action if holders of a majority in principal amount of each affected series
direct the Trustee to take action inconsistent with the request of the holder
desiring to institute action against us. Holders may institute an action for
payment of overdue principal or interest without complying with the preceding
conditions.
We are required to file annually with the Trustee a certificate stating
whether we are in default under any of the provisions of either indenture,
specifying any default that exists. (Senior and senior subordinated debt
indentures, Section 3.5).
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Discharge, Defeasance and Covenant Defeasance
When we use the term defeasance, we mean discharge from some or all of our
obligations under the indenture. If we deposit with the Trustee sufficient cash
or U.S. government securities to pay the principal, interest, any premium and
all of our other potential future obligations on the debt securities of a
particular series, then at our option:
. we will be discharged from our obligations for the series of debt
securities; or
. we will no longer be under any obligation to comply with the restrictive
covenants contained in the indenture, and the Events of Default relating
to failures to comply with covenants will no longer apply to us.
If we are discharged from our obligations, the holders of the debt
securities of the affected series will not be entitled to the benefits of the
indenture except for registration of transfer and exchange of debt securities
and replacement of lost, stolen or mutilated debt securities. Instead, the
holders will only be able to rely on the deposited funds or obligations for
payment.
We must deliver to the Trustee an opinion of counsel to the effect that the
deposit and related defeasance would not cause the holders of the debt
securities to recognize income, gain or loss for federal income tax purposes.
We must also deliver a ruling to the same effect received from or published by
the United States Internal Revenue Service if we are to be discharged from our
obligations.
For the senior subordinated debt, we must also deliver to the Trustee an
opinion of counsel to the effect that:
. other holders of senior indebtedness will have no rights to the funds
deposited with the Trustee; and
. after the 91st day following the deposit, none of our other creditors
would have claims on the funds deposited with the Trustee under
bankruptcy or similar laws affecting creditors' rights. However, if a
court rules that the funds deposited with the Trustee remain our
property, then the Trustee and holders of the senior subordinated debt
securities would have some rights as secured creditors over the funds
deposited with the Trustee.
For the senior subordinated debt, we may not discharge our obligations in
the ways described in this section if something may prevent us from making
payments of principal, interest and premium, if any, on the securities from the
date we make the deposit establishing the trust fund to the 91st day after that
date.
Modification of the Indentures
Without the consent of the holders of debt securities, we and the Trustee
may enter into supplemental indentures to:
. secure any debt securities;
. document that a successor corporation has assumed our obligations;
. add covenants for the protection of the holders of debt securities;
. cure any ambiguity or correct any inconsistency in the indentures;
. establish the forms or terms of debt securities of any series; or
. document the appointment of a successor trustee. (Senior and senior
subordinated debt indentures, Section 8.1).
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If the holders of a majority in principal amount of all affected series
consent, we and the Trustee may add to, change or eliminate any of the
provisions of an indenture or modify in any way the rights of holders of the
affected series. However, each affected holder must consent before we can:
. extend the stated maturity of the principal;
. reduce the amount of the principal;
. reduce the rate or extend the time of payment of interest;
. reduce any amount payable on redemption;
. impair the right to sue to enforce any payment on any debt security when
due; or
. reduce the percentage in principal amount required to consent to any of
the foregoing actions. (Senior and senior subordinated debt indentures,
Section 8.2).
We may not amend the senior subordinated debt indenture to alter the
subordination of any outstanding senior subordinated debt securities without
the consent of each holder of Senior Indebtedness then outstanding that would
be negatively affected. (Senior subordinated debt indenture, Section 8.6).
Governing Law
The laws of the State of California will govern the indentures and the
securities. (Senior and Senior subordinated debt indentures, Section 11.8).
Concerning the Trustee
Under the Trust Indenture Act of 1939, if a default occurs under the debt
securities issued under the senior debt indenture or the debt securities issued
under the senior subordinated debt indenture, The Chase Manhattan Bank would be
required to resign as Trustee on one of the indentures within 90 days after the
default unless we cure the default or the default is waived or otherwise
eliminated.
The Chase Manhattan Bank has loaned money to us and provided other services
to us in the past and may do so in the future as a part of its regular
business.
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PLAN OF DISTRIBUTION
We may sell our debt securities through agents, underwriters, dealers or
directly to purchasers.
Agents
Agents which we designate may solicit offers to purchase our debt
securities.
. We will name any agent involved in offering or selling our debt
securities, and any commissions that we will pay to the agent, in our
prospectus supplement.
. Unless we indicate otherwise in our prospectus supplement, our agents
will act on a reasonable efforts basis for the period of their
appointment.
. Our agents may be deemed to be underwriters under the Securities Act of
any of our debt securities that they offer or sell.
Underwriters
We may use an underwriter or underwriters in the offer or sale of our debt
securities.
. If we use an underwriter or underwriters, we will execute an underwriting
agreement with the underwriter or underwriters at the time that we reach
an agreement for the sale of our debt securities.
. We will indicate in the prospectus supplement the names of the specific
managing underwriter or underwriters, as well as any other underwriters,
and the terms of the transactions, including the compensation the
underwriters and dealers will receive.
. The underwriters will use our prospectus supplement to sell our debt
securities.
Dealers
We may use a dealer to sell our debt securities.
. If we use a dealer, we, as principal, will sell our debt securities to
the dealer.
. The dealer will then sell our debt securities to the public at varying
prices that the dealer will determine at the time it sells our debt
securities.
. We will include in our prospectus supplement the name of the dealer and
the terms of our transactions with the dealer.
Indemnification
We are required to indemnify agents, underwriters and dealers against some
liabilities. Agents, underwriters and dealers may be our customers, perform
services for us or do business with us in other ways.
Delayed Delivery Contracts
We may authorize our agents and underwriters to solicit offers by certain
institutions to purchase our debt securities at the public offering price under
delayed delivery contracts.
. If we use delayed delivery contracts, we will disclose that we are using
them in our prospectus supplement and will tell you when we will demand
payment and delivery of the debt securities under the delayed delivery
contracts.
. These delayed delivery contracts will be subject only to the conditions
contained in the prospectus supplement.
. We will indicate in our prospectus supplement the commission that
underwriters and agents soliciting purchases of our debt securities under
delayed contracts will be entitled to receive.
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Stabilization Transactions
In order to facilitate the offering of the debt securities, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the debt securities.
. They may overallot in connection with the offering, creating a short
position in the debt securities for their own accounts.
. To cover overallotments or to stabilize the price of the debt securities,
they may bid for, and purchase, the debt securities in the open market.
. In any offering of the debt securities through a syndicate of
underwriters, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the debt
securities in the offering if the syndicate repurchases previously
distributed debt securities to cover syndicate short positions, in
stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the
debt securities above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Remarketing
One or more firms may remarket the debt securities.
. The firms may include Morgan Stanley & Co., Incorporated, Goldman, Sachs
& Co., Credit Suisse First Boston Corporation and Charles Schwab & Co.,
Inc., acting as principals for their own accounts or as our agents.
. We will include in the prospectus supplement the name of any remarketing
firm, the terms of its agreement with us and its compensation.
. We may indemnify remarketing firms against some liabilities. Remarketing
firms may be our customers, perform services for us or do business with
us in other ways.
Miscellaneous
Any underwriter, agent or dealer that we use in the initial offering of debt
securities will not confirm sales to any account over which it exercises
discretionary authority without the prior specific written approval of its
customer.
Charles Schwab & Co., Inc. is a wholly owned subsidiary of The Charles
Schwab Corporation. If Charles Schwab & Co., Inc. participates in the
distribution of our securities, we will conduct the offering in accordance with
Section 2720 of the NASD Conduct Rules.
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LEGAL MATTERS
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
will pass on the legality of the debt securities. Directors of that firm
beneficially own an aggregate of less than 1% of our common stock.
Davis Polk & Wardwell will pass on specified legal matters relating to the
debt securities on behalf of dealers, underwriters or agents.
EXPERTS
The audited consolidated financial statements and the related consolidated
financial statement schedules of The Charles Schwab Corporation and
subsidiaries as of December 31, 1999 and 1998 and for each of the three years
in the period ended December 31, 1999 incorporated in this prospectus by
reference from The Charles Schwab Corporation's Annual Report on Form 10-K for
the year ended December 31, 1999 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are incorporated by
reference in this prospectus, and have been so incorporated in reliance upon
the reports of Deloitte & Touche LLP given upon their authority as experts in
accounting and auditing. Their 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.
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