-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QpFA732u2p22kjAy5F6ursW2GC8QRIGJ5SRxcWmAdcSEnh0WeyMUpUwq2XFrJ38m yU1rKcrOb3rqpFnahcVAWg== 0000316709-96-000021.txt : 19961115 0000316709-96-000021.hdr.sgml : 19961115 ACCESSION NUMBER: 0000316709-96-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB CHARLES CORP CENTRAL INDEX KEY: 0000316709 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 943025021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09700 FILM NUMBER: 96662381 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 10-Q FOR QTR 9/30/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 Commission file number 1-9700 THE CHARLES SCHWAB CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-3025021 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 101 Montgomery Street, San Francisco, CA 94104 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 627-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 175,172,568 shares of $.01 par value Common Stock Outstanding on November 1, 1996 THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended September 30, 1996 Index Page ---- Part I - Financial Information Item 1. Condensed Consolidated Financial Statements: Statement of Income 1 Balance Sheet 2 Statement of Cash Flows 3 Notes 4-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-16 Part II - Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16-17 Signature 18 FORWARD-LOOKING STATEMENTS In addition to the historical information contained throughout this interim report, there are forward-looking statements that reflect management's expectations for the future. These statements relate to the Company's strategy, sources of liquidity and capital expenditures. Many factors could cause actual results to differ materially from these statements. These factors include, but are not limited to: management's decisions regarding the amount or timing of anticipated investments by the Company; the effect of customer trading patterns on Company revenues; changes in technology, which can result in obsolescence of existing equipment and/or significant investments in new technology; evolving industry regulation; pricing, product and service decisions by competitors; and changes in revenue due to cyclical securities markets and interest rates. The Company disclaims any obligation to update its forward-looking statements. Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Revenues Commissions $ 210,110 $ 206,831 $ 712,172 $ 537,023 Mutual fund service fees 80,295 58,745 224,514 156,585 Interest revenue, net of interest expense(1) 63,966 55,180 185,315 150,867 Principal transactions 57,403 51,985 192,156 148,020 Other 18,265 12,820 54,446 32,637 - ----------------------------------------------------------------------------------------------------------------- Total 430,039 385,561 1,368,603 1,025,132 - ----------------------------------------------------------------------------------------------------------------- Expenses Excluding Interest Compensation and benefits 171,656 161,456 567,845 423,801 Communications 40,170 34,214 127,470 90,674 Occupancy and equipment 33,177 28,233 96,270 79,062 Commissions, clearance and floor brokerage 18,695 22,877 60,001 57,728 Depreciation and amortization 24,231 17,773 72,335 46,465 Advertising and market development 16,464 10,888 56,511 34,081 Professional services 10,761 10,666 34,406 26,515 Other 18,388 21,396 58,899 52,080 - ----------------------------------------------------------------------------------------------------------------- Total 333,542 307,503 1,073,737 810,406 - ----------------------------------------------------------------------------------------------------------------- Income before taxes on income 96,497 78,058 294,866 214,726 Taxes on income 39,429 30,837 120,760 84,710 - ----------------------------------------------------------------------------------------------------------------- Net Income $ 57,068 $ 47,221 $ 174,106 $ 130,016 ================================================================================================================= Weighted-average number of common and common equivalent shares outstanding(2) 179,588 179,688 179,244 178,001 ================================================================================================================= Primary/Fully Diluted Earnings per Share $ .32 $ .26 $ .97 $ .73 ================================================================================================================= Dividends Declared per Common Share $ .05 $ .04 $ .13 $ .10 ================================================================================================================= (1) Interest revenue is presented net of interest expense. Interest expense for the three months ended September 30, 1996 and 1995 was $107,522 and $94,039, respectively. Interest expense for the nine months ended September 30, 1996 and 1995 was $307,683 and $260,908, respectively. (2) Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements. - 1 - THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except share data)
September 30, December 31, 1996 1995 ---- ---- (Unaudited) ----------- Assets Cash and equivalents $ 664,585 $ 454,996 Cash and investments required to be segregated under Federal or other regulations (including resale agreements of $4,946,546 in 1996 and $4,409,869 in 1995) 6,219,276 5,426,619 Receivable from brokers, dealers and clearing organizations 170,496 141,916 Receivable from customers - net 4,495,467 3,946,295 Securities owned - at market value 147,965 113,522 Equipment, office facilities and property - net 289,153 243,472 Intangible assets - net 72,346 80,863 Other assets 87,917 144,325 - ------------------------------------------------------------------------------------------------------------- Total $ 12,147,205 $ 10,552,008 ============================================================================================================= Liabilities and Stockholders' Equity Drafts payable $ 153,909 $ 212,961 Payable to brokers, dealers and clearing organizations 875,963 581,226 Payable to customers 9,692,231 8,551,996 Accrued expenses and other 316,973 326,785 Long-term debt (including current maturities) 293,965 246,146 - ------------------------------------------------------------------------------------------------------------- Total liabilities 11,333,041 9,919,114 - ------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock - 9,940,000 shares authorized; $.01 par value per share; none issued Common stock - 500,000,000 shares authorized in 1996 and 200,000,000 shares authorized in 1995; $.01 par value per share; 178,459,416 shares issued in 1996 and 1995 1,785 1,785 Additional paid-in capital 195,661 180,302 Retained earnings 672,006 520,532 Treasury stock - 3,108,149 shares in 1996 and 4,427,255 shares in 1995, at cost (39,580) (50,968) Unearned ESOP shares (5,318) (9,397) Unamortized restricted stock compensation (8,571) (7,074) Foreign currency translation adjustment (1,819) (2,286) - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 814,164 632,894 - ------------------------------------------------------------------------------------------------------------- Total $ 12,147,205 $ 10,552,008 =============================================================================================================
See Notes to Condensed Consolidated Financial Statements. - 2 - THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 1996 1995 ---- ---- Cash flows from operating activities Net income $ 174,106 $ 130,016 Noncash items included in net income: Depreciation and amortization 72,335 46,465 Deferred income taxes (2,425) (3,310) Other 19,703 15,275 Change in securities owned - at market value (34,443) (42,071) Change in other assets 58,871 28,840 Change in accrued expenses and other 3,851 76,211 - --------------------------------------------------------------------------------------------------------- Net cash provided before change in customer-related balances 291,998 251,426 - --------------------------------------------------------------------------------------------------------- Change in customer-related balances (excluding the effects of businesses acquired): Payable to customers 1,137,124 1,113,323 Receivable from customers (550,237) (616,895) Drafts payable (60,080) 36,723 Payable to brokers, dealers and clearing organizations 294,213 142,047 Receivable from brokers, dealers and clearing organizations (27,352) (19,934) Cash and investments required to be segregated under Federal or other regulations (789,611) (672,478) - --------------------------------------------------------------------------------------------------------- Net change in customer-related balances 4,057 (17,214) - --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 296,055 234,212 - --------------------------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of equipment, office facilities and property - net (110,642) (94,087) Cash payments for businesses acquired, net of cash received (3,709) (68,113) - --------------------------------------------------------------------------------------------------------- Net cash used by investing activities (114,351) (162,200) - --------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from long-term debt 64,000 40,000 Repayment of long-term debt (16,000) Dividends paid (22,740) (17,261) Other 2,701 7,110 - --------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 27,961 29,849 - --------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and equivalents (76) (654) - --------------------------------------------------------------------------------------------------------- Increase in cash and equivalents 209,589 101,207 Cash and equivalents at beginning of period 454,996 401,031 - --------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 664,585 $ 502,238 =========================================================================================================
See Notes to Condensed Consolidated Financial Statements. - 3 - THE CHARLES SCHWAB CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company). CSC is a holding company engaged, through its subsidiaries, in securities brokerage and related investment services. CSC's principal operating subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with a network of 235 branch offices and four regional customer telephone service centers. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to broker-dealers, including Schwab, and institutional customers. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. All adjustments were of a normal recurring nature. All material intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Annual Report to Stockholders, which are incorporated by reference in the Company's 1995 Annual Report on Form 10-K, and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 1996 and June 30, 1996. Prior periods' financial statements have been reclassified to conform to the 1996 presentation. Statement of Financial Accounting Standards No. 121 Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121 - Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. The new standard requires that long-lived assets and certain identifiable intangibles to be held and used by or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of the new standard did not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. Statement of Financial Accounting Standards No. 123 Effective January 1, 1996, the Company adopted SFAS No. 123 - Accounting for Stock-Based Compensation. The new standard establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. Under the new standard, the Company may either adopt the new fair value-based accounting method or continue using the intrinsic value-based method under Accounting Principles Board (APB) Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the accounting provision of the new standard had been adopted. The Company elected to continue to follow APB Opinion No. 25 and implement the disclosure requirements of the new standard. Such adoption did not have an effect on the Company's results of operations, earnings per share or cash flows. Statement of Financial Accounting Standards No. 125 On June 28, 1996, the Financial Accounting Standards Board issued SFAS No. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, effective for transfers of financial assets made after December 31, 1996. The new standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of the new standard will not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. Commitments and Contingencies In the normal course of its margin lending activities, Schwab may be liable for the margin requirement of customer margin securities transactions. M&S has been named as one of thirty-three defendant market-making firms in a consolidated class action which is pending in Federal District Court in the Southern District of New York pursuant to an order of the Judicial Panel on Multidistrict Litigation. On December 16, 1994, the plaintiffs filed a consolidated amended complaint purportedly on behalf of certain persons who purchased or sold Nasdaq securities during the period May 1, 1989 through May 27, 1994. A second consolidated amended complaint was filed - 4 - on August 22, 1995. The consolidated complaint does not set forth any specific conduct by M&S and does not request any specific amount of damages, although it requests that the actual damages be trebled where permitted by statute. The consolidated complaint generally alleges an illegal combination and conspiracy among the defendant market makers to fix and maintain the spreads between the bid and ask prices of Nasdaq securities. The ultimate outcome of this consolidated action cannot currently be determined. Between August 12, 1993 and November 17, 1995, Schwab was named as a defendant in eleven class action lawsuits, seven of which are still pending in state courts in Illinois, New York, Louisiana, Texas and California. The class actions purport to be brought on behalf of customers of Schwab who purchased or sold securities for which Schwab received payments from the market maker, stock dealer or other third party who executed the transaction. The complaints generally allege that Schwab failed to disclose and remit such payments to members of the class, and generally seek damages equal to the payments received by Schwab. On June 30, 1995, a class was certified in Civil District Court for the Parish of Orleans in Louisiana for Louisiana residents who purchased or sold securities through Schwab between February 1, 1985 and February 1, 1995 for which Schwab received monetary payments from the market maker or stock dealer who executed the transaction. The class certification was affirmed by the Louisiana Court of Appeals on February 29, 1996. On August 16, 1995, another class was certified in Civil District Court for the Parish of Natchitoches in Louisiana for residents of all states who purchased or sold securities through Schwab since 1985 for which Schwab received monetary payments from the market maker or other third party who executed the transaction. Schwab has appealed this class certification to the Louisiana Court of Appeals. On October 17, 1996, the class action filed in New York state court was dismissed by the New York Court of Appeals on the ground that the claims asserted were preempted by federal law. The ultimate outcome of the remaining actions cannot currently be determined. There are other various lawsuits pending against the Company which, in the opinion of management, will be resolved with no material impact on the Company's financial position or results of operations. Regulatory Requirements Schwab and M&S are subject to the SEC's Uniform Net Capital Rule and each compute net capital under the alternative method permitted by this Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from customer transactions or a minimum dollar amount, which is based on the type of business conducted by the broker- dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. At September 30, 1996, Schwab's net capital was $548 million (12% of aggregate debit balances), which was $454 million in excess of its minimum required net capital and $313 million in excess of 5% of aggregate debit balances. At September 30, 1996, M&S' net capital was $11 million (391% of aggregate debit balances), which was $10 million in excess of its minimum required net capital. Schwab and ShareLink Limited, a subsidiary of ShareLink Investment Services plc, had portions of their cash and investments segregated for the exclusive benefit of customers at September 30, 1996, in accordance with applicable regulations. M&S had no such cash reserve requirement at September 30, 1996. Cash Flow Information Certain information affecting the cash flows of the Company follows (in thousands): Nine Months Ended September 30, 1996 1995 ---- ---- Income taxes paid $106,249 $ 61,895 ======== ======== Interest paid: Customer cash balances $266,695 $234,381 Long-term debt (including current maturities) 16,733 11,221 Other 22,979 13,687 -------- -------- Total interest paid $306,407 $259,289 ======== ======== - 5 - Subsequent Events On November 1, 1996, the SEC declared effective CSC's registration statement covering the issuance of up to an additional $150 million in Senior or Senior Subordinated Medium-Term Notes, Series A, bringing the aggregate principal amount of such notes available to be issued to $196 million. From October 15, 1996 through November 5, 1996, the Company repurchased and recorded as treasury stock a total of 700,000 shares of its common stock for $17 million. - 6 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide brokerage and related investment services to customers with 3.9 million active(a) accounts and assets that totaled $231.6 billion at September 30, 1996. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with a network of 235 branch offices in 46 states, the Commonwealth of Puerto Rico and the United Kingdom. Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to broker-dealers and institutional customers. The Company remains focused on achieving profitable growth within several areas of the financial services industry - retail brokerage, mutual funds, support services for independent investment managers, equity securities market-making, electronic brokerage and 401(k) defined contribution plans. The Company faces heavy competitive pressure in these areas from full commission and discount brokerage firms, as well as from mutual fund companies. Increasingly, competition has also come from banks, software development companies, insurance companies and others as they expand their product lines. The Company's strategy for increasing stockholder value while operating in this competitive environment includes several key elements, all of which reflect a focus on providing value to customers. First, the Company offers a broad range of products and services at prices that management believes represent superior value to customers. The Company uses varying levels of discount pricing, such as with its Mutual Fund OneSource (registered trademark) service, to enhance the value of its products and services, and support its efforts to gain market share. Management expects to continue aggressive use of discount pricing in the marketing of new products and services. Second, the Company's products and services are delivered through diverse and complementary customer service delivery systems including the branch office network, Schwab's regional customer telephone service centers and electronic brokerage channels. The electronic brokerage channels include the SchwabLink (registered trademark) service for financial advisors, TeleBroker (registered trademark) - Schwab's touchtone telephone trading service - and PC-based online services such as StreetSmart (registered trademark), e.Schwab (trademark) and SchwabNOW! (trademark) - Internet trading via Schwab's World Wide Web site. Third, the Company is broadening the ways in which it helps investors achieve their goals by using the branch office network to assist newer investors in developing asset allocation strategies and narrowing down their investment choices. Branch staff are also matching investors that need additional guidance with independent fee-based investment managers through the Schwab AdvisorSource (trademark) service. Another key element is the Company's ongoing investment in technology to provide fast and consistent customer service, and reduce processing costs. The Company is a forerunner in placing technology in the hands of customers. A few examples include TeleBroker, e.Schwab, SchwabNOW! and VoiceBroker (trademark). VoiceBroker was introduced in the third quarter of 1996 as the first telephone-based service that uses voice recognition technology to provide individual investors with real-time quotes. Finally, the Company's nationwide advertising and marketing programs are designed to distinguish the Schwab brand as well as the Company's products and services. Management expects to continue to invest in these areas in order to position the - ----- (a) Accounts with balances or activity within the preceding twelve months. - 7 - Company for future expansion, and to enable customers to choose the type and level of service most appropriate to their investing activity. The Company's business, like that of other securities brokerage firms, is directly affected by the fluctuations in securities trading volumes and price levels that occur in fundamentally cyclical financial markets. Transaction- based revenues continue to represent a majority of the Company's revenues. Since these revenues are heavily influenced by fluctuations in the volume of securities transactions, it is not unusual for the Company to experience significant variations in quarterly revenue levels. The Company adjusts its expenses in anticipation of and in response to changes in financial market conditions and customer trading patterns. Certain of the Company's expenses, including variable compensation, portions of communications, and commissions, clearance and floor brokerage vary directly with changes in financial performance or customer trading activity. Expenses relating to the level of temporary employees, contractors and overtime hours, professional services, advertising and market development, and travel and entertainment are adjustable over the short term to help the Company achieve its financial objectives. Additionally, developmental spending (e.g., branch openings, product and service rollouts, and technology enhancements) is discretionary and can be altered to reflect market conditions. However, a significant portion of the Company's expenses such as salaries and wages, occupancy and equipment, and depreciation and amortization do not vary directly, at least in the short term, with fluctuations in revenue or securities trading volumes. Given the nature of the Company's revenues and expenses, and the environmental factors discussed above, the Company's earnings and common stock price may be subject to significant volatility. The Company's results for any interim period are not necessarily indicative of results for a full year. In addition to the historical information contained throughout this interim report, the preceding forward-looking statements relating to the Company's strategy, as well as those that follow concerning sources of liquidity and capital expenditures, reflect management's expectations for the future. Many factors could cause actual results to differ materially from these statements. These factors include, but are not limited to: management's decisions regarding the amount or timing of anticipated investments by the Company; the effect of customer trading patterns on Company revenues; changes in technology, which can result in obsolescence of existing equipment and/or significant investments in new technology; evolving industry regulation; pricing, product and service decisions by competitors; and changes in revenue due to cyclical securities markets and interest rates. The Company disclaims any obligation to update its forward- looking statements. Three Months Ended September 30, 1996 Compared To Three Months Ended September 30, 1995 Summary Net income for the third quarter of 1996 totaled $57 million, up 21% from third quarter 1995 net income of $47 million. Earnings per share for the third quarter of 1996 increased 23% to $.32 per share from $.26 per share for the third quarter of 1995. Third quarter 1996 revenues were $430 million, up 12% from $386 million for the third quarter of 1995, mainly due to increases in asset-based revenues such as mutual fund service fees and net interest revenue. The Company's strategy of placing technology in the hands of customers and providing diverse service delivery systems has facilitated growth in electronic trading at Schwab. During the third quarter of 1996, customers averaged a total of 31,600 trades per day through electronic brokerage channels, an - 8 - increase of 36% from the 23,300 average trades per day for the same period last year. Trades executed via TeleBroker (registered trademark) and SchwabLink (registered trademark) averaged 11,500 and 8,400 per day, respectively, during the third quarter of 1996, compared to average daily trades of 10,900 and 5,700, respectively, for the same period last year. Assets in customer accounts totaled $231.6 billion at September 30, 1996, an increase of $62.0 billion, or 37%, from a year ago. Customers' equity securities increased $23.0 billion to $93.1 billion, and customer assets in Schwab's Mutual Fund Marketplace (registered trademark) increased $22.7 billion to $69.2 billion. In addition, customer assets in cash and money market funds increased $9.9 billion to $45.3 billion. Schwab added 217,000 new customer accounts during the third quarter of 1996, an increase of 32% from the 164,000 new accounts added during the third quarter of 1995. Total operating expenses excluding interest during the third quarter of 1996 were $334 million, up 8% from $308 million for the third quarter of 1995, primarily resulting from additional staff to support the Company's growth and expansion, as well as investments in technology and advertising. The after-tax profit margin for the third quarter of 1996 was 13%, up from 12% for the third quarter of 1995. The annualized return on stockholders' equity for the third quarter of 1996 was 29%, down from 32% for the third quarter of 1995. Commissions Commission revenues for the Company were $210 million for the third quarter of 1996, up $3 million, or 2%, from the third quarter of 1995. Schwab earns commissions when acting as an agent as opposed to principal transaction revenues when acting as a principal or a market maker. Commissions earned on retail agency trades, which exclude commissions from institutional customers such as corporations and specialists, constituted 96% of Schwab's total commissions, and were $194 million for both the third quarter of 1996 and 1995. The daily average retail agency trades were 45,000 in the third quarter of 1996, compared with 41,100 for the comparable period in 1995. Although Schwab's customer base continued to grow and customer accounts in general were more active, total retail agency commission revenues were essentially unchanged due to a decline in average commission per transaction, as detailed in the table below. Average commission per transaction declined due to a higher proportion of trades placed through electronic channels, which provide additional commission discounts from Schwab's standard rates, and a decrease in the average principal value per transaction. - ----------------------------------------------------------------------------- Three Months Ended Retail Agency September 30, Percent Commission Revenues 1996 1995 Change - ----------------------------------------------------------------------------- Number of customer accounts that traded (in thousands) 773 720 7% Average transactions per account that traded 3.73 3.59 4 Total number of transactions (in thousands) 2,883 2,588 11 Average commission per transaction $67.46 $74.85 (10) Total commission revenues (in millions) $ 194 $ 194 0 ============================================================================= Note: The above table excludes customer transactions in Schwab's Mutual Fund OneSource (registered trademark) service. Mutual Fund Service Fees Mutual fund service fees increased $22 million, or 37%, to $80 million in the third quarter of 1996 from the comparable period in 1995. The increase was primarily attributable to significant increases in customer assets in funds purchased through Schwab's Mutual Fund OneSource (registered trademark) service, and customer assets in Schwab's proprietary funds, collectively referred to as the SchwabFunds (registered trademark). Most of these fees are earned for record keeping and shareholder services - 9 - provided to funds in the Mutual Fund OneSource (registered trademark) service, and for transfer agent, shareholder and investment management services provided to proprietary money market funds. Customer assets held by Schwab that have been purchased through the Mutual Fund OneSource service, excluding SchwabFunds (registered trademark), totaled $36.1 billion at September 30, 1996, compared to $21.8 billion at September 30, 1995, a 66% increase. Customer assets invested in the SchwabFunds increased 33% to $39.2 billion at September 30, 1996 from $29.5 billion at September 30, 1995. Interest Revenue, Net of Interest Expense Interest revenue, net of interest expense, increased $9 million, or 16%, to $64 million from the prior year's third quarter as shown in the following table (in millions): - --------------------------------------------------------------------------- Three Months Ended September 30, 1996 1995 - --------------------------------------------------------------------------- Interest Revenue Investments, customer-related $ 76 $ 76 Margin loans to customers 87 68 Other 9 5 - --------------------------------------------------------------------------- Total 172 149 - --------------------------------------------------------------------------- Interest Expense Customer cash balances 94 84 Long-term debt (including current maturities) 5 3 Other 9 7 - --------------------------------------------------------------------------- Total 108 94 - --------------------------------------------------------------------------- Interest Revenue, Net of Interest Expense $ 64 $ 55 =========================================================================== The increase in interest revenue, net of interest expense, from the prior year's third quarter was primarily due to higher levels of interest-earning assets - a $1.3 billion, or 39%, increase in average margin loans to customers and a $.5 billion, or 10%, increase in average investment balances, partially offset by a higher level of funding sources - a $1.6 billion, or 23%, increase in interest-bearing customer cash balances, and a decrease in average net interest margin. Customer-related daily average balances, interest rates and average net interest margin for the third quarters of 1996 and 1995 are summarized in the following table (dollars in millions): - --------------------------------------------------------------------------- Three Months Ended September 30, 1996 1995 - --------------------------------------------------------------------------- Interest-Earning Assets (customer-related): Investments: Average balance outstanding $5,693 $5,188 Average interest rate 5.30% 5.95% Margin loans to customers: Average balance outstanding $4,603 $3,306 Average interest rate 7.55% 8.31% Average yield on interest-earning assets 6.30% 6.86% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $8,493 $6,891 Average interest rate 4.39% 4.95% Other interest-bearing sources: Average balance outstanding $ 747 $ 497 Average interest rate 4.51% 4.65% Average noninterest-bearing portion $1,056 $1,106 Average interest rate on funding sources 3.95% 4.29% Summary: Average yield on interest-earning assets 6.30% 6.86% Average interest rate on funding sources 3.95% 4.29% - --------------------------------------------------------------------------- Average net interest margin 2.35% 2.57% =========================================================================== Principal Transactions During the third quarter of 1996, principal transaction revenues increased $5 million, or 10%, from the comparable period in 1995 to $57 million. This increase was primarily due to higher average revenue per principal transaction from market-making activities in Nasdaq securities handled by M&S, a significant participant in the Nasdaq market. This increase in average revenue per principal transaction was partially offset by a decrease in M&S' trading - 10 - volume. Nasdaq's daily average share volume during the third quarter of 1996 was 502 million shares, of which M&S handled approximately 7%, down from 8% during the third quarter of 1995. During 1994, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) commenced investigations related to the activities of broker-dealers, including M&S, who act as market makers in Nasdaq securities. On July 16, 1996, M&S and twenty-three other Nasdaq market makers entered into a Stipulation and Order resolving a civil complaint filed by the DOJ alleging violations of the federal antitrust laws in connection with certain customs and practices. Under the Stipulation, the parties agreed that the defendants would not engage in certain types of market-making activities and would take specific steps to assure compliance with the agreement. No fines or damages were assessed. The Stipulation and Order is subject to approval by the United States District Court of the Southern District of New York, following a public hearing, and if that Court approves the Order, the complaint will be dismissed. On August 8, 1996, the SEC issued a report of its investigation and filed proceedings against the National Association of Securities Dealers, Inc. (NASD) for allegedly failing to enforce compliance with its rules and the federal securities laws. Simultaneously, the NASD agreed to settle the proceedings, without admitting or denying the SEC's findings, by consenting to a censure and to certain remedial undertakings. No market makers in Nasdaq securities, including M&S, were named as parties in the proceedings, although the SEC has stated that further enforcement proceedings are not precluded. In August 1996, the SEC adopted certain new rules and rule amendments which will alter the manner in which orders related to both Nasdaq and listed securities will be handled. These rules are scheduled to become effective in January 1997, and could have a material adverse impact on M&S' revenues from principal transactions. In addition, the SEC has also issued for comment certain proposed rules by the NASD which, if adopted, would introduce a new system for processing orders in the Nasdaq market. The proposed NASD rules, if adopted, and other potential regulatory actions and improvements in technology, could impact the manner in which business is currently conducted in the Nasdaq market. These changes in market customs and practices could have a material adverse impact on M&S' revenues from principal transactions. Expenses Excluding Interest The only expense category that had a significant dollar fluctuation for the third quarter of 1996 as compared to the third quarter of 1995 was compensation and benefits expense as described below. Compensation and benefits expense for the third quarter of 1996 increased $10 million, or 6%, to $172 million from the prior year's third quarter primarily due to an increase in salaries and wages resulting from a larger number of employees, partially offset by a decrease in variable compensation. During the third quarters of 1996 and 1995, variable compensation represented 24% and 28%, respectively, of total compensation and benefits. At September 30, 1996, the Company had full-time, part-time and temporary employees, and persons employed on a contract basis that represented the equivalent of approximately 9,600 full-time employees, compared to approximately 8,400 at September 30, 1995. Compensation for temporary employees, contractors and overtime hours accounted for $19 million and $20 million of total compensation and benefits during the third quarters of 1996 and 1995, respectively. The Company's effective income tax rate for the third quarter of 1996 was 40.9% compared to 39.5% for the comparable period in 1995. - 11 - Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Summary Net income for the first nine months of 1996 totaled $174 million, up 34% from the first nine months of 1995 net income of $130 million. Earnings per share for the first nine months of 1996 increased 33% to $.97 per share from $.73 per share for the first nine months of 1995. Revenues for the first nine months of 1996 were $1.4 billion, up 34% from $1.0 billion for the first nine months of 1995, due to increases in all revenue categories primarily resulting from higher trading volume and an increase in customer assets. During the first nine months of 1996, customers averaged a total of 32,800 trades per day through electronic brokerage channels, an increase of 63% from the 20,100 average trades per day for the same period last year. Trades executed via TeleBroker (registered trademark) and SchwabLink (registered trademark) averaged 13,200 and 8,300 per day, respectively, during the first nine months of 1996, compared to average daily trades of 9,000 and 5,400, respectively, for the same period last year. Total operating expenses excluding interest during the first nine months of 1996 were $1.1 billion, up 32% from $810 million for the first nine months of 1995, primarily resulting from additional staff to support the Company's growth and expansion, investments in technology and advertising, and higher communications expense. For the first nine months of both 1996 and 1995, the after-tax profit margin and annualized return on stockholders' equity were 13% and 32%, respectively. Commissions Commission revenues for the Company were $712 million for the first nine months of 1996, up $175 million, or 33%, from the first nine months of 1995. Commissions earned on retail agency trades constituted 96% of Schwab's total commissions for the first nine months of 1996 and 1995, and totaled $667 million on a daily average retail agency trade level of 49,900 in the first nine months of 1996, compared with commission revenues of $510 million on a daily average retail agency trade level of 36,700 for the comparable period in 1995. Total retail agency commission revenues increased 31% from the first nine months of 1995 as Schwab's customer base continued to grow and customer accounts in general were more active. These factors were partially offset by a decline in average commission per transaction, as detailed in the table below. Average commission per transaction declined due to a higher proportion of trades placed through electronic channels, which provide additional commission discounts from Schwab's standard rates. - ----------------------------------------------------------------------------- Nine Months Ended Retail Agency September 30, Percent Commission Revenues 1996 1995 Change - ----------------------------------------------------------------------------- Number of customer accounts that traded (in thousands) 1,550 1,326 17% Average transactions per account that traded 6.12 5.29 16 Total number of transactions (in thousands) 9,479 7,008 35 Average commission per transaction $70.33 $72.81 (3) Total commission revenues (in millions) $ 667 $ 510 31 ============================================================================= Note: The above table excludes customer transactions in Schwab's Mutual Fund OneSource (registered trademark) service. During the first nine months of 1996, Schwab added 726,000 new customer accounts, an increase of 43% from the 508,000 new accounts added in the first nine months of 1995. - 12 - Interest Revenue, Net of Interest Expense Interest revenue, net of interest expense, increased $34 million, or 23%, to $185 million from the prior year's first nine months as shown in the following table (in millions): - --------------------------------------------------------------------------- Nine Months Ended September 30, 1996 1995 - --------------------------------------------------------------------------- Interest Revenue Investments, customer-related $ 225 $ 209 Margin loans to customers 248 188 Other 20 15 - --------------------------------------------------------------------------- Total 493 412 - --------------------------------------------------------------------------- Interest Expense Customer cash balances 267 235 Long-term debt (including current maturities) 14 9 Other 27 17 - --------------------------------------------------------------------------- Total 308 261 - --------------------------------------------------------------------------- Interest Revenue, Net of Interest Expense $ 185 $ 151 =========================================================================== The increase in interest revenue, net of interest expense, for the first nine months of 1996 was primarily due to higher levels of interest-earning assets - a $1.3 billion, or 44%, increase in average margin loans to customers and a $1.0 billion, or 20%, increase in average investment balances, partially offset by a higher level of funding sources - a $1.8 billion, or 29%, increase in interest-bearing customer cash balances, and a decrease in average net interest margin. Customer-related daily average balances, interest rates and average net interest margin for the first nine months of 1996 and 1995 are summarized in the following table (dollars in millions): - --------------------------------------------------------------------------- Nine Months Ended September 30, 1996 1995 - --------------------------------------------------------------------------- Interest-Earning Assets (customer-related): Investments: Average balance outstanding $5,662 $4,701 Average interest rate 5.31% 6.00% Margin loans to customers: Average balance outstanding $4,371 $3,038 Average interest rate 7.58% 8.31% Average yield on interest-earning assets 6.30% 6.91% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $8,122 $6,312 Average interest rate 4.39% 5.01% Other interest-bearing sources: Average balance outstanding $ 725 $ 446 Average interest rate 4.42% 4.51% Average noninterest-bearing portion $1,186 $ 981 Average interest rate on funding sources 3.87% 4.35% Summary: Average yield on interest-earning assets 6.30% 6.91% Average interest rate on funding sources 3.87% 4.35% - ---------------------------------------------------------------------------- Average net interest margin 2.43% 2.56% ============================================================================ Principal Transactions Principal transaction revenues increased $44 million, or 30%, from prior year's first nine months to $192 million. This increase was due to higher trading volume handled by M&S and higher revenues relating to specialist posts. Mutual Fund Service Fees The change in mutual fund service fees between the nine-month periods is generally attributable to the change described in the comparison between the three-month periods. Expenses Excluding Interest Compensation and benefits expense increased $144 million, or 34%, to $568 million from the prior year's first nine months primarily due to an increase in salaries and wages resulting from a larger number of employees, and an increase in variable compensation. - 13 - Communications expense increased $37 million, or 41%, to $127 million from the prior year's first nine months primarily due to higher trading and call volumes, which contributed to higher telephone, financial news and securities quotation services expenses, and postage expense. Total trades for the first nine months of 1996 were 16 million, up 41% from the same period last year. Depreciation and amortization expense increased $26 million, or 56%, to $72 million from the prior year's first nine months primarily due to depreciation on recently acquired data processing equipment and the amortization of related software. Advertising and market development expense increased $22 million, or 66%, to $57 million from the prior year's first nine months primarily due to increased direct mail, print and media advertisements relating to campaigns covering Mutual Fund OneSource (registered trademark). Additionally, IRA product offerings, as well as new product and service offerings such as e.Schwab (trademark) and the Company's rollout of the 401(k) defined contribution plan offering to corporations also contributed to the increase. The Company's effective income tax rate for the first nine months of 1996 was 41.0% compared to 39.5% for the same period in 1995. Liquidity and Capital Resources Liquidity Schwab Liquidity needs relating to customer trading and margin borrowing activities are met primarily through cash balances in customer accounts, which totaled $9.5 billion at September 30, 1996, up 13% from the December 31, 1995 level of $8.4 billion. Earnings from Schwab's operations are the primary source of liquidity for capital expenditures and investments in new services, marketing and technology. Management believes that customer cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab in the future. To manage Schwab's regulatory capital position, CSC provides Schwab with a $250 million subordinated revolving credit facility maturing in September 1998, of which $215 million was outstanding at September 30, 1996. At quarter end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC maturing in 1998. Borrowings under these subordinated lending arrangements qualify as regulatory capital for Schwab. For use in its brokerage operations, Schwab maintains uncommitted unsecured bank credit lines totaling $515 million. Schwab used such borrowings for five days during the first nine months of 1996, with the daily amounts borrowed averaging $52 million. These lines were unused at September 30, 1996. M&S M&S' liquidity needs are generally met through earnings generated by its operations. The majority of M&S' assets are liquid, consisting primarily of marketable securities, receivables from brokers, dealers and clearing organizations, and cash and equivalents. M&S may borrow up to $35 million under a subordinated lending arrangement with CSC. At quarter end, M&S had outstanding borrowings of $4 million under this facility. These borrowings mature in December 1997. Borrowings under this arrangement qualify as regulatory capital for M&S. CSC CSC's liquidity needs are generally met through cash generated by its subsidiaries. Schwab and M&S are subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker- dealers. These regulations would prohibit Schwab and M&S from repaying subordinated - 14 - borrowings to CSC, paying cash dividends, or making any unsecured advances or loans to their parent or employees if such payment would result in net capital of less than 5% of their aggregate debit balances or less than 120% of their minimum dollar amount requirement of $1 million. At September 30, 1996, Schwab had $548 million of net capital (12% of aggregate debit balances), which was $454 million in excess of its minimum required net capital. At September 30, 1996, M&S had $11 million of net capital (391% of aggregate debit balances), which was $10 million in excess of its minimum required net capital. Management believes that funds generated by the operations of CSC's subsidiaries will continue to be the primary funding source in meeting CSC's liquidity needs and maintaining Schwab's and M&S' net capital. CSC has individual liquidity needs that arise from its issued and outstanding $288 million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from the funding of cash dividends, common stock repurchases and acquisitions. The Medium-Term Notes have maturities ranging from 1996 to 2005 and fixed interest rates ranging from 4.95% to 7.72% with interest payable semiannually. At September 30, 1996, $46 million in Senior or Senior Subordinated Medium-Term Notes, Series A, remained unissued under CSC's registration statement with respect to such securities. On November 1, 1996, the SEC declared effective CSC's registration statement covering the issuance of up to an additional $150 million in Senior or Senior Subordinated Medium-Term Notes, Series A, bringing the aggregate principal amount of such notes available to be issued to $196 million. CSC may borrow under its $250 million committed unsecured credit facility with a group of nine banks through June 1997. The funds are available for general corporate purposes. CSC pays a commitment fee on the unused balance. The terms of this facility require CSC to maintain a minimum level of stockholders' equity and Schwab and M&S to maintain minimum levels of net capital, as defined. This facility has never been used. See "Commitments and Contingencies" note in Part I - Financial Information, Item 1., Notes to Condensed Consolidated Financial Statements. Cash Flows and Capital Resources Net income plus depreciation and amortization was $246 million for the first nine months of 1996, up 40% from $176 million for the first nine months of 1995. During the first nine months of 1996, the Company invested $111 million in various capital expenditures, including $43 million for an office building to be used for the expansion of its operations and $68 million for equipment and office facilities relating to the continued enhancement of data processing and telecommunications systems and the opening of nine new branch offices. As has been the case recently, capital expenditures will vary from period to period as business conditions change. The Company issued $64 million and repaid $16 million in Medium-Term Notes during the first nine months of 1996. From October 15, 1996 through November 5, 1996, the Company repurchased and recorded as treasury stock a total of 700,000 shares of its common stock for $17 million. Currently, authorization granted by the Company's Board of Directors allows for the repurchase of an additional 200,000 shares. During the first nine months of 1996, the Company paid common stock cash dividends totaling $23 million, up from $17 million paid during the first nine months of 1995. In July 1996, the Board of Directors increased the quarterly cash dividend from $.04 per share to $.05 per share. The Company monitors both the relative composition and absolute level of its financial capital. The Company's stockholders' equity at September 30, 1996 totaled $814 million. In - 15 - addition, the Company had long-term debt (including current maturities) of $294 million that bears interest at a weighted-average rate of 6.39%. These borrowings, together with the Company's equity, provided total financial capital of $1.1 billion at September 30, 1996, up $229 million, or 26% from the December 31, 1995 level of $879 million. PART II - OTHER INFORMATION Item 1. Legal Proceedings The legal proceedings discussed in Notes to Condensed Consolidated Financial Statements, under "Commitments and Contingencies" in Part I - Financial Information, Item 1., as well as in "Principal Transactions" in Management's Discussion and Analysis in Part I, Item 2., are incorporated herein by reference. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Mr. James R. Harvey, who had been a member of the Company's Board of Directors since 1989, passed away on June 6, 1996. On October 24, 1996, Mr. Frank C. Herringer was elected to the Company's Board of Directors to fill the vacancy created by Mr. Harvey's death. Mr. Herringer will be considered for re-election by the stockholders at the 1999 Annual Meeting, along with the other directors holding three-year terms. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this quarterly report on Form 10-Q. - ---------------------------------------------------------------------------- Exhibit Number Exhibit - ---------------------------------------------------------------------------- 3.7 Third Restated Certificate of Incorporation, as amended on May 6, 1996, of the Registrant. 3.8 Second Restated Bylaws, as amended on July 17, 1996, of the Registrant. 10.159 The Charles Schwab Corporation Executive Officer Stock Option Plan (1987), as amended September 17, 1996, with form of Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan (1987)) attached (supersedes Exhibit 10.9 to Registrant's Registration Statement No. 33-16192 on Form S-1). 10.160 The Charles Schwab Corporation 1987 Stock Option Plan, as amended September 17, 1996, with form of Non-Qualified Stock Option Agreement (General Management Plan) attached (supersedes Exhibit 4.1 to Registrant's Registration Statement No. 33-21582 on Form S-8). 10.161 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended September 17, 1996 (supersedes Exhibit 10.141 to Registrant's Form 10-Q for the quarter ended September 30, 1994). 10.162 The Charles Schwab Corporation Deferred Compensation Plan, as amended September 17, 1996 (supersedes Exhibit 10.142 to Registrant's Form 10-Q for the quarter ended September 30, 1994). 11.1 Computation of Earnings per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule (electronic only). - ---------------------------------------------------------------------------- - 16 - (b) Reports on Form 8-K On November 8, 1996, the Registrant filed a Current Report on Form 8-K relating to up to $196 million aggregate principal amount of debt securities issuable by the Registrant pursuant to Registration Statement Numbers 333-12727 and 33-61943 declared effective by the SEC on November 1, 1996 and August 18, 1995, respectively. Certain exhibits relating to Medium-Term Notes, Series A, issuable pursuant to the Registration Statements are contained in the Current Report. - 17 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHARLES SCHWAB CORPORATION (Registrant) Date: November 13, 1996 /s/ Steven L. Scheid -------------------- ------------------------------- Steven L. Scheid Executive Vice President and Chief Financial Officer - 18 - EX-3 2 EXHIBIT 3.7 EXHIBIT 3.7 THIRD RESTATED CERTIFICATE OF INCORPORATION OF THE CHARLES SCHWAB CORPORATION (Originally incorporated on November 25, 1986, under the name CL Acquisition Corporation) FIRST. The name of this corporation (hereinafter called the "Corporation") is THE CHARLES SCHWAB CORPORATION. SECOND. The address of the registered office of this Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, and its registered agent at that address is THE CORPORATION TRUST COMPANY. THIRD. The purpose of this Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. (A) This Corporation is authorized to issue two classes of stock, preferred stock and common stock. The authorized number of shares of capital stock is Five Hundred Nine Million, Nine Hundred Forty Thousand (509,940,000) shares, of which the authorized number of shares of preferred stock is Nine Million, Nine Hundred Forty Thousand (9,940,000) and the authorized number of shares of common stock is Five Hundred Million (500,000,000). The stock, whether preferred stock or common stock, shall have a par value of one cent ($0.01) per share. (B) Shares of preferred stock may be issued from time to time in one or more series. The Board of Directors of this Corporation is hereby authorized to fix or alter the voting rights, powers, preferences and privileges, and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock; and to fix the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares of any series of preferred stock (but not below the number of shares thereof then outstanding). FIFTH. The Bylaws of the Corporation may be made, altered, amended, or repealed, and new Bylaws may be adopted, by the Board of Directors at any regular or special meeting by the affirmative vote of a majority of those directors present at any meeting of the directors; subject, however, to the right of the stockholders to alter, amend or repeal any Bylaws made or amended by the directors. Notwithstanding the foregoing, after the 1996 Annual Meeting of Stockholders, Sections 2.06, 2.10, 3.02, 3.05, 3.06 and 8.04 of the Corporation's Bylaws may not be amended, altered or repealed, nor may any provision inconsistent with such Sections be adopted, except by the affirmative vote of the holders of no less than 80% of the total voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. SIXTH. (A) Number, Election and Terms. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect, additional directors under specified circumstances, the number of the directors of the Board of the Corporation shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies. Commencing with the 1996 annual meeting of stockholders, the directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is reasonably possible, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1997, the second class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1998, and the third class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999, with each director to hold office until his or her successor is duly elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 1997 annual meeting, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election, with each director to hold office until his or her director shall have been duly elected and qualified. (B) Stockholder nomination of director candidates. Advance notice of stockholder nominations for the election of directors shall be given in the manner provided in the Bylaws of the Corporation. (C) Vacancies. Subject to applicable law and except as otherwise provided for or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors of the Corporation shall shorten the term of any incumbent director. (D) Removal. Subject to the rights of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of 80% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. SEVENTH. Elections of directors shall be by written ballot. EIGHTH. No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article EIGHTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH. No stockholder shall be entitled to cumulate votes (i.e., cast for any nominee for election to the Board of Directors of the Corporation a number of votes greater than the number of the stockholder's shares). TENTH. (A) In addition to any affirmative vote required by law, by this Restated Certificate of Incorporation, by a certificate filed under Section 151(g) of the General Corporation Law of the State of Delaware, or by the Bylaws, and except as otherwise expressly permitted in paragraph (B) of this Article TENTH, a Business Combination (as hereafter defined) with, for, or on behalf of, any Interested Stockholder (as hereafter defined) or any Affiliate or Associate (as hereafter defined) of such Interested Stockholder shall require the affirmative vote of at least 80% of the votes entitled to be cast by the holders of all the then outstanding Voting Stock (as hereafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage of a separate class vote may otherwise be specified, by law or by any agreement between this Corporation and any national securities exchange or otherwise. (B) The provisions of paragraph (A) of this Article TENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such vote, if any, as is required by law, or by any other provisions of this Restated Certificate of Incorporation, or by a certificate filed under Section 151(g) of the General Corporation Laws of the State of Delaware, or by the Bylaws, or by any agreement between this Corporation and any national securities exchange if (i) such Business Combination shall have been specifically approved by a majority of the Disinterested Directors (as hereafter defined) at the time or (ii) all the conditions specified in each of the following subparagraphs (1), (2), (3), (4), (5) and (6) are satisfied. (1) The aggregate amount of cash and the Fair Market Value (as hereafter defined) as of the Consummation Date (as hereafter defined) of any consideration other than cash to be received per share by holders of Voting Stock in such Business Combination, shall be at least equal to the highest amount determined under clauses (a) and (b) below: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of such Interested Stockholder for any share of Voting Stock in connection with the acquisition by the Interested Stockholder of Beneficial Ownership (as hereafter defined) of shares of Voting Stock (i) within the five-year period immediately prior to the Announcement Date (as hereafter defined) or (ii) in the transaction or series of transactions in which it became an Interested Stockholder, whichever is higher, in either case adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Voting Stock; or (b) the Fair Market Value per share of Voting Stock on the Announcement Date or the Determination Date (as hereafter defined), whichever is higher, as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Voting Stock. (2) The consideration to be received by holders of a particular class of series of outstanding Voting Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of Beneficial Ownership of shares of such class or series of Voting Stock. If the consideration so paid for share of any class or series of Voting Stock varied as to form, the form of consideration for such class or series of Voting Stock shall either be cash or the form used to acquire Beneficial Ownership of the largest number of shares of such class or series of Voting Stock acquired by the Interested Stockholder during the five-year period prior to the Announcement Date. If non-cash consideration is to be paid, the Fair Market Value of such non-cash consideration shall be determined on and as of the Consummation Date. (3) After the Determination Date and prior to the Consummation Date there shall have been (a) no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Voting Stock; (b) no reduction in the annual rate of dividends paid on the Voting Stock (except as necessary to reflect any split or subdivision of the Voting Stock), except as approved by a majority of the Disinterested Directors; (c) an increase in such annual rate of dividends (as necessary to prevent any such reduction) in the event of any reclassification (including any reverse stock split or combination of shares), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Voting Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (d) no transaction by which such Interested Stockholder has become the Beneficial Owner of any additional shares of Voting Stock except as part of the transaction that results in the Interested Stockholder becoming an Interested Stockholder and except in a transaction that, after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage Beneficial Ownership of any class or series of Voting Stock. (4) After the Determination Date, such Interest Stockholder shall not have received the benefit, directly or indirectly (except as a stockholder of this Corporation, in proportion to its stockholding), of any loans, advances, guarantees or similar financial assistance or any tax credits or tax advantages provided by this Corporation (collectively, "Financial Assistance"), whether in anticipation of or in connection with such Business Combination or otherwise. (5) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act, rules or regulations, or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent location, any statement as to the advisability or inadvisability of the Business Combination that the Disinterested Directors, or any of them, may desire to make, and, if deemed advisable by a majority of the Disinterested Directors, the proxy or information statement shall contain the opinion of an independent investment banking firm selected by a majority of the Disinterested Directors as to the fairness or lack of fairness of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Voting Stock other than the Interested Stockholder and its Affiliates or Associates, such investment banking firm to be paid a reasonable fee for its services by this Corporation. (6) Such Interested Stockholder shall not have made any major change in this Corporation's business or equity capital structure without the approval of a majority of the Disinterested Directors. (C) The following definitions shall apply with respect to this Article TENTH: (1) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to those terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, and as in effect on the date that this provision of the Restated Certificate of Incorporation of this Corporation is approved by the stockholders (the term "registrant" in said Rule 12b-2 meaning in this case the Corporation). (2) The term "Announcement Date" with respect to any Business Combination means the date of the first public announcement of the proposal of such Business Combination. (3) A person shall be a "Beneficial Owner" of, or have "Beneficial Ownership" of, or "Beneficially Own," any Voting Stock over which such person or any of its Affiliates or Associates, directly or indirectly, through any contract, arrangement, understanding or relationship, has or shares or, upon the exercise of any conversion right, exchange right, warrant, option or similar interest (whether or not then exercisable) would have or share, either (a) voting power (including the power to vote or to direct the voting) of such security or (b) investment power (including the power to dispose or direct the disposition) of such security. For the purposes of determining whether a person is an Interested Stockholder, the number of shares of Voting Stock deemed to be outstanding shall include any shares Beneficially Owned by such person even though not actually outstanding, but shall not include any other shares of Voting Stock which are not outstanding but which may be issuable to other persons pursuant to any agreement, arrangement or understanding, or upon exercise of any conversion right, exchange right, warrant, option or similar interest. (4) The term "Business Combination" shall mean: (a) any merger or consolidation of this Corporation or any Subsidiary (as hereafter defined) with (i) any Interested Stockholder (as hereafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition on or security agreement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint venture participation or other arrangement (in one transaction or a series of related transactions) with or for the benefit of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, involving any assets, securities, or commitments of this Corporation, any Subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder which, together with all other such arrangements (including all contemplated future events) have an aggregate Fair Market Value as hereafter defined) and/or involve aggregate commitments of $5,000,000 or more; or (c) the issuance or transfer by this Corporation or any Subsidiary (in one transaction or a series of related transactions) to an Interested Stockholder or Associate or Affiliate of an Interested Stockholder of any securities of this Corporation or any Subsidiary in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value as of the Announcement Date of $5,000,000 or more, other than the issuance of securities upon the conversion or exchange of securities of this Corporation or in exchange for securities of any Subsidiary which were acquired by an Interested Stockholder from this Corporation or a Subsidiary in a Business Combination which was approved by a vote of the shareholders pursuant to this Article TENTH; or (d) the adoption of any plan or proposal for the liquidation or dissolution of this Corporation; or (e) any reclassification of any securities of this Corporation (including any reverse stock split), any recapitalization of the Voting Stock of this Corporation, any merger or consolidation of this Corporation with or into any of its Subsidiaries, or any other transaction (whether or not with or otherwise involving any Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Voting Stock or series thereof of the Corporation or of any Subsidiary Beneficially Owned by any Interested Stockholder or Associate or Affiliate of any Interested Stockholder or as a result of which the stockholders of the Corporation would cease to be stockholders of a corporation having, as part of its certificate of incorporation, provisions to the same effect as this Article TENTH and the provisions of Article ELEVENTH of this Restated Certificate of Incorporation relating to the provisions of this Article TENTH; or (f) any agreement, contract, or other arrangement providing for one or more of the actions specified in the foregoing paragraphs (a) through (e), or any series of transactions which, if taken together, would constitute one or more of the actions specified in the foregoing paragraphs (a) through (e). (5) The term "Consummation Date" means the date of the consummation of a Business Combination. (6) The term "Determination Date" in respect to an Interested Stockholder means the date on which such Interested Stockholder first became an Interested Stockholder. (7) The term "Disinterested Director" with respect to a Business Combination means any member of the Board of Directors of this Corporation who (a) is not an Interested Stockholder involved in such Business Combination; (b) is not an Affiliate or Associate of such Interested Stockholder; (c) is not a party to any agreement or arrangement with such Interested Stockholder to act in concert with such Interested Stockholder to direct the management or policies of this Corporation; and (d) either (i) was a member of the Board of Directors prior to the time that such Interested Stockholder became an Interested Stockholder, or (ii) is a successor of a Disinterested Director and was nominated to succeed a Disinterested Director by a majority of the Disinterested Directors at the time of his nomination; provided, however, that any member of the Board of Directors may be a Disinterested Director with respect to a Business Combination involving an Interested Stockholder who was an Interested Stockholder on the date that the second Restated Certificate of Incorporation of this Corporation filed by the Secretary of State of the State of Delaware was so filed, notwithstanding the failure of such member to satisfy the conditions set forth in clause (d) above. Any reference to "Distinterested Directors" shall refer to a single Disinterested Director if there be but one. Any matter referred to as requiring approval of, or having been approved by, a majority of the Disinterested Directors shall mean the matter requires the approval of, or has been approved by, the Board of Directors of this Corporation without giving effect to the vote of any Director who is not a Disinterested Director and with the affirmative vote of a majority of the Disinterested Directors." (8) The term "Fair Market Value" as of any particular date means: (a) in the case of cash, the amount of such cash; (b) in the case of stock (including Voting Stock), the highest closing price per share of such stock during the thirty-day period immediately preceding the date in question on the largest United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed or, if such stock is not listed on any such exchange, the highest last sales price as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") during the thirty-day period immediately preceding the date in question if the stock is a National Market System security or, if such stock is not a National Market System security, the highest reported closing bid quotation for a share of such stock during the thirty-day period preceding the date in question on NASDAQ or any successor quotation reporting system or, if quotations are not available in such system, as furnished by the National Quotation Bureau Incorporated or any similar organization furnishing quotations, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; and (c) in the case of stock of any class or series which is not traded on any securities exchange or in the over-the-counter market, or in the case of property other than cash or stock, or in the case of Financial Assistance, the fair market value of such stock, property or Financial Assistance, as the case may be, on the date in question as determined by a majority of the Disinterested Directors in good faith. (9) The term "Interested Stockholder" shall mean any person, other than this Corporation, any Subsidiary or any employee benefit plan of this Corporation or any Subsidiary, who or which: (a) is, or has announced or publicly disclosed a plan or intention to become, the Beneficial Owner, directly or indirectly, of shares of Voting Stock representing 15% or more of the total votes which all of the then- outstanding shares of Voting Stock are entitled to cast in the election of directors; or (b) is an Affiliate or Associate of any person described in Subparagraph 9(a) at any time during the five-year period immediately preceding the date in question; or (c) acts with any other person as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of this Corporation, and such group is the Beneficial Owner, directly or indirectly, of shares of Voting Stock representing 15% or more of the total votes which all of the then-outstanding share of Voting Stock are entitled to cast in the election of directors. Any reference to a particular Interested Stockholder involved in a Business Combination shall also refer to any Affiliate or Associate thereof, any predecessor thereto and any other person acting as a member of a partnership, limited partnership, syndicate group with such particular Interested Stockholder within the meaning of the foregoing clause (c) of this subparagraph (9). (10) A "person" shall mean any individual, firm, company, corporation, (which shall include a business trust), partnership, joint venture, trust or estate, association or other entity. (11) The term "Subsidiary" in respect of this Corporation means any corporation or partnership of which a majority of any class of its equity securities is owned, directly or indirectly, by this Corporation. (12) The term "Voting Stock" shall mean all shares of capital stock that entitle the holder to vote for the election of directors, including, without limitation, this Corporation's common stock. (D) A majority of the Disinterested Directors shall have the power and duty to determine, on the basis of information known to them after reasonably inquiry, all facts necessary to determine compliance with this Article TENTH, including, without limitation (1) whether a person is an Interested Stockholder, (2) the number of shares of Voting Stock Beneficially Owned by any person, (3) whether a person is an Affiliate or Associate of another person, (4) whether the requirements of paragraph (B) of this Article TENTH have been met with respect to any Business Combination, (5) whether the proposed transaction is with, or proposed by, or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder, and (6) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or more. The good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all purposes of this Article TENTH. (E) Nothing contained in this Article TENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. (F) The fact that any Business Combination complies with paragraph (B) of this Article TENTH shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of this Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. (G) For purposes of this Article TENTH, a Business Combination or any proposal to amend, repeal or adopt any provision of this Restated Certificate of Incorporation inconsistent with this Article TENTH (collectively, "Proposed Action") is presumed to have been proposed by, or on behalf of, an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder or a person who thereafter would become such if (1) after the Interested Stockholder became such, the Proposed Action is proposed following the election of any director of this Corporation who, with respect to such Interested Stockholder, would not qualify to serve as a Disinterested Director or (2) such Interested Stockholder, Affiliate, Associate or person votes for or consents to the adoption of any such Proposed Action, unless as to such Interested Stockholder, Affiliate, Associate or person, a majority of the Disinterested Directors makes a good faith determination that such Proposed Action is not proposed by or on behalf of such Interested Stockholder, Affiliate, Associate or person, based on information known to them after reasonably inquiry. ELEVENTH. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation with respect to such class or series of stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such stockholders. TWELFTH. (A) This Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained herein, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law, and all rights, preferences, and privileges of whatsoever nature conferred upon shareholders, directors, or any other person whomsoever by or pursuant to the Restated Certificate of Incorporation in its present form or as hereafter are granted, subject to the rights reserved in this Article TWELFTH. (B) In addition to any requirements of law and any other provisions hereof (and notwithstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of 80% or more of the combined voting power of the then-outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article TWELFTH or Articles FIFTH, SIXTH, NINTH, TENTH and ELEVENTH hereof. This Third Restated Certificate of Incorporation of The Charles Schwab Corporation amends and restates the prior Certificate of Incorporation of The Charles Schwab Corporation pursuant to Sections 242 and 245 of the Delaware Corporation Law. /s/ Cynthia K. Holbrook Cynthia K. Holbrook Assistant Corporate Secretary EX-3 3 EXHIBIT 3.8 EXHIBIT 3.8 SECOND RESTATED BYLAWS OF THE CHARLES SCHWAB CORPORATION ARTICLE I OFFICES Section 1.01. Registered Office. The registered office of The Charles Schwab Corporation (the "Corporation") in the State of Delaware shall be at 1209 Orange Street, Wilmington, Delaware, and the name of the registered agent at that address shall be the Corporation Trust Company. Section 1.02. Principal Office. The principal office for the transaction of the business of the Corporation shall be at 101 Montgomery Street, San Francisco, California. The Board of Directors (hereafter called the "Board") is hereby granted full power and authority to change said principal office from one location to another. Section 1.03. Other Offices. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.01. Annual Meetings. Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings shall be held each year on a date and at a time designated by the Board. Section 2.02. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called by the Chairman of the Board, the Board or a committee of the Board which has been duly designated by the Board and whose powers and authority, as provided in a resolution of the Board or in these Bylaws, include the power to call such meetings. Unless otherwise prescribed by statute, the Certificate of Incorporation or these Bylaws, special meetings may not be called by any other person or persons. No business may be transacted at any special meeting of stockholders other than such business as may be designated in the notice calling such meeting. Section 2.03. Place of Meeting. The Board of Directors, the Chairman of the Board, or a committee of the Board, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the stockholders called by the Board of Directors, the Chairman of the Board, or a committee of the Board. If no designation is so made, the place of meeting shall be the principal office of the Corporation. Section 2.04. Notice of Meeting. Written or printed notice, stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 8.02 of these Bylaws. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be canceled, by resolution of the Board upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 2.05. Quorum and Adjournment. Except in the case of any meeting for the election of directors summarily ordered as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. In the absence of a forum at any meeting or any adjournment thereof, a majority in voting interest of the shareholders present in person or by proxy and entitled to vote thereat or, in the absence therefrom of all stockholders, any officer entitled to preside at, or to act as secretary of such meeting may adjourn such meeting from time to time. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. No business may be transacted at a meeting in the absence of a quorum other than the adjournment of such meeting, except that if a quorum is present at the commencement of a meeting, business may be transacted until the meeting is adjourned even though the withdrawal of stockholders results in less than a quorum. Section 2.06. Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (i) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation's notice of meeting, (B) by or at the direction of the Board or (C) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stock holder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board or (ii) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (a)(ii) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public an nouncement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded. (i) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (ii) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 2.07. Voting. (a) Each stockholder shall, at each meeting of the stockholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by him and registered in his name on the books of the Corporation: (i) on the date fixed pursuant to Section 6.05 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or (ii) if no such record date shall have been so fixed, then (a) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (b) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Nothing in this section shall be construed as limiting the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledging shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Law of the State of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority of the shares present in person or by proxy and entitled to vote thereat and thereon, a quorum being present. The vote at any meeting of the stockholders on any questions shall be by ballot and each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and it shall state the number of shares voted. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. Section 2.08. List of Stockholders. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the duration thereof, and may be inspected by any stockholder who is present. Section 2.09. Inspectors of Election. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to act at the meeting. If no inspector or alternative is able to act at a meeting of stockholders, the chairman of such meeting shall appoint one or more inspectors to act at the meeting. Each inspector so appointed shall first sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at a meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. Reports of the inspectors shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The inspectors may appoint or retain other persons or entities to assist them in the performance of their duties as inspectors. The inspectors need not be stockholders of the Corporation, and any officer of the Corporation may be an inspector on any question other than a vote for or against a proposal in which he shall have a material interest. Section 2.10. No Stockholder Action by Written Consent. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH of the Certificate of Incorporation relating to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation with respect to such class or series of stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such stockholders. ARTICLE III BOARD OF DIRECTORS Section 3.01. General Powers. The property, business and affairs of the Corporation shall be managed by or under the direction of the Board. Section 3.02. Number, Election and Terms. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH of the Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of the directors of the Board of the Corporation shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies. Commencing with the 1996 annual meeting of stockholders, the directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is reasonably possible, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1997, the second class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1998, and the third class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1999, with each director to hold office to hold office until his or her successor is duty elected and qualified. At each annual meeting of the stockholders of the Corporation, commencing with the 1997 annual meeting, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election, with each director to hold office until his or her director shall have been duly elected and qualified. Section 3.03. Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, except as otherwise fixed by or pursuant to the provisions of Article FOURTH of the Certificate of Incorporation relating to the rights to the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Section 3.04. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time be not specified, it shall take effect immediately upon its receipt; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.05. Removal. Subject to the rights of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of 80% of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. Section 3.06. Vacancies. Subject to applicable law and except as otherwise provided for or fixed by or pursuant to the provisions of Article FOURTH of the Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors of the Corporation shall shorten the term of any incumbent director. Section 3.07. Place of Meeting, Etc. The Board may hold any of its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. Section 3.08. First Meeting. The Board shall meet as soon as practicable after each annual election of directors and notice of such first meeting shall not be required. Section 3.09. Regular Meetings. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day not a legal holiday. Except as provided by law, notice of regular meetings need not be given. Section 3.10. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board of Directors or the President. Notice of any special meeting of directors shall be given to each director at his business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five (5) days before such meeting. If by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least twenty-four (24) hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twelve (12) hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve (12) hours prior to the time set for the meeting. Such notice may be waived by any director and any meeting shall be a legal meeting without notice having been given if all the directors shall be present thereat or if those not present shall, either before or after the meeting, sign a written waiver of notice of, or a consent to, such meeting or shall after the meeting sign the approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or be made a part of the minutes of the meeting. Section 3.11. Quorum and Manner of Acting. Except as otherwise provided in the Certificate of Incorporation or these Bylaws or by law, the presence of a majority of the total number of directors then in office shall be required to constitute a quorum for the transaction of business at any meeting of the Board. Except as otherwise provided in the Certificate of Incorporation or these Bylaws or by law, all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such. Section 3.12. Action by Consent. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Section 3.13. Compensation. The directors shall receive only such compensation for their services as directors as may be allowed by resolution of the Board. The Board may also provide that the Corporation shall reimburse each such director for any expense incurred by him on account of his attendance at any meetings of the Board or Committees of the Board. Neither the payment of such compensation nor the reimbursement of such expenses shall be construed to preclude any director from serving the Corporation or its subsidiaries in any other capacity and receiving compensation therefor. Section 3.14. Executive Committee. There may be an Executive Committee of two or more directors appointed by the Board, who may meet at stated times, or in notice to all by any of their own number, during the intervals between the meetings of the Board; they shall advise and aid the officers of the Corporation in all matters concerning its interest and the management of its business, and generally perform such duties and exercise such powers as may be directed or delegated by the Board from time to time. The Board of Directors may also designate, if it desires, other directors as alternate members who may replace any absent or disqualified member of the Executive Committee at any meeting thereof. To the full extent permitted by law, the Board may delegate to such committee authority to exercise all the powers of the Board while the Board is not in session. Vacancies in the membership of the committee shall be filled by the Board at a regular meeting or at a special meeting for that purpose. In the absence or disqualification of any member of the Executive Committee and any alternate member in his or her place, the member or members of the Executive Committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may, by unanimous vote, appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The Executive Committee shall keep written minutes of its meeting and report the same to the Board when required. The provisions of Sections 3.09, 3.10, 3.11 and 3.12 of these Bylaws shall apply, mutatis mutandis, to any Executive Committee of the Board. Section 3.15. Other Committees. The Board may, by resolution passed by a majority of the whole Board, designate one or more other committees, each such committee to consist of one or more of the directors of the Corporation. The Board of Directors may also designate, if it desires, other directors as alternate members who may replace any absent or disqualified member of any such committee at any meeting thereof. To the full extent permitted by law, any such committee shall have and may exercise such powers and authority as the Board may designate in such resolution. Vacancies in the membership of a committee shall be filled by the Board at a regular meeting or a special meeting for that purpose. Any such committee shall keep written minutes of its meeting and report the same to the Board when required. In the absence or disqualification of any member of any such committee and any alternate member or members of any such committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may, by unanimous vote, appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. The provisions of Section 3.09, 3.10, 3.11 and 3.12 of these Bylaws shall apply, mutatis mutandis, to any such committee of the Board. ARTICLE IV OFFICERS Section 4.01. Number. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Treasurer. The Chief Executive Officer of the corporation shall be such officer as the Board shall from time to time designate. The Board may also elect one or more Assistant Secretaries and Assistant Treasurers. A person may hold more than one office providing the duties thereof can be consistently performed by the same person. Section 4.02. Other Officers. The Board may appoint such other officers as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4.03. Election. Each of the officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 4.02 or Section 4.05 of this Article, shall be chosen annually by the Board and shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 4.04. Salaries. The salaries of all executive officers of the Corporation shall be fixed by the Board or by such committee of the Board as may be designated from time to time by a resolution adopted by a majority of the Board. Section 4.05. Removal; Vacancies. Subject to the express provisions of a contract authorized by the Board, any officer may be removed, either with or without cause, at any time by the Board or by any officer upon whom such power of removal may be conferred by the Board. Any vacancy occurring in any office of the Corporation shall be filled by the Board. Section 4.06. The Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and directors and shall have such other powers and duties as may be prescribed by the Board or by applicable law. He shall be an ex-officio member of standing committees, if so provided in the resolutions of the Board appointing the members of such committees. Section 4.07. The President. The President shall be the managing officer of the Corporation. Subject to the control of the Board, the President shall have general supervision, control and management of the affairs and business of the Corporation, and general charge and supervision of all offices, agents and employees of the Corporation; shall see that all orders and resolutions of the Board are carried into effect; shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and Board; and in general shall exercise all powers and perform all duties incident to President and managing officer of the Corporation and such other powers and duties as may from time to time be assigned to him by the Board or as may be prescribed in these Bylaws. The President may execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Corporation. The President shall be an ex-officio member of standing committees, if so provided in the resolutions of the Board appointing the members of such committees. Section 4.08. The Vice Presidents. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties and have such other powers as the Board may from time to time prescribe. Section 4.09. The Secretary and Assistant Secretary. The Secretary shall attend all meetings of the Board and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board in a book to be kept for that purpose and shall perform like duties for the standing and special committees of the Board when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board, and shall perform such other duties as may be prescribed by the Board or President, under whose supervision he shall act. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his inability or his refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe. Section 4.10. The Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. He shall disburse the funds of the Corporation as may be ordered by the Board, making proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board , he shall give the Corporation a bond (which shall be renewed every six (6) years) in such sum and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 4.11. The Assistant Treasurer. The Assistant Treasurer, or if there be more than one, the assistant treasurers in the order determined by the Board (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. Section 5.01. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness payable by the Corporation and all contracts or agreements shall be signed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such person or persons shall give such bond, if any, as the Board may require. Section 5.02. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the President, any Vice President or the Treasurer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. Section 5.03. General and Special Bank Accounts. The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VI SHARES AND THEIR TRANSFER Section 6.01. Certificates for Stock. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, to be in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by him. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman, Vice Chairman or President or a Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any of or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 6.04. Section 6.02. Transfers of Stock. Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 6.03. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. Section 6.04. Lost, Stolen, Destroyed, and Mutilated Certificates. In any case of loss, theft, destruction or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do. Section 6.05. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action except for consenting to corporate action in writing without a meeting, the Board of Directors may fix a record date, which shall not precede the date the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as herein before described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or any other lawful action except for consenting to corporate action in writing without a meeting, the record date shall be the close of business on the day on which the Board of Directors adopts a resolution relating thereto. For purposes of determining the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted, as of which shall be determined the stockholders of record entitled to consent to corporate action in writing without a meeting. If no record date has been fixed by the Board of Directors and no prior action by the Board of Directors is required by the Delaware General Corporation Law, the record date shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in the manner prescribed in Section 2.09 hereof. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware General Corporation Law with respect to the proposed action, the record date for determining stockholders entitled to consent to corporate action writing shall be the close of business on the day in which the Board of Directors adopts the resolutions taking such prior action. ARTICLE VII INDEMNIFICATION Section 7.01. Indemnification of Officers, Directors, Employees and Agents; Insurance. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitees in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that except as provided in paragraph (c) hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized or is subsequently ratified by the Board of Directors of the Corporation. (b) Right to Advancement of Expenses. The right to indemnification conferred in paragraph (a) of this Section shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any proceeding for which such right to indemnification is applicable in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. (c) To obtain indemnification under this Bylaw, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this paragraph (c), a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by Independent Counsel, (i) by the Board by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (ii) if a quorum of the Board consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the claimant, or (iii) if a quorum of Disinterested Directors so directs, by the stockholders of the Corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board unless there shall have occurred within two years prior to the date of the commencement of the action, suit or proceeding for which indemnification is claimed a "Change of Control" as defined in the Senior Executive Severance Policy, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board. If is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. (d) Right of Indemnitee to Bring Suit. The rights to indemnification and to the advancement of expenses conferred in paragraphs (a) and (b) of this Section shall be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this Article VII is in effect. Any repeal or modification of this Article VII or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of such director or officer or the obligations of the Corporation hereunder. If a claim under paragraph (a) or (b) of this Section is not paid in full by the Corporation within sixty (60) days after a written claim pursuant to paragraph (c) of the Bylaw has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Section or otherwise shall be on the Corporation. (e) Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. (f) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law, provided that such insurance is available on acceptable terms, which determination shall be made by the Board of Directors or by a committee thereof. (g) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent and in accordance with the terms authorized from time to time by the board of directors, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (h) For purposes of this Section, references to "the Corporation" shall include, in addition to the Corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Section with respect to the Corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this Section, references to "serving at the request of the Corporation" shall include any service as director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Section. (j) Notwithstanding anything else in this Article VII, in the event that the express provisions of the Delaware General Corporation Law relating to indemnification of, or advancement of expenses by the Corporation to, persons eligible for indemnification or advancement of expenses under this Article VII are amended to permit broader indemnification or advancement of expenses, then the Corporation will provide such indemnification and advancement of expenses to the maximum extent permitted by the Delaware General Corporation Law. (k) If this Article VII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each indemnitee of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article VII that shall not have been invalidated and to the full extent permitted by applicable law. (l) Notwithstanding anything else in this Article VII, at any and all times at which the Corporation is subject to the provisions of the California Corporations Code by virtue of the operation of Section 2115 thereof or otherwise, the indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII shall be in all respects limited by the provisions of the California Corporations Code made applicable by such Section 2115 (or such other provision of California law). (m) If a determination shall have been made pursuant to paragraph (c) of this Bylaw that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to paragraph (d) of this Bylaw. (n) The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (d) of this Bylaw that the procedures and presumptions are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this Bylaw. (o) For purposes of this Bylaw: (i) "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. (ii) "Independent Counsel" means a law firm, a member of a law firm, or and independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this Bylaw. ARTICLE VIII MISCELLANEOUS Section 8.01. Seal. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Delaware and the year of incorporation. Section 8.02. Waiver of Notices. Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice. Section 8.03. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board. Section 8.04. Amendments. These Bylaws may be altered, amended or repealed at any meeting of the Board or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board, in a notice given not less than two days prior to the meeting; provided, however, that, in the case of amendments by stockholders, notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law, the Certificate of Incorporation of these Bylaws, the affirmative vote of the holders of at least 80% of the total voting power of all the then outstanding shares of Voting Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this Section 8.04 or any provision of Sections 2.06, 2.10, 3.02, 3.05 and 3.06 of these Bylaws. Section 8.05. Voting Stock. Any person so authorized by the Board, and in the absence of such authorization, the Chairman of the Board, the President or any Vice President, shall have full power and authority on behalf of the Corporation to attend and to act and vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock and at any such meeting shall possess and may exercise any and all rights and powers which are incident to the ownership of such stock and which as the owner thereof the Corporation might have possessed and exercised if present. The Board by resolution from time to time may confer like powers upon any other person or persons. EX-10 4 EXHIBIT 10.159 EXHIBIT 10.159 THE CHARLES SCHWAB CORPORATION EXECUTIVE OFFICER STOCK OPTION PLAN (1987) 1. Purpose. The purpose of the 1987 Stock Option Plan (the "Option Plan") is to enable The Charles Schwab Corporation (the "Company") and its subsidiaries to attract and retain directors, officers, and other key employees and to provide such persons with additional incentive to advance the interests of the Company. 2. Administration. (a) This Option Plan shall be administered by the Board of Directors (the "Board"), or by a committee of Directors (the "Committee") selected by the Board, provided that the Committee may not include any Director who is an employee of the Company. (b) The Board or the Committee shall have the power, subject to the express provisions of this Option Plan: (1) To determine the recipients of options under this Options Plan, the time of grant of the options, and the number of shares covered by the grant. (2) To prescribe the terms and provisions of each option granted (which need not be identical). (3) To construe and interpret this Option Plan and options, to establish, amend, and revoke rules and regulations for this Option Plan's administration, and to make all other determinations necessary or advisable for the administration of this Option Plan. 3. Shares Subject to this Option Plan. Subject to the provisions of Paragraph 8 (relating to the adjustment upon changes in stock), a total of up to 1,284,000 shares of the Common Stock (the "Shares") of the Company may be issued pursuant to options granted under this Option Plan. The Shares may be unissued Shares or reacquired Shares. If any options granted under this Option Plan shall for any reason terminate or expire without having been exercised in full, the Shares not purchased under such options shall be available again for the purposes of this Option Plan. 4. Eligibility. Options under this Option Plan may be granted only to directors, officers, and other employees of the Company and/or of its subsidiaries who qualify as "accredited investors" under Regulation D as promulgated by the Securities and Exchange Commission ("Regulation D"). Persons to whom options to purchase Shares are granted are hereinafter referred to as "Optionee(s)". Subject to the provisions of Paragraph 3 of this Option Plan, there is no limitation on the number of options that may be granted to an Optionee. 5. Terms of Option Agreements. Options granted pursuant to this Option Plan shall be evidenced by agreements specifying the number of Shares covered thereby, in such form as the Board or Committee shall from time to time establish, which agreements may incorporate all or any of the terms hereof by reference and shall comply with and be subject to the following terms and conditions: (1) Options under this Option Plan will be exercisable, subject to the other provisions of this Option Plan, only at such times as the Company has satisfied itself that the Optionee is in possession of information concerning the Company in full satisfaction of Rule 10b-5 of the Securities and Exchange Commission and such exercise is in compliance with all applicable federal and state securities laws; provided that the Company may place such restriction on exercise, resale or otherwise as it deems appropriate in order to satisfy applicable securities laws. In no event shall an option be exercisable after the expiration of eight years from the date it is granted. (2) The exercise price shall not be less than the fair market value (computed as provided in Paragraph 6(g)) of the Shares of the Company on the date of granting of the option. (3) To the extent that options are exercisable hereunder, options may be exercised by written notice to the Company, stating the number of Shares being purchased and accompanied by the payment in full of the option price for such Shares. Such payment shall be made in cash or, subject to the Company's discretion, in fully paid shares of the outstanding common stock of the Company or a combination of cash and such common stock. If shares of common stock are used in part or full payment for the Shares to be acquired upon exercise of the option, such shares shall be valued for the purpose of such exchange by the Board of Directors of the Company as of the date of exercise of the option. Any certificates for shares of outstanding common stock used to pay the option price shall be accompanied by stock powers duly endorsed in blank by the registered holder of the certificate (with the signature thereon guaranteed). In the event the certificates tendered by the optionee in such payment cover more Shares than are required for such payment, the certificates shall also be accompanied by instructions from the optionee to the Company's transfer agent with regard to disposition of the balance of the Shares covered thereby. (4) The Company at all times shall keep available the number of Shares required to satisfy options granted under this Option Plan. (5) The Company may require any person to whom an option is granted, his or her legal representative, heir, legatee, or distributees, as a condition of exercising any option granted hereunder, to give written assurance satisfactory to the Company to the effect that such person is acquiring the Shares subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and that such person is an "accredited investor" within the meaning of Regulation D. The Company reserves the right to place a legend on any Share certificate issued pursuant to this Option Plan to ensure compliance with this paragraph. (6) Neither a person to whom an option is granted, nor such person's legal representative, heir, legatee, or distributees, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any Shares subject to such option unless and until such person has exercised his or her option pursuant to the terms thereof. (7) Options shall be transferable only by will or by the laws of descent and distribution, and during the lifetime of the person to whom they are granted such person alone may exercise them. (8) In no event may an option be exercised by anyone after the expiration of the term of the option established pursuant to Subparagraph 5(l) hereof. 6. Restriction as to the Shares. (a) Share Certificates; Escrow. Share certificates issued for Shares purchased upon exercise of options granted pursuant to this Option Plan will bear all legends required by law and necessary to effectuate this Option Plan's provisions. For purposes of facilitating the enforcement of the provisions of this Option Plan, the Optionee, at the Company's option, will deliver the certificate(s) for his or her Shares with a stock power executed by him or her and by his or her spouse (if required for transfer), in blank, to the Secretary of the Company or his or her designee, to hold said certificate(s) and stock power(s) in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms of this Option Plan. The certificates may be held in escrow so long as the Shares whose ownership they evidence are subject to any right of repurchase under this Option Plan. Each Optionee, by exercising an option, thereby acknowledges that the Secretary of the Company (or his or designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to the grant of an Optionee under this Option Plan, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow holder will not be liable to any party to this Option Plan (or to any other party) for any actions or omissions unless the escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine. (b) Vested and Unvested Shares. As of the date of the grant of any option granted under this Option Plan, all Shares underlying the option will be deemed "Unvested." Except as otherwise provided in the stock option agreement executed by the Optionee, Shares purchased upon the exercise of any option will be or become "Vested" according to the following schedule: at the end of each six (6) month period after the date of grant of any option, one tenth (1/10) of the Shares underlying such option will be deemed "Vested". Upon the termination of Optionee's employment (in the case of employees) or service as a director (in the case of directors) with or for the Company (including any subsidiary of the Company) for any reason whatsoever (whether by reason of death, disability, voluntary resignation, involuntary termination, or any other reason), all Unvested Shares will remain Unvested Shares and no further Shares will become Vested. Notwithstanding the foregoing, and irrespective of any provision in a Stock Option Agreement to the contrary, upon an Optionee's Retirement, all outstanding Options that had been granted more than two years before the date of the Optionee's Retirement shall become immediately Vested. For purposes of the preceding sentence, "Retirement" shall mean any termination of employment of an Optionee for any reason other than death at any time after the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any such Stock Option Agreement. (c) Restrictions on Transfer. (1) Definitions. As used in this Option Plan, the term "Transfer" will include, but not be limited to, a voluntary or involuntary sale, assignment, transfer, pledge hypothecation, encumbrance, disposal, loan, gift, attachment or levy of Shares. A Transfer will be considered "Involuntary" for purposes of this Option Plan if it occurs pursuant to any assignment of Shares for the benefit of creditors or any Transfer by operation of law, including (but not limited to) any Transfer by will or under the laws of intestate succession; any execution of judgment against the Shares or the acquisition of record or beneficial ownership of Shares by a lender or creditor; any Transfer pursuant to any decree of divorce, dissolution or separate maintenance, any property settlement, any separation agreement or any other agreement under which a part or all of any Shares are Transferred or awarded to the spouse of Optionee or are required to be sold; or any Transfer resulting from the filing by Optionee of a petition for relief, or the filing of any involuntary petition against Optionee, under the bankruptcy laws of the United State or of any other nation. (2) General Prohibition on Transfer. Except as expressly provided in this Option Plan, or as expressly provided otherwise in the stock option agreement executed by any Optionee, Shares may not be Transferred in any manner, Voluntarily or Involuntarily. (3) Required Undertaking. Any Transfer that would otherwise be permitted under the terms of this Option Plan is prohibited unless the transferee executes such documents as the Company may reasonably require to ensure that the Company's rights under this Option Plan are adequately protected with respect to the Shares Transferred. Such agreements may include (but are not limited to) the transferee's agreement to be bound by all of the terms of this Option Plan as if he or she were the original Optionee, except that the Vesting of Shares under Paragraph 6(b) hereof and the Company's right of repurchase upon termination under paragraph 6(d) hereof will continue to be determined with reference to the employment (or other service) of the original Optionee. (4) Permissible Transfer of Shares. Subject to any limitation on Transfer imposed by any applicable state or federal securities laws, and subject to the requirements of paragraph 6 (c) (3) hereof: (i) Shares may be Transferred by will or by the laws of intestate succession; (ii) Shares may be Transferred to Optionee's ancestors, descendants, or spouse, or to a trust, partnership, custodianship or other fiduciary account for his, her, or their benefit; and (iii) Vested Shares may be Transferred. All other Transfers of Shares are expressly prohibited. (5) Effect of Prohibited Transfer. Any prohibited Transfer, whether Voluntary or Involuntary, is void and of no effect. Should such a Transfer purport to occur, the Company may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertaking required under paragraph 6(c)(3), or exercise any other legal remedy. (d) Company's Right To Purchase Unvested Shares Upon Termination. (1) Definitions. For purposes of this section, neither a transfer of Optionee from the Company to one of its subsidiaries or vice versa, or from one of its subsidiaries to another, or to a successor to the business of the Company or that subsidiary, or a leave of absence duly authorized by the Company, will be deemed a termination of employment or service. If Optionee is a director of the Company but not an employee when Shares are purchased upon exercise of an option granted under this Option Plan, then for definitional purposes of this Option Plan only, Optionee will be deemed to be employed by the Company so long as he or she is a director or employee of the Company. (2) Scope of Right. Should Optionee cease to be employed by the Company and its subsidiaries for any reason whatsoever (whether due to death, voluntary resignation, involuntary termination, disability or any other reason), the Company will have an assignable right (but not an obligation) to repurchase any Unvested Shares owned by Optionee at the time of termination for a price per share equal to Optionee's original cost per share, subject to appropriate adjustment pursuant to paragraph 8. If the Company assigns its right under this subparagraph, the assignee, upon exercise of its right to purchase the Unvested Shares, will pay the Company cash in the amount equal to the difference between the fair market value per share at the time of exercise and the Optionee's original cost per share, subject to appropriate adjustment pursuant to paragraph 8. The fair market value at the time of exercise will be determined by the Board of Directors. (3) Mechanics and Notice. The Company's right to repurchase may be exercised by written notice to Optionee or his or her personal representative at any time not more than sixty (60) days after the Optionee's employment with or service to the Company and its subsidiaries terminates. The Shares will be repurchased at the Company's principal executive offices on the sixtieth day (or, if that day is not a regular business day for the Company, on the Company's first regular business day thereafter) following the termination of employment or service. The repurchase price will be paid in cash at that time. (e) Additional Restriction on Transfer. By accepting options and/or Shares under this Option Plan, Optionee represents, warrants and agrees as follows: (1) Accredited Investors. Optionee is an "accredited investor" within the meaning of Regulation D by reason of Optionee's income, net worth, service as a director to the Company and/or service as an "executive officer" (as defined in Regulation D) to the Company. (2) Securities Act of 1933. Optionee further understands that the options and Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), and that the options and Shares, when and if obtained are not freely tradable and must be held indefinitely unless registered under the Act or an exemption from such registration is available. Optionee understands that the Company is under no obligation to register the options or Shares except as expressly set forth herein. Optionee further understands that although an exemption from registration may be available pursuant to Rule 144 promulgated under the Act by the Securities and Exchange Commission, satisfaction of a number of conditions is required to make a sale under that exemption, and that, even if Rule 144 is applicable in whole or in part, in no event may Optionee sell the Shares to the public under such Rule prior to the expiration of a two-year period after purchase, that any such sales must be limited in amount and that sales can only be made in full compliance with the provisions of the Rule. Optionee understands that Rule 144 contains specific requirements that there be available to the public certain information with respect to the Company's business and financial affairs, and that the Company does not presently comply with the information requirements of the Rule. Optionee acknowledges that there is no assurance that the requirements will be met at the time Optionee may want to make sales pursuant to the Rule. Optionee represents that Optionee is purchasing the Shares for Optionee's own account and not with a view to distribution within the meaning of the Act, other than as may be effected in compliance with the Act and rules and regulations promulgated thereunder. No one else has any beneficial interest in the Shares. Optionee has no present intention of disposing of the Shares at any particular time or for any particular price and is not aware of any particular occasion, event or circumstance upon the occurrence of which Optionee intends to dispose of the Shares. Optionee understands that the Company is relying upon the truth and accuracy of these representations in issuing the Shares without first registering them under the Act. (3) Legends and Stop Order. The Company may affix to the certificates representing the Shares legends substantially as follows: These securities have not been registered under the Securities Act of 1933, as amended, and have been taken by the issuee for his or her own account and not with a view to their distribution. Said securities may not be sold or transferred unless (a) they have been registered under said Act, or (b) the transfer agent (or the Company, if it is then acting as its own transfer agent) is presented with either a written opinion of counsel satisfactory to the Company or a "no-action" letter of the Securities and Exchange Commission to the effect that such registration is not required under the circumstances of such sale or transfer. This security may not be voluntarily or involuntarily sold, assigned, transferred, pledged, hypothecated, encumbered or disposed of, except under limited circumstances. It is also subject to optional repurchase under certain circumstances. These restrictions and repurchase provisions are set forth in full in the 1987 Stock Option Plan, a copy of which is on file at the principal offices of the Company. The Company may place a "stop transfer" order against the Shares until all restrictions and conditions set forth in this Option Plan and in the legends referred to in this subparagraph have been complied with. (f) Compliance with Law. Despite anything else herein, Shares may be sold pursuant to this Option Plan or by Optionee only after there has been compliance with all applicable federal and state securities laws, and all offers will be subject to this overriding condition. The Company will not be required to register or qualify Shares with the Securities and Exchange Commission or any State agency. (g) Fair Market Value. If the Shares of the Company are not publicly traded as of a particular date, fair market value may be computed by any method the Board or Committee believes in good faith will reflect the fair market value of the Shares on such day. During such time as such Shares are publicly traded but not listed upon an established stock exchange, the fair market value per Share shall be the last sale price on the relevant date as reported on the National Market System or, if such Shares are not then reported on the National Market System but quotations are reported on the National Association of Securities Dealers Automated Quotations System, the average of the bid and asked prices on the relevant date, in either event as such price quotes are listed in The Wall Street Journal, Western Edition (or if not so reported in The Wall Street Journal any other listing service or publication known to the Board). If the Shares are listed upon an established stock exchange or exchanges, such fair market value shall be deemed to be the closing price of the Shares on the largest such stock exchange upon which such Shares are listed on the relevant date. 7. Use of Proceeds from Shares. Proceeds from the sale of shares pursuant to options granted under the Option Plan shall be used for general corporate purposes. 8. Adjustment Upon Changes in Shares. (a) In the event that the Common Stock of the Company is changed by a stock split, reverse stock split, recapitalization, or other change in the capital structure of the Company, or in the event that the outstanding number of shares of stock of the Company is increased through payment of a stock dividend, appropriate proportionate adjustments will be made in the number and class of shares of stock subject to this Option Plan, and the exercise price of any rights of repurchase under this Option Plan. Any such adjustment will be made by the Board, whose determination will be conclusive. If there is any other change in the number or kind of the outstanding shares of stock of the Company, or of any other security into which that stock has been changed or for which it has been exchanged, and if the Board, in its sole discretion, determines that this change requires any adjustment in the restrictions on Transfer or rights of repurchase in Shares then subject to this Option Plan, such an adjustment will be made in accordance with the determination of the Board. No adjustments will be required by reason of the issuance or sale by the Company for cash or other consideration of additional shares of its stock or securities convertible into or exchangeable for shares of its stock. (b) If, as a result of a stock split, stock dividend, or exchange for other securities in the Company or in another corporation by reclassification, reorganization, merger, consolidation, recapitalization or otherwise, Optionee (or his or her successor or assignee), as the owner of Shares subject to restrictions on Transfer or rights of repurchase hereunder, is entitled to new, additional or different securities, then, at the option and in the sole discretion of the Board, those new, additional, or different securities may be distributed subject to all, some, or none of the restrictions on Transfer or rights of repurchase to which the original Shares were subject. The certificate or certificates for, or other evidences of, such new or additional or different securities, together with a stock power or other instrument of transfer appropriately endorsed, as appropriate, also will be imprinted with such legends as may be required by law or necessary to effectuate the rights or restrictions imposed, and will be deposited in escrow, as provided in Paragraph 6(a). (c) In the event of a dissolution or liquidation of the Company, the Board shall have discretion and power to shorten the time over which an option may be exercised or the time over which Shares are deemed "Vested" under Paragraph 6(b) herein, notwithstanding the provisions of the option agreement or this Option Plan. (d) In the event of a merger or consolidation or other reorganization in which the Company is not the surviving corporation, or in which the Company becomes a subsidiary of another corporation, the successor corporation shall agree to assume the outstanding options or substitute comparable options therefor, or, if the successor corporation is unwilling to do so, the outstanding options shall be exercisable only prior to such merger, consolidation, or other reorganization and any Shares purchased upon exercise shall be deemed fully "Vested" prior to such merger or consolidation or other reorganization. 9. Rights as an Employee. Nothing in this Option Plan or in any rights awarded hereunder shall confer upon any employee any right to continue in the employ of the Company or of any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary to terminate such employee's employment at any time. 10. Withholding Tax. There shall be deducted from the compensation of any employee holding options under this Option Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of the person with respect to such options. 11. Termination and Amendment of Option Plan. The Board of Directors may at any time terminate this Option Plan, or make such modifications of the Option Plan as it shall deem advisable. 12. Effective Date of the Option Plan. The Option Plan shall become effective on March 24, 1987. Any options granted under this Option Plan must be exercised within eight (8) years of the date of grant. The Option Plan shall terminate not more than ten (10) years from the date the Option Plan is adopted or the date the Option Plan is approved by the shareholders, whichever is earlier but such termination will not affect any options then outstanding. 13. Indemnification. In addition to such other rights of indemnification as they may have as directors, the members of the Board of Directors administering the Option Plan shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Option Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding that such member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. NON-QUALIFIED STOCK OPTION AGREEMENT (Executive Officer Stock Option Plan (1987)) THIS AGREEMENT made as of this ____ day of _________, 19____, by and between The Charles Schwab Corporation, a Delaware corporation ("Company") and ______________________________ ("Optionee"). WITNESSETH: WHEREAS, there has been granted to Optionee, effective as of __________, 19___, a non-qualified stock option under the Executive Officer Stock Option Plan (1987) of the Company ("Option Plan"); NOW THEREFORE, it is mutually agreed as follows: 1. The Optionee shall have a non-qualified stock option to acquire ________ shares of common stock of the company (the "Shares"), at a price of $_______ per share. 2. Except as provided in paragraphs 3 and 4 below, the other terms of this option shall be the same as all of those provided for in the Option Plan, which include, without limitation, vesting of Shares, limitations on exercise and transfer, and other restrictions. The Option Plan is attached hereto as Exhibit A and is incorporated herein by this reference. Optionee has read the Option Plan and, other than as provided in paragraphs 3 and 4 below, agrees to be bound by its terms. Without limitation, Optionee specifically acknowledges the representations, warranties and agreements contained in paragraph 6(e) of the Option Plan. 3. Notwithstanding paragraph 6(b) of the Option Plan, in the event Optionee's employment or service as a director with or for the Company and its subsidiaries terminates by reason of Optionee's death or permanent disability, all Shares then not deemed to be Vested thereupon will be deemed immediately Vested. For this purpose, "permanent disability" will mean the reasonable determination by a qualified physician acceptable to the company that the Optionee has an illness or incapacity that has disabled, or will disable, the Optionee from rendering his or her normal services to the Company and its subsidiaries for a period of more than six (6) consecutive months in any consecutive twelve (12) month period. 4. Upon exercise of this Option, the Company will extend to the Optionee rights under that certain Registration Rights and Stock Restriction Agreement dated as of March 31, 1987, as amended, subject to the Optionee's agreement to be bound by the terms thereof. 5. Any notice to be given by the Optionee under the terms of the Option Plan shall be deemed to have been duly given, and effective upon the receipt, if sent by Certified Mail, postage and certification prepaid, to The Charles Schwab Corporation, 101 Montgomery, San Francisco, California 94104, Attention: Corporate Secretary, except as superseded by a different address noticed to Optionee. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year referred to above. THE CHARLES SCHWAB CORPORATION ("Company") By: ___________________________________ ________________________________________ "Optionee" Attachment(1) Spousal Consent (2) Exhibit A: 1987 Stock Option Plan EX-10 5 EXHIBIT 10.160 EXHIBIT 10.160 THE CHARLES SCHWAB CORPORATION 1987 Stock Option Plan, as Amended on September 17, 1996 1. Purpose. The purpose of the 1987 Stock Option Plan, as Amended and Restated (the "Option Plan") is to enable The Charles Schwab Corporation (formerly known as CL Acquisition Corporation) (the "Company") and its subsidiaries to attract and retain directors, officers, and other key employees and to provide such persons with additional incentive to advance the interests of the Company. Options qualifying as incentive stock options under Section 422A of the Internal Revenue Code of 1954, as amended, and other forms of options may be granted under this Option Plan. 2. Administration. (a) This Option Plan shall be administered by the Board of Directors (the "Board"), or by a committee of Directors (the "Committee") selected by the Board, provided that the Committee may not include any Director who is an employee of the Company. (b) The Board or the Committee shall have the power, subject to the express provisions of this Option Plan: (1) To determine the recipients of options under this Option Plan, the time of grant of the options, and the number of shares covered by the grant. (2) To prescribe the terms and provisions of each option granted (which need not be identical). (3) To construe and interpret this Option Plan and options, to establish, amend, and revoke rules and regulations for this Option Plan's administration, and to make all other determinations necessary or advisable for the administration of this Option Plan. 3. Shares Subject to this Option Plan. Subject to the provisions of Paragraph 8 (relating to the adjustment upon changes in stock), a total of up to 1,616,000 shares of the Common Stock (the "Shares") of the Company may be issued pursuant to options granted under this Option Plan. The Shares may be unissued Shares or reacquired Shares. If any options granted under this Option Plan shall for any reason terminate or expire without having been exercised in full, the Shares not purchased under such options shall be available again for the purposes of this Option Plan. 4. Eligibility. Options under this Option Plan may be granted only to directors, officers, and other employees of the Company and/or of its subsidiaries who do now own stock possessing more than ten percent of the total combined voting power or value of all classes of stock of the Company or any of its subsidiaries. Persons to whom options to purchase Shares are granted are hereinafter referred to as "Optionee(s)." Subject to the provisions of Paragraphs 3 and 5, and this Paragraph 4, of this Option Plan, there is no limitation on the number of options that may be granted to an Optionee. Notwithstanding the foregoing provisions of this Paragraph 4, options may not be granted under this Plan for the purchase of an aggregate of more than 100,000 Shares to persons who, at the time of the grant of the option(s), are members of the Board but not employees of the Company and/or of its subsidiaries, and options to purchase no more than 10,000 Shares may be granted to any single such director in any calendar year. If any option granted to any such director shall for any reason terminate or expire without having been exercised in full, the Shares not purchased under such option shall be available again for the purpose of granting options to such directors (as well as any other eligible participant) under this Option Plan. 5. Terms of Option Agreements. (a) All Option Agreements. Options granted pursuant to this Option Plan shall be evidenced by agreements specifying the number of Shares covered thereby, in such form as the Board or Committee shall from time to time establish, which agreements may incorporate all or any of the terms hereof by reference and shall comply with and be subject to the following terms and conditions: (1) options under this Option Plan will be exercisable, subject to the other provisions of this option Plan, only at the following times: (i) from and after the effective date of registration pursuant to the Securities Act of 1933, as amended (the "Act"), of the common shares underlying the options granted pursuant to this Option Plan, provided that such exercise is in compliance with all applicable securities laws; or (ii) at such times (if at all) and with such conditions as the Company, in its sole discretion, may determine, provided that the Company may place such restrictions on exercise, resale or otherwise as it deems appropriate in order to satisfy applicable securities laws; provided, however, that an option issued to a member of the Board shall not be exercisable prior to the later to occur of the satisfaction of (i) or (ii) above and the termination of a one year period from the date of the grant of such option. The Company covenants to effect the registration described in paragraph (1)(i), above, contemporaneously with, or a reasonable time after, the effectiveness of the initial public offering of equity securities of the Company provided that: (i) in no event will the Company be obligated to effect such registration earlier than 180 days after such initial public offering; and (ii) in no event will the Company be obligated to effect such registration at any time as such registration would constitute or cause a breach of any then existing contract to which the Company is a party. In no event shall an option be exercisable after the expiration of eight years from the date it is granted. (2) Except as provided in Paragraph 5(b)(2) below, the exercise price shall not be less than the fair market value (computed as provided in Paragraph 6(g)) of the Shares on the date of granting of the option, provided that, in addition to the foregoing limitation contained in this sentence, prior to September 30, 1987 the exercise price shall not be less than one dollar and twenty-seven cents ($1.27). (3) To the extent that options are exercisable hereunder, options may be exercised by written notice to the Company, stating the number of Shares being purchased and accompanied by the payment in full of the option price for such Shares. Such payment shall be made in cash or, subject to the Company's discretion, in fully paid shares of the outstanding common stock of the Company or a combination of cash and such common stock. If shares of common stock are used in part or full payment for the Shares to be acquired upon exercise of the option, such shares shall be valued for the purpose of such exchange by the Board of Directors of the Company as of the date of exercise of the option. Any certificates for shares of outstanding common stock used to pay the option price shall be accompanied by stock powers duly endorsed in blank by the registered holder of the certificate (with the signature thereon guaranteed). In the event the certificates tendered by the optionee in such payment cover more Shares than are required for such payment, the certificates shall also be accompanied by instructions from the optionee to the Company's transfer agent with regard to disposition of the balance of the Shares covered thereby. (4) The Company at all times shall keep available the number of Shares required to satisfy options granted under this Option Plan. (5) The Company may require any person to whom an option is granted, or his or her legal representative, heir, legatee, or distributees, as a condition of exercising any option granted hereunder, to give written assurance satisfactory to the Company to the effect that such person is acquiring the Shares subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same. The Company reserves the right to place a legend on any Share certificate issued pursuant to this Option Plan to ensure compliance with this paragraph. Unless a Registration Statement under the Act is in effect with respect to the Shares issuable upon exercise of the option, the exercise of any option shall be conditioned upon the approval of the Company. (6) Neither a person to whom an option is granted, nor such person's legal representative, heir, legatee, or distributees, shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any Shares subject to such option unless and until such person has exercised his or her option pursuant to the terms thereof. (7) Options shall be transferable only by will or by the laws of descent and distribution, and during the lifetime of the person to whom they are granted such person alone may exercise them. (8) In no event may an option be exercised by anyone after the expiration of the term of the option established pursuant to Subparagraph 5(a)(1) hereof. (9) Each option granted pursuant to this Option Plan shall specify whether it is a non-qualified (i.e., non-statutory) or an incentive stock option or other form of stock option. (b) Incentive Stock Options. In addition to the terms and conditions specified above, incentive stock options granted under this Option Plan shall be subject to the following terms and conditions: (1) The aggregate value (determined as of the time the option is granted) of the Shares with respect to which incentive stock options are exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. (2) As to individuals otherwise eligible under this Option Plan who own at the time of the grant of an option more than 10% of the total combined voting power of all classes of stock of the Company and its parent and subsidiary corporations, incentive stock options can be granted under this Option Plan to any such individual only if at the time such option is granted the option price is at least 110% of the fair market value (as defined in paragraph 6(g) below) of the Shares subject to the option and such option by its terms is not exercisable after the expiration of five years from the date such option is granted. (3) An option shall terminate and may not be exercised if the person to whom it is granted ceases to be employed by the Company or by a subsidiary of the Company (unless such person continues as an employee of the Company or another subsidiary of the Company), with the following exceptions: (i) If the employment is terminated for any reason other than the person's death or disability, he or she may exercise the option if otherwise exercisable under this Option Plan not later than three months after such termination, but only to the extent that it was exercisable by such person on the date of such termination, or (ii) If such person dies or becomes permanently disabled while in the employ of the Company or of a subsidiary, his or her option, if otherwise exercisable under this Option Plan, may be exercised by his or her personal representatives, heirs or legatees not later than twelve (12) months following the date of death or permanent disability, but only to the extent such option was exercisable by such person on the date of death or permanent disability. 6. Restrictions as to the Shares. (a) Share Certificates; Escrow. Share certificates issued for Shares purchased upon exercise of options granted pursuant to this Option Plan will bear all legends required by law and necessary to effectuate this Option Plan's provisions. For purposes of facilitating the enforcement of the provisions of this Option Plan, the Optionee, at the Company's option, will deliver the certificate(s) for his or her Shares with a stock power executed by him or her and by his or her spouse (if required for transfer), in blank, to the Secretary of the Company, or the Secretary's designee, to hold said certificate(s) and stock power(s) in escrow and to take all such actions and to effectuate all such transfers and/or releases as are in accordance with the terms of this Option Plan. The certificates may be held in escrow so long as the Shares whose ownership they evidence are subject to any right of repurchase under this Option Plan. Each Optionee, by exercising an option, thereby acknowledges that the Secretary of the Company (or his or her designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to the grant of an Option under this Option Plan, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow holder will not be liable to any party to this Option Plan (or to any other party) for any actions or omissions unless the escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine. (b) Vested and Unvested Shares. As of the date of the grant of any option granted under this Option Plan, all Shares underlying the option will be deemed "Unvested." Except as may be otherwise provided in the stock option agreement executed by an optionee who is not a member of the Board, Shares purchased upon the exercise of any option will be or become "Vested" according to the following schedule: at the end of each six (6) month period after the date of grant of any option, one tenth (1/10) of the Shares underlying such option will be deemed "Vested." Unless otherwise provided in the stock option agreement executed by an Optionee, upon the termination of Optionee's employment (in the case of employees), service as a director (in the case of directors), or provision of independent contractor services (in the case of independent contractors) with or for the Company (including any subsidiary of the Company) for any reason whatsoever (whether by reason of death, disability, voluntary resignation, involuntary termination, or any other reason), all Unvested Shares will remain Unvested Shares and no further Shares will become Vested. Notwithstanding the foregoing, and irrespective of any provision in a Stock Option Agreement to the contrary, upon an Optionee's Retirement, all outstanding Options that had been granted more than two years before the date of the Optionee's Retirement shall become immediately Vested. For purposes of the preceding sentence, "Retirement" shall mean any termination of employment of an Optionee for any reason other than death at any time after the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any such Stock Option Agreement. (c) Restrictions on Transfer. (1) Definitions. As used in this Option Plan, the term "Transfer" will include, but not be limited to, a voluntary or involuntary sale, assignment, transfer, pledge hypothecation, encumbrance, disposal, loan, gift, attachment or levy of Shares. A Transfer will be considered "Involuntary" for purposes of this Option Plan if it occurs pursuant to any assignment of Shares for the benefit of creditors or any Transfer by operation of law, including (but not limited to) any Transfer by will or under the laws of intestate succession; any execution of judgment against the Shares or the acquisition of record or beneficial ownership of Shares by a lender or creditor; any Transfer pursuant to any decree of divorce, dissolution or separate maintenance, any property settlement, any separation agreement or any other agreement under which a part or all of any Shares are Transferred or awarded to the spouse of Optionee or are required to be sold; or any Transfer resulting from the filing by Optionee of a petition for relief, or the filing of an involuntary petition against Optionee, under the bankruptcy laws of the United States or of any other nation. (2) General Prohibition on Transfer. Except as expressly provided in this Option Plan, or as expressly provided otherwise in the stock option agreement executed by any Optionee, Shares may not be Transferred in any manner, Voluntarily or Involuntarily. (3) Required Undertaking. Any Transfer that would otherwise be permitted under the terms of this Option Plan is prohibited unless the transferee executes such documents as the Company may reasonably require to ensure that the Company's rights under this Option Plan are adequately protected with respect to the Shares Transferred. Such agreements may include (but are not limited to) the transferee's agreement to be bound by all of the terms of this Option Plan as if he or she were the original Optionee, except that the Vesting of Shares under Paragraph 6(b) hereof and the Company's right of repurchase upon termination under paragraph 6(d) hereof will continue to be determined with reference to the employment (or other service) of the original Optionee. (4) Permissible Transfer of Shares. Subject to any limitations on Transfer imposed by any applicable state or federal securities laws, and subject to the requirements of paragraph 6(c)(3) hereof: (i) Shares may be Transferred by will or by the laws of intestate succession; (ii) Shares may be Transferred to Optionee's ancestors, descendants, or spouse, or to a trust, partnership, custodianship or other fiduciary account for his, her, or their benefit; and (iii) Vested Shares may be Transferred. All other Transfers of Shares are expressly prohibited. (5) Effect of Prohibited Transfer. Any prohibited Transfer, whether Voluntary or Involuntary, is void and of no effect. Should such a Transfer purport to occur, the Company may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertaking required under paragraph 6(c)(3), or exercise any other legal remedy. (d) Company's Right To Purchase Unvested Shares Upon Termination. (1) Definitions. For purposes of this section, neither a transfer of Optionee from the Company to one of its subsidiaries or vice versa, or from one of its subsidiaries to another, or to a successor to the business of the Company or any of its subsidiaries by way of merger, consolidation or purchase of substantially all the assets of the Company or that subsidiary, or a leave of absence duly authorized by the Company, will be deemed a termination of employment or service. If Optionee is a director of the Company but not an employee when Shares are purchased upon exercise of an option granted under this Option Plan, then for definitional purposes of this Option Plan only, Optionee will be deemed to be employed by the Company so long as he or she is a director or employee of the Company. (2) Scope of Right. Should Optionee cease to be employed by the Company and its subsidiaries for any reason whatsoever (whether due to death, voluntary resignation, involuntary termination, disability or any other reason), the Company will have an assignable right (but not an obligation) to repurchase any Unvested Shares owned by Optionee at the time of termination for a price per share equal to Optionee's original cost per share, subject to appropriate adjustment pursuant to paragraph 8. If the Company assigns its right under this subparagraph, the assignee, upon exercise of its right to purchase the Unvested Shares, will pay the Company cash in the amount equal to the difference between the fair market value per share at the time of exercise and the Optionee's original cost per share, subject to appropriate adjustment pursuant to paragraph 8. The fair market value at the time of exercise will be determined by the Board of Directors. (3) Mechanics and Notice. The Company's right to repurchase may be exercised by written notice to Optionee or his or her personal representative at any time not more than sixty (60) days after the Optionee's employment with or service to the Company and its subsidiaries terminates. Except as otherwise agreed upon by the Company and the Optionee, the Shares will be repurchased at the Company's principal executive offices on the sixtieth day (or, if that day is not a regular business day for the Company, on the Company's first regular business day thereafter) following the termination of employment or service. The repurchase price will be paid in cash at the tine of the repurchase. (e) Additional Restrictions on Transfer. By accepting options and/or Shares under this option Plan Optionee represents, warrants and agrees as follows: (1) Commissioner of Corporations. Optionee understands that Transfer of the Shares may be restricted in accordance with Section 260.141.11 of the rules of the California Commissioner of Corporations (to the extent applicable), a copy of which is attached hereto. (2) Securities Act of 1933. Optionee further understands that the options and Shares may not have been registered under the Act and that the options and Shares, when and if obtained are not freely tradeable and must be held indefinitely unless registered under the Act or an exemption from such registration is available. Optionee understands that the Company is under no obligation to register the options or Shares except as expressly set forth herein. Optionee further understands that although an exemption from registration may be available pursuant to Rule 144 promulgated under the Act by the Securities and Exchange Commission, satisfaction of a number of conditions is required to make a sale under that exemption, and that, even if Rule 144 is applicable in whole or in part, in no event may Optionee sell the Shares to the public under such Rule prior to the expiration of a two-year period after purchase, that any such sales must be limited in amount and that sales can only be made in full compliance with the provisions of the Rule. Optionee understands that Rule 144 contains specific requirements that there be available to the public certain information with respect to the Company's business and financial affairs, and that the Company may not be in compliance with the information requirements of the Rule at any given time. Optionee acknowledges that there is no assurance that the requirements will be met at the time Optionee may want to make sales pursuant to the Rule. Optionee represents that Optionee is purchasing the Shares for Optionee's own account and not with a view to distribution within the meaning of the Act, other than as may be effected in compliance with the Act and rules and regulations promulgated thereunder. No one else has any beneficial interest in the Shares. Optionee has no present intention of disposing of the Shares at any particular time or for any particular price and is not aware of any particular occasion, event or circumstance upon the occurrence of which Optionee intends to dispose of the Shares. Optionee understands that the Company is relying upon the truth and accuracy of these representations in issuing the Shares without first registering them under the Act. (3) Legends and Stop Order. The Company may affix to the certificates representing the Shares such legends as it deems necessary or appropriate to give effect to the terms of this Option Plan or as are required to comply with any federal or state securities laws. The Company may place a "stop transfer" order against the Shares until all restrictions and conditions set forth in this Option Plan and in the legends referred to in this subparagraph have been complied with. (f) Compliance with Law. Despite anything else herein, Shares may be sold pursuant to this Option Plan or by Optionee only after there has been compliance with all applicable federal and state securities laws, and all offers will be subject to this overriding condition. The Company will not be required to register or qualify Shares with the Securities and Exchange Commission or any State agency except that the Company will obtain any required permit from the California Commissioner of Corporations authorizing the original issuance of the Shares. (g) Fair Market Value. If the Shares of the Company are not publicly traded as of a particular date, fair market value may be computed by any method the Board or Committee believes in good faith will reflect the fair market value of the Shares on such day. During such time as such Shares are publicly traded but not listed upon an established stock exchange, the fair market value per Share shall be the last sale price on the relevant date as reported on the National Market System, or, if such Shares are not then reported on the National Market System but quotations are reported on the National Association of Securities Dealers Automated Quotations System, the average of the bid and asked prices on the relevant date, in either event as such price quotes are listed in The Wall Street Journal, Western Edition (or if not so reported in The Wall Street Journal any other listing service or publication known to the Board). If the Shares are listed upon an established stock exchange or exchanges, such fair market value shall be deemed to be the closing price of the Shares on the largest such stock exchange upon which such Shares are listed on the relevant date. 7. Use of Proceeds from Shares. Proceeds from the sale of shares pursuant to options granted under the Option Plan shall be used for general corporate purposes. 8. Adjustment Upon Changes in Shares. (a) In the event that the Common Stock of the Company is changed by a stock split, reverse stock split, recapitalization, or other change in the capital structure of the Company, or in the event that the outstanding number of shares of stock of the company is increased through payment of a stock dividend, appropriate proportionate adjustments will be made in the number and class of shares of stock subject to this Option Plan, and the exercise price of the rights of purchase or repurchase under this Option Plan. Any such adjustment will be made by the Board, whose determination will be conclusive. If there is any other change in the number or kind of the outstanding shares of stock of the Company, or of any other security into which that stock has been changed or for which it has been exchanged, and if the Board, in its sole discretion, determines that this change requires any adjustment in the restrictions on Transfer or rights of repurchase in Shares then subject to this Option Plan, such an adjustment will be made in accordance with the determination of the Board. No adjustments will be required by reason of the issuance or sale by the Company for cash or other consideration of additional shares of its stock or securities convertible into or exchangeable for shares of its stock. (b) If, as a result of a stock split, stock dividend, or exchange for other securities in the Company or in another corporation by reclassification, reorganization, merger, consolidation, recapitalization or otherwise, Optionee (or his or her successor or assignee), as the owner of Shares subject to restrictions on Transfer or rights of repurchase hereunder, is entitled to new, additional or different securities, then, at the option and in the sole discretion of the Board, those new, additional, or different securities may be distributed subject to all, some, or none of the restrictions on Transfer or rights of repurchase to which the original shares were subject. The certificate or certificates for, or other evidences of, such new or additional or different securities, together with a stock power or other instrument of transfer appropriately endorsed, as appropriate, also will be imprinted with such legends as may be required by law or necessary to effectuate the rights or restrictions imposed, and will be deposited in escrow, as provided in Paragraph 6(a). (c) In the event of a dissolution or liquidation of the Company, the Board shall have discretion and power to shorten the time over which an option may be exercised or the time over which Shares are deemed "Vested" under Paragraph 6(b) herein, notwithstanding the provisions of the option agreement or this Option Plan. (d) In the event of a merger or consolidation or other reorganization in which the Company is not the surviving corporation, or in which the Company becomes a subsidiary of another corporation, the successor corporation shall agree to assume the outstanding options or substitute comparable options therefor or, if the successor corporation is unwilling to do so, the outstanding options shall be exercisable only prior to such merger, consolidation, or other reorganization and any Shares purchased upon exercise shall be deemed fully "Vested" prior to such merger or consolidation or other reorganization. 9. Rights as an Employee. Nothing in this Option Plan or in any rights awarded hereunder shall confer upon any employee any right to continue in the employ of the Company or of any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary to terminate such employee's employment at any time. 10. Withholding Tax. There shall be deducted from the compensation of any employee holding options under this Option Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of the person with respect to such options. 11. Termination and Amendment of Option Plan. The Board of Directors may at any time terminate this Option Plan, or make such modifications of the Option Plan as it shall deem advisable. 12. Effective Date of the Option Plan. The Option Plan was initially adopted on March 24, 1987, and was amended on July 29, 1987. The Option Plan, as amended and restated herein, shall be effective as of April 17, 1989. Any options granted under this Option Plan must be exercised within eight (8) years of the date of grant. The Option Plan shall terminate not more than ten (10) years from the date the Option Plan initially was adopted, but such termination will not affect any options then outstanding. 13. Indemnification. In addition to such other rights of indemnification as they may have as directors, the members of the Board of Directors administering the Option Plan shall be indemnified by the Company against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Option Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding that such member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. NON-OUALIFIED STOCK OPTION AGREEMENT (1987 Stock Option Plan, as first amended) THIS AGREEMENT, made as of this _____ of _________, 19__, by and between The Charles Schwab Corporationp a Delaware corporation ("Company"), and _______________ ("Optionee"). WITNESSETH: WHEREAS, there has been granted to Optionee, effective as of __________ __, 19____, a non-qualified stock option under the 1987 Stock Option Plan, as first amended, of the Company ("Option Plan"); NOW, THEREFORE, it is mutually agreed as follows: 1. The Optionee shall have a non-qualified stock option to acquire _____ shares of common stock of the Company (the "Shares"), at a price of $_______ per share. 2. Optionee acknowledges that paragraph 5(a) of the Option Plan imposes significant restrictions on Optionee's ability to exercise this option. 3. This is a non-statutory stock option and the provisions of paragraph 5(b) of the Option Plan are inapplicable to this Option. With that exception and except as provided in paragraph 4, 5 and 6 below, the other terms of this option shall be the same as without limitation, vesting of Shares, limitations on exercise and transfer, and other restrictions. The Option Plan is attached hereto as Exhibit A and is incorporated herein by this reference. Optionee has read the Option Plan and, other than for the provisions of paragraph 5(b) of the Option Plan and as provided in paragraphs 4, 5 and 6 below, agrees to be bound by its terms. Without limitation, Optionee specifically acknowledges the representations, warranties and agreements contained in paragraph 6(e) of the Option Plan. 4. Notwithstanding paragraph 6(b) of the Option Plan, in the event Optionee's employment, service as a director or provision of independent contractor services with or for the Company and its subsidiaries terminates by reason of Optionee's death or permanent disability, all shares then not deemed to be Vested thereupon will be deemed immediately Vested. For this purpose, "permanent disability" will mean the reasonable determination by a qualified physician acceptable to the Company that the Optionee has an illness or incapacity that has disabled, or will disable, the Optionee from rendering his or her normal services to the company and its subsidiaries for a period of more than six (6) consecutive months in any consecutive twelve (12) month period. 5. If the Company fails to timely exercise its right to repurchase Unvested Shares, those Shares will be treated as Vested Shares. Options underlying Unvested Shares may not be exercised once vesting ceases. 6. Any notice to be given by the Optionee under the terms of the Option Plan shall be deemed to have been duly given, and effective upon receipt, if sent by Certified Mail, postage and certification prepaid, to The Charles Schwab Corporation, 101 Montgomery Street, San Francisco, California 94104, Attention: Corporate Secretary, except as superseded by a different address noticed to Optionee. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year referred to above. BY: on Behalf of The Charles Schwab Corporation ("Company") Optionee Attachments: (1) Spousal Consent (2) Exhibit A: 1987 Stock Option Plan, as first amended. EX-10 6 EXHIBIT 10.161 EXHIBIT 10.161 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN (Restated to include Amendments through September 17, 1996) Article 1. Introduction. The Plan was adopted by the Board of Directors on March 26, 1992. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging Non-Employee Directors and Key Employees to focus on long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors and Key Employees with exceptional qualifications and (c) linking Non-Employee Directors and Key Employees directly to stockholder interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Performance Share Awards or Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Article 2. Administration. 2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more disinterested directors of the Company, who shall be appointed by the Board. A member of the Committee shall not be eligible to receive any award under the Plan, other than Options granted under Section 4.2. 2.2 Disinterested Directors. A member of the Board shall be deemed to be "disinterested" only if he or she satisfies such requirements as the Securities and Exchange Commission may establish for disinterested administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act. 2.3 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. Article 3. Limitation on Awards. The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed 6,550,000 (including those shares awarded prior to the amendment of the Plan). If any Restricted Shares, Performance Share Awards or Options are forfeited, or if any Performance Share Awards terminate for any other reason without the associated Common Shares being issued, or if any Options terminate for any other reason before being exercised, then such Restricted Shares, Performance Share Awards or Options shall again become available for Awards under the Plan. The limitation of this Article 3 shall be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. Subject to the overall limit on the aggregate shares set forth above, the following limitations shall apply: (a) The maximum number of Common Shares which may be granted subject to an Option to any one Participant in any one fiscal year shall be 500,000; and (b) The maximum number of Restricted Shares or Performance Share Awards which may be granted to any one Participant in any one fiscal year shall be 200,000. Article 4. Eligibility. 4.1 General Rule. Except as provided in Section 4.2, only Key Employees shall be eligible for designation as Participants by the Committee. 4.2 Non-Employee Directors. Non-Employee Directors shall be entitled to receive the NSOs described in this Section 4.2 (and no other Awards). (a) Each Non-Employee Director shall receive a Non-Officer Stock Option covering 2,500 Common Shares for each Award Year with respect to which he or she serves as a Non-Employee Director on the grant date described in subsection (b) below; provided that the Non-Officer Stock Option shall cover 1,500 shares if the Exercise Price determined as of the grant date, is $35 or more; (b) The NSO for a particular Award Year shall be granted to each Non-Employee Director as of May 15 of each Award Year, and if May 15 is not a business day, then the grant shall be made on and as of the next succeeding business day; (c) Each NSO shall be exercisable in full at all times during its term; (d) The term of each NSO shall be 10 years; provided, however, that any unexercised NSO shall expire on the date that the Optionee ceases to be a Non-Employee Director or a Key Employee for any reason other than death or disability. If an Optionee ceases to be a Non-Employee Director or Key Employee on account of death or disability, any unexercised NSO shall expire on the earlier of the date 10 years after the date of grant or one year after the date of death or disability of such Director; and (e) The Exercise Price under each NSO shall be equal to the Fair Market Value on the date of grant and shall be payable in any of the forms described in Article 6. 4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the Exercise price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant and (b) such ISO by its terms is not exercisable after the expiration of five years from the date of grant. 4.4 Attribution Rules. For purposes of Section 4.3, in determining stock ownership, a Key Employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors or lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries. Stock with respect to which the Key Employee holds an option shall not be counted. 4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the ISO to the Key Employee. "Outstanding stock" shall not include treasury shares or shares authorized for issuance under outstanding options held by the Key Employee or by any other person. Article 5. Options. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan, and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Committee may designate all or any part of an Option as an ISO, except for Options granted to Non-Employee Directors under Section 4.2. The Committee may designate all or any part of an Option as an ISO (or, in the case of a Key Employee who is subject to the tax laws of a foreign jurisdiction, as an option qualifying for favorable tax treatment under the laws of such foreign jurisdiction), except for Options granted to Non-Employee Directors under section 4.2. 5.2 Options Nontransferability. No Option granted under the Plan shall be transferable by the Optionee other than by will or the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Each Stock Option Agreement shall also specify whether the Option is an ISO or an NSO. 5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant, except as otherwise provided in Section 4.3. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with Article 6. 5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. The term of an ISO shall in no event exceed 10 years from the date of grant, and Section 4.3 may require a shorter term. Subject to the preceding sentence, the Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided that, in appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability, retirement, or other termination of employment and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's employment. Except as provided in Section 4.2, NSOs may also be awarded in combination with Restricted Shares, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares are forfeited. In addition, NSOs granted under this Section 5 may be granted subject to forfeiture provisions which provide for forfeiture of the Option upon the exercise of tandem awards, the terms of which are established in other programs of the Company. 5.6 Limitation on Amount of ISOs. The aggregate fair market value (determined at the time the ISO is granted) of the Common Shares with respect to which ISOs are exercisable for the first time by the Optionee during any calendar year (under all incentive stock option plans of the Company) shall not exceed $100,000; provided, however, that all or any portion of an Option which cannot be exercised as an ISO because of such limitation shall be treated as an NSO. 5.7 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in Control with respect to the Company. 5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Common Shares. 5.9 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant (other than NSOs granted pursuant to Section 4.2), the Committee may authorize the grant of Replacement Options. If Replacement Options have been authorized by the Committee with respect to a particular award of Options (the "Underlying Options"), the Option Agreement with respect to the Underlying Options shall so state, and the terms and conditions of the Replacement Options shall be provided therein. The grant of any Replacement Options shall be effective only upon the exercise of the Underlying Options through the use of Common Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall equal the number of Common Shares used to exercise the Underlying Options, and, if the Option Agreement so provides, the number of Common Shares used to satisfy any tax withholding requirements incident to the exercise of the Underlying Options in accordance with Section 13.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement Option is not intended to qualify as an ISO. The Exercise Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee's employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate. 5.10 Options Granted to Non-United States Key Employees. In the case of Key Employees who are subject to the tax laws of a foreign jurisdiction, the Company may issue Options to such Key Employees that contain terms required to conform with any requirements for favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the laws of such foreign jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum to the Plan specifically applicable to such Options." Article 6. Payment for Option Shares. 6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee may specify in the Stock Option Agreement that payment may be made pursuant to Section 6.2 or 6.3. (b) In the case of an NSO, the Committee may at any time accept payment pursuant to Section 6.2 or 6.3. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company; provided, however, that such Common Shares which are surrendered must have been beneficially owned by the Participant for at least six (6) months prior to the date such shares are surrendered. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased. 6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes; provided, however, that certain restrictions may be imposed by the Committee on persons who are considered a director or officer of the Company, to the extent required by Section 16 of the Exchange Act or any rule thereunder. Article 7. Restricted Shares and Performance Share Awards. 7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the grant. Restricted Shares or Performance Share Awards may also be awarded in combination with NSOs, and such an Award may provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related NSOs are exercised. 7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. 7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. Common Shares shall be issued pursuant to Performance Share Awards in full or in installments upon satisfaction of the issuance conditions specified in the Stock Award Agreement. The Committee shall select the vesting conditions in the case of Restricted Shares, or issuance conditions in the case of Performance Share Awards, which may be based upon the Participant's service, the Participant's performance, the Company's performance or such other criteria as the Committee may adopt. A Stock Award Agreement may also provide for accelerated vesting or issuance, as the case may be, in the event of the Participant's death, disability or retirement. The Committee, in its sole discretion, may determine, at the time of making an Award of Restricted Shares, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. The Committee, in its sole discretion, may determine, at the time of making a Performance Share Award, that the issuance conditions set forth in such Award shall be waived in the event that a Change in Control occurs with respect to the Company. The Committee shall have the discretion to adjust the payouts associated with Awards downward. Unless and until (i) the rules set forth under Code Section 162(m) permit discretionary adjustments to increase payouts; or (ii) the Committee determines that compliance with Code Section 162(m) is not desired with respect to some or all Named Executive Officers, no payout associated with an Award held by a Named Executive Officer shall be discretionarily adjusted upward in a manner that would eliminate the ability of the Award to satisfy the "performance-based" exception under Treasury Regulation Section 1.162-27(e)(2). 7.4 Form of Settlement of Performance Share Awards. Settlement of Performance Share Awards shall only be made in the form of Common Shares. Until a Performance Share Award is settled, the number of Performance Share Awards shall be subject to adjustment pursuant to Article 10. 7.5 Death of Recipient. Any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Performance Share Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's estate. The Committee, in its sole discretion, shall determine the form and time of any distribution(s) to a recipient's beneficiary or estate. Article 8. Claims Procedures. Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review. Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of the claimant's position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee's receipt of the notice of appeal, unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the Committee's receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision on review shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and shall specifically refer to the pertinent Plan provisions on which it is based. All determinations of the Committee shall be final and binding on Participants and their beneficiaries. Article 9. Voting Rights and Dividends. 9.1 Restricted Shares. (a) All holders of Restricted Shares who are not Named Executive Officers shall have the same voting, dividend, and other rights as the Company's other stockholders. (b) During the period of restriction, Named Executive Officers holding Restricted Shares granted hereunder shall be credited with all regular cash dividends paid with respect to all Restricted Shares while they are so held. If a dividend is paid in the form of cash, such cash dividend shall be credited to Named Executive Officers subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. If any dividends or distributions are paid in shares of Common Stock, the shares of Common Stock shall be subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. Subject to the succeeding paragraph, and to the restrictions on vesting and the forfeiture provisions, all dividends credited to a Named Executive Officer shall be paid to the Named Executive Officer within forty-five (45) days following the full vesting of the Restricted Shares with respect to which such dividends were earned. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be subject to a vesting period equal to the longer of: (i) the remaining vesting period of the Restricted Shares with respect to which the dividend is paid; or (ii) six (6) months. The Committee shall establish procedures for the application of this provision. Named Executive Officers holding Restricted Shares shall have the same voting rights as the Company's other stockholders. 9.2 Performance Share Awards. The holders of Performance Share Awards shall have no voting or dividend rights until such time as any Common Shares are issued pursuant thereto, at which time they shall have the same voting, dividend and other rights as the Company's other stockholders. Article 10. Protection Against Dilution; Adjustment of Awards. 10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options, Restricted Shares and Performance Share Awards available for future Awards under Article 3, (b) the number of Performance Share Awards included in any prior Award which has not yet been settled, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. 10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options, Restricted Shares and Performance Share Awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash. 10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. Article 11. Limitation of Rights. 11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any). 11.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10. 11.3 Creditors' Rights. A holder of Performance Share Awards shall have no rights other than those of a general creditor of the Company. Performance Share Awards represent unfunded and unsecured obligations of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. 11.4 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award until such time as: (a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable state securities laws; and (b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York Stock Exchange or any other securities exchange on which Common Shares are then listed. Article 12. Limitation of Payments. 12.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer in the nature of compensation to or for the benefit of a Participant, whether paid or payable (or transferred or transferable) pursuant to the terms of this Plan or otherwise (a "Payment"), would be nondeductible for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided, however, that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 12. For purposes of this Article 12, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 12.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 12, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 12 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan, and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 12.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 12.4 Related Corporations. For purposes of this Article 12, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. Article 13. Withholding Taxes. 13.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or distribution until such obligations are satisfied. 13.2 Nonstatutory Options, Restricted Shares or Performance Share Awards. The Committee may permit an Optionee who exercises NSOs, or who receives Awards of Restricted Shares, or who receives Common Shares pursuant to the terms of a Performance Share Award, to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission. Article 14. Assignment or Transfer of Award. Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law. However, this Article 14 shall not preclude (i) a Participant from designating a beneficiary to succeed, after the Participant's death, to those of the Participant's Awards (including without limitation, the right to exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, or (ii) a transfer of any Award hereunder by will or the laws of descent or distribution. Article 15. Future of Plans. 15.1 Term of the Plan. The Plan, as set forth herein, shall become effective on May 8, 1992. The Plan shall remain in effect until it is terminated under Section 15.2, except that no ISOs shall be granted after May 7, 2002. 15.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan; provided, however, that any amendment of the Plan shall be subject to the approval of the Company's stockholders to the extent required by applicable laws, regulations or rules; and provided further, that Section 4.2 shall not be amended more than once every six months, other than to comport with changes in the Code or ERISA, or the rules thereunder. 15.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option, Restricted Share or Performance Share Award previously granted under the Plan. Article 16. Definitions. 16.1 "Award" means any award of an Option, a Restricted Share or a Performance Share Award under the Plan. 16.2 "Award Year" means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted. 16.3 "Board" means the Company's Board of Directors, as constituted from time to time. 16.4 "Change in Control" means the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1: (a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (c) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. 16.5 "Code" means the Internal Revenue Code of 1986, as amended. 16.6 "Committee" means the Compensation Committee of the Board, as constituted from time to time. 16.7 "Common Share" means one share of the common stock of the Company. 16.8 "Company" means The Charles Schwab Corporation, a Delaware corporation. 16.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 16.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 16.11 "Exercise Price" means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 16.12 "Fair Market Value" means the market price of a Common Share, determined by the committee as follows: (a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 16.13 "ISO" means an incentive stock option described in section 422(b) of the Code. 16.14 "Key Employee" means a key common-law employee of the Company or any Subsidiary, as determined by the Committee. 16.15 "Named Executive Officer" means a Participant who, as of the date of vesting of an Award is one of a group of "covered employees," as defined in the Regulations promulgated under Code Section 162(m), or any successor statute. 16.16 "Non-Employee Director" means a member of the Board who is not a common-law employee. 16.17 "NSO" means an employee stock option not described in sections 422 through 424 of the Code. 16.18 "Option" means an ISO or NSO or, in the case of a Key Employee who is subject to the tax laws of a foreign jurisdiction, an option qualifying for favorable tax treatment under the laws of such jurisdiction, including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share. 16.19 "Optionee" means an individual, or his or her estate, legatee or heirs at law that holds an Option. 16.20 "Participant" means a Non-Employee Director or Key Employee who has received an Award. 16.21 "Performance Share Award" means the conditional right to receive in the future one Common Share, awarded to a Participant under the Plan. 16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab Corporation, as it may be amended from time to time. 16.23 "Replacement Option" means an Option that is granted when a Participant uses a Common Share held or to be acquired by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option. 16.24 "Restricted Share" means a Common Share awarded to a Participant under the Plan. 16.25 "Stock Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Performance Share Award which contains the terms, conditions and restrictions pertaining to such Restricted Share or Performance Share Award. 16.26 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her option. 16.27 "Subsidiary" means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ADDENDUM A The provisions of the Plan, as amended by the terms of this Addendum A, shall apply to the grant of Approved Options to Key U.K. Employees. 1. For purposes of this Addendum A, the following definitions shall apply in addition to those set out in section 16 of the Plan: Approved Option Means a stock option designed to qualify as an approved executive share option under the Taxes Act; Inland Revenue means the Board of the Inland Revenue in the United Kingdom. Key U.K. Employee means a designated employee of Sharelink Investment Services plc or any subsidiary (as that term is defined in the Companies Act 1985 of the United Kingdom, as amended) of which Sharelink Investment Services plc has control for the purposes of section 840 of the Taxes Act; Taxes Act means the Income and Corporation Taxes Act 1988 of the United Kingdom. 2. An Approved Option may only be granted to a Key U.K. Employee who: (i) is employed on a full-time basis; and (ii) does not fall within the provisions of paragraph 8 of Schedule 9 to the Taxes Act. For purposes of this section 2(i) of Addendum A, "full-time" shall mean an employee who is required to work 20 hours per week, excluding meal breaks. 3. No Approved Option may be granted to a Key U.K. Employee if it would cause the aggregate of the exercise price of all subsisting Approved Options granted to such employee under the Plan, or any other subsisting options granted to such employee under any other share option scheme approved under Schedule 9 of the Taxes Act and established by the Company or an associated company, to exceed the higher of (a) one hundred thousand pounds sterling and (b) four times such employee's relevant emoluments for the current or preceding year of assessment (whichever is greater); but where there were no relevant emoluments for the previous year of assessment, the limit shall be the higher of one hundred thousand pounds sterling) or four times such employee's relevant emoluments for the period of twelve months beginning with the first day during the current year of assessment in respect of which there are relevant emoluments. For the purpose of this section 3 of Addendum A, "associated company" means an associated company within the meaning of section 416 of the Taxes Act; "relevant emoluments" has the meaning given by paragraph 28(4) of Schedule 9 to the Taxes Act and "year of assessment" means a year beginning on any April 6 and ending on the following April 5. 4. Common Shares issued pursuant to the exercise of Approved Options must satisfy the conditions specified in paragraphs 10 to 14 of Schedule 9 to the Taxes Act. 5. Notwithstanding the provisions of Section 5.4 of the Plan, the exercise price of an Approved Option shall not be less than 100 percent of the closing price of a Common Share as reported in the New York Stock Exchange Composite Index on the date of grant. 6. No Approved Option may be exercised at any time by a Key U.K. Employee when that Key U.K. Employee falls within the provisions of paragraph 8 of Schedule 9 to the Taxes Act. If at any time the shares under an Approved Option cease to comply with the conditions in paragraphs 10 to 14 of Schedule 9 to the Taxes Act, then all Approved Options then outstanding shall lapse and cease to be exercisable from the date of the shares ceasing so to comply, and no optionee shall have any cause of action against the Company, Sharelink Investment Services plc or any subsidiary of the Company or any other person in respect thereof. 7. An Approved Option may contain such other terms, provisions and conditions as may be determined by the Committee consistent with the Plan, provided that the approved option otherwise complies with the requirements for approved executive option schemes specified in Schedule 9 of the Taxes Act. 8. In relation to an Approved Option, notwithstanding the terms of section 10.1 of the Plan, no adjustment shall be made pursuant to section 10.1 of the Plan to any outstanding Approved Options without the prior approval of the Inland Revenue. 9. In relation to an Approved Option any Key U.K. Employee shall make arrangements satisfactory to the Company for the satisfaction of any tax withholding or deduction -- at -- source obligations that arise by reason of the grant to him or her of such option, or its subsequent exercise. 10. In relation to an Approved Option, in addition to the provisions set out in section 15.2 of the Plan, no amendment which affects any of the provisions of the Plan relating to Approved Options shall be effective until approved by the Inland Revenue, except for such amendment as are required to obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to the Taxes Act. EX-10 7 EXHIBIT 10.162 EXHIBIT 10.162 THE CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN (RESTATED TO INCLUDE AMENDMENTS THROUGH SEPTEMBER 17, 1996) THE CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN TABLE OF CONTENTS Section Page Article I. Purpose 1.1 Establishment of the Plan 2 1.2 Purpose of the Plan 2 Article II. Definitions 2.1 Definitions 3 2.2 Gender and Number 4 Article III. Administration 3.1 Committee and Administrator 5 Article IV. Participants 4.1 Participants 6 Article V. Deferrals 5.1 Salary Deferrals 7 5.2 Deferrals of Bonuses and Other Cash Incentive Compensation 7 5.3 Deferral Procedures 8 5.4 Election of Time and Manner of Payment 8 5.5 Accounts and Earnings 10 5.6 Maintenance of Accounts 11 5.7 Change in Control 11 5.8 Payment of Deferred Amounts 14 5.9 Acceleration of Payment 14 Article VI. General Provisions 6.1 Unfunded Obligation 15 6.2 Informal Funding Vehicles 15 6.3 Beneficiary 16 6.4 Incapacity of Participant or Beneficiary 17 6.5 Nonassignment 17 6.6 No Right to Continued Employment 17 6.7 Tax Withholding 17 6.8 Claims Procedure and Arbitration 17 6.9 Termination and Amendment 19 6.10 Applicable Law 19 THE CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN Article I. Purpose 1.1 Establishment of the Plan. Effective as of July 1, 1994, The Charles Schwab Corporation (hereinafter, the "Company") hereby establishes The Charles Schwab Corporation Deferred Compensation Plan (the "Plan"), as set forth in this document. 1.2 Purpose of the Plan. The Plan permits participating employees to defer the payment of certain cash compensation that they may earn. The opportunity to elect such deferrals is provided in order to help the Company attract and retain key employees. This Plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. It is accordingly intended to be exempt from the participation, vesting, funding, and fiduciary requirements set forth in Title I of the Employee Retirement Income Security Act of 1974. Article II. Definitions 2.1 Definitions. The following definitions are in addition to any other definitions set forth elsewhere in the Plan. Whenever used in the Plan, the capitalized terms in this section shall have the meanings set forth below unless otherwise required by the context in which they are used: (a) "Administrator" the administrator described in section 3.1 that is selected by the Committee to assist in the administration of the Plan. (b) "Beneficiary" means a person entitled to receive any benefit payments that remain to be paid after a Participant's death, as determined under section 6.3. (c) "Board" means the Board of Directors of the Company. (d) "Company" means The Charles Schwab Corporation, a Delaware corporation. (e) "Category 1 Participant" and "Category 2 Participant" each refer to a specific Participant group and have the meaning set forth in section 4.1. (f) "Committee" means the Compensation Committee of the Board. (g) "Deferral Account" means the account representing deferrals of cash compensation, plus investment adjustments, as described in sections 5.5 and 5.6. (h) "Participant" means any employee who meets the eligibility requirements of the Plan, as set forth in Article 4, and includes, where appropriate to the context, any former employee who is entitled to benefits under this Plan. (i) "Plan" means The Charles Schwab Corporation Deferred Compensation Plan, as in effect from time to time. (j) "Plan Year" means the calendar year. (k) "Retirement" shall mean any termination of employment with the Company and its Subsidiaries for any reason other than death at any time after the Participant has attained age fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. Provided, however, that with respect to any payments made on account of a deferral election made prior to November 1, 1994, Retirement shall also mean any termination of employment with the Company and its Subsidiaries for any reason other than death after the Participant has attained age 55. (l) "Subsidiary" means a corporation or other business entity in which the Company owns, directly or indirectly, securities with more than 80 percent of the total voting power. (m) "Valuation Date" means each December 31 and any other date designated from time to time by the Committee for the purpose of determining the value of a Participant's Deferral Account balance pursuant to section 5.5. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine or feminine terminology shall also include the neuter and other gender, and the use of any term in the singular or plural shall also include the opposite number. Article III. Administration 3.1 Committee and Administrator. The Committee shall administer the Plan and may select one or more persons to serve as the Administrator. The Administrator shall perform such administrative functions as the Committee may delegate to it from time to time. Any person selected to serve as the Administrator may, but need not, be a Committee member or an officer or employee of the Company. However, if a person serving as Administrator or a member of the Committee is a Participant, such person may not vote on a matter affecting his interest as a Participant. The Committee shall have discretionary authority to construe and interpret the Plan provisions and resolve any ambiguities thereunder; to prescribe, amend, and rescind administrative rules relating to the Plan; to select the employees who may participate and to terminate the future participation of any such employees; to determine eligibility for benefits under the Plan; and to take all other actions that are necessary or appropriate for the administration of the Plan. Such interpretations, rules, and actions of the Committee shall be final and binding upon all concerned and, in the event of judicial review, shall be entitled to the maximum deference allowable by law. Where the Committee has delegated its responsibility for matters of interpretation and Plan administration to the Administrator, the actions of the Administrator shall constitute actions of the Committee. Article IV. Participants 4.1 Participants. Officers and other key employees of the Company and each of its Subsidiaries shall be eligible to participate in this Plan upon selection by the Committee. To be nominated for participation, an employee must be highly compensated or have significant responsibility for the management, direction and/or success of the Company as a whole or a particular business unit thereof. Directors of the Company who are full-time employees of the Company shall be eligible to participate in the Plan. Participating employees of the Company in the position of executive vice president or above shall be "Category 1 Participants." All other participating employees shall be "Category 2 Participants." Article V. Deferrals 5.1 Salary Deferrals. Each Category 2 Participant selected under section 4.1 may elect to defer up to 50 percent of his regular base salary (subject to the provisions of this Article V). Any such election must be made by entering a deferred compensation agreement with the employer, as evidenced by a form approved by and filed with the Administrator on or before the deadline specified by the Committee (which shall be no earlier than one month prior to the beginning of the election period for which the deferred salary is to be earned). For this purpose, the election period shall be the calendar year; provided, however, that during periods in which the Plan is not in effect for a full calendar year or an employee is not a Participant for a full calendar year, the election period shall be the portion of the calendar year during which the Plan is in effect and the employee is an eligible Participant. Notwithstanding the foregoing, a person who is not a Participant at the beginning of a calendar year shall not be allowed to elect a deferral of compensation that takes effect during that year without the consent of the Committee. Salary deferrals that have been elected shall occur throughout the election period in equal increments for each payroll period. 5.2 Deferrals of Bonuses and Other Cash Incentive Compensation. Each Category 1 Participant and each Category 2 Participant may elect to defer all or any portion (subject to the provisions of this Article V) of any amount that he subsequently earns under an annual cash bonus program and/or a long-term cash incentive compensation program of the Company or a participating Subsidiary. Any such election must be made by entering a deferred compensation agreement with the employer, as evidenced by a form approved by the Committee that is filed with the Administrator on or before the deadline specified by the Committee. For annual cash bonuses, this deadline shall be no earlier than one month prior to the beginning of year (or portion thereof) for which the bonus will be earned. For other cash incentive compensation, this deadline shall be a date no later than six months before the end of the year or other period for which the incentive compensation will be earned. Rules similar to those in section 5.1 shall apply in cases where the Plan is not in existence or an employee is not a Participant for the full period in which an annual cash bonus or long-term incentive compensation award is earned. 5.3 Deferral Procedures. Participants eligible to elect salary deferrals under section 5.1 shall have an opportunity to do so each year. Participants eligible to elect deferrals under section 5.2 shall have a separate opportunity to do so for each cash bonus under an annual bonus program and for each other cash bonus or incentive payment under a long-term incentive plan that they may earn. Unless the Committee specifies other rules for the deferrals that may be elected, the minimum deferral shall be 20 percent of the compensation to which a deferral election applies; and, subject to the maximum percentage allowed under section 5.1 or 5.2, as applicable, deferrals in excess of the minimum allowable percentage may be made only in increments of 10 percent. If a deferral is elected, the election shall be irrevocable with respect to the particular compensation that is subject to the election. Deferral elections shall be made on a form prescribed by the Committee or the Administrator. As provided in section 6.7, any deferral is subject to appropriate tax withholding measures and may be reduced to satisfy tax withholding requirements. 5.4 Election of Time and Manner of Payment. At the time a Participant makes a deferral election under section 5.1 or 5.2, the Participant shall also designate the manner of payment and the date on which payments from his or her Deferral Account shall begin, from among the following options: (i) a lump sum payable by the end of February of any year that the Participant specifies; (ii) a lump sum payable by the end of February in the year immediately following the Participant's Retirement; (iii) a series of annual installments, commencing in any year selected by the Participant and payable each year on or before the end of February, over a period of four years; or (iv) a series of annual installments, commencing in the year following the Participant's Retirement and payable each year on or before the end of February, over a period of five, ten, or fifteen years, as designated by the Participant. However, if a Participant terminates employment for any reason other than Retirement, the payment of the Participant's entire Deferral Account, including any unpaid installments pursuant to clause (iii) above, shall be made in a single lump sum by the end of February in the year next following the year in which the Participant terminates employment, notwithstanding the terms of the Participant's election. Any election of a specified payment date pursuant to clauses (i) or (iii) shall be subject to any restrictions that the Committee may, in its sole discretion, choose to establish in order to limit the number of different payment dates that a Participant may have in effect at one time. If payment is due in the form of a lump sum, the payment shall equal the balance of the Deferral Account being paid, determined as of the Valuation Date coincident with or immediately preceding the payment date. If payment is due in the form of installments, the amount of each installment payment shall be equal to the quotient determined by dividing (A) the value of the portion of the Deferral Account to which the installment payment election applies (determined as of the Valuation Date coincident with or immediately preceding the date the payment is to be made), by (B) the number of years over which the installment payments are to be made, less the number of years in which prior payments attributable to such installment payment election have been made. Notwithstanding the foregoing, however, if earnings or any other amounts credited to a Participant's Deferral Account are not considered performance- based compensation, within the meaning of Section 162(m) of the Internal Revenue Code, and do not otherwise meet Internal Revenue Code conditions allowing the Company and its Subsidiaries to receive a federal income tax deduction for such amounts upon paying them at the time provided under the Participant's election, the payment of such amounts, to the extent in excess of the amount that would be currently tax deductible, shall automatically be deferred until the earliest year that the payment can be deducted. 5.5 Accounts and Earnings. The Company shall establish a Deferral Account for each Participant who has elected a deferral under section 5.1 or 5.2 above, and its accounting records for the Plan with respect to each such Participant shall include a separate Deferral Account or subaccount for each deferral election of the Participant that could cause a payment made at a different time or in a different form from other payments of deferrals elected by the same Participant. Each Deferral Account balance shall reflect the Company's obligation to pay a deferred amount to a Participant or Beneficiary as provided in this Article V. Under procedures approved by the Committee and communicated to Participants, a Participant's Deferral Account balance shall be increased periodically (not less frequently than annually) to reflect an assumed earnings increment, based on an interest rate or other benchmark selected by the Committee and in effect at the time. Until the time for determining the amount to be paid to the Participant or Beneficiary, such assumed earnings shall accrue from each Valuation Date on the Deferral Account balance as of that date and shall be credited to the account as of the next Valuation Date. The rate of earnings may, but need not, be determined with reference to the actual rate of earnings on assets held under any existing grantor trust or other informal funding vehicle that is in effect pursuant to section 6.2. Any method of crediting earnings that is followed from time to time may, with reasonable advance notice to affected Participants, be revoked or revised prospectively as of the beginning of any new Plan Year. Earnings that have been credited for any Plan Year, like deferred amounts that have been previously credited to a Participant, shall not be reduced or eliminated retroactively unless they were credited in error. The crediting of assumed earnings shall not mean that any deferred compensation promise to a Participant is secured by particular investment assets or that the Participant is actually earning interest or any other form of investment income under the Plan. Consistent with the foregoing authority to exercise flexibility in establishing a method for crediting assumed earnings on account balances, the Committee may, but need not, consult with Participants about their investment preferences and may, but need not, institute a program of assumed earnings that tracks the investment performance in a Participant's qualified defined contribution plan account or in an assumed participant-directed investment arrangement. 5.6 Maintenance of Accounts. The Accounts of each Participant shall be entered on the books of the Company and shall represent a liability, payable when due under this Plan, out of the general assets of the Company. Prior to benefits becoming due hereunder, the Company shall expense the liability for such accounts in accordance with policies determined appropriate by the Company's auditors. Except to the extent provided pursuant to the second paragraph of this section 5.6, the Accounts created for a Participant by the Company shall not be funded by a trust or an insurance contract; nor shall any assets of the Company be segregated or identified to such account; nor shall any property or assets of the Company be pledged, encumbered, or otherwise subjected to a lien or security interest for payment of benefits hereunder. Notwithstanding that the amounts to be paid hereunder to Participants constitute an unfunded obligation of the Company, the Company may direct that an amount equal to any portion of the Accounts shall be invested by the Company as the Company, in its sole discretion, shall determine. The Committee may in its sole discretion determine that all or any portion of an amount equal to the Accounts shall be paid into one or more grantor trusts that may be established by the Company for the purpose of providing a potential source of funds to pay Plan benefits. The Company may designate an investment advisor to direct the investment of funds that may be used to pay benefits, including the investment of the assets of any grantor trusts hereunder. 5.7 Change in Control. In the event of a Change in Control (as defined below), the following rules shall apply: (a) All Participants shall continue to have a fully vested, nonforfeitable interest in their Deferral Accounts. (b) Deferrals of amounts for the year that includes the Change in Control shall cease beginning with the first payroll period that follows the Change in Control. (c) A special allocation of earnings on all Deferral Accounts shall be made under section 5.5 as of the date of the Change in Control on a basis no less favorable to Participants than the method being followed prior to the Change in Control. (d) All payments of deferred amounts following a Change in Control, whether or not they have previously begun, shall be made in a cash lump sum no later than 30 days following the Change in Control and, except as provided in section 5.4 with respect to installment payments in progress, shall be in an amount equal to the full Deferral Account balance, as adjusted pursuant to paragraph (c) above, as of the date of the Change in Control. (e) Nothing in this Plan shall prevent a Participant from enforcing any rules in a contract or another plan of the Company or any Subsidiary concerning the method of determining the amount of a bonus, incentive compensation, or other form of compensation to which a Participant may become entitled following a change in control, or the time at which that compensation is to be paid in the event of a change in control. For purposes of this Plan, a "Change in Control" means any of the following: (1) Any "person" who, alone or together with all "affiliates" and "associates" of such person, is or becomes (1) an "acquiring person" or (2) the "beneficial owner" of 35% of the outstanding voting securities of the Company (the terms "person", "affiliates", "associates" and "beneficial owner" are used as such terms are used in the Securities Exchange Act of 1934 and the General Rules and Regulations thereunder); provided, however, that a "Change in Control" shall not be deemed to have occurred if such "person" is Charles R. Schwab, the Company, any subsidiary or any employee benefit plan or employee stock plan of the Company or of any Subsidiary, or any trust or other entity organized, established or holding shares of such voting securities by, for or pursuant to, the terms of any such plan; or (2) Individuals who at the beginning of any period of two consecutive calendar years constitute the Board cease for any reason, during such period, to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's Shareholders, of each new Board Member was approved by a vote of at least three-quarters (3/4) of the Board members then still in office who were Board members at the beginning of such period; or (3) Approval by the shareholders of the Company of: (A) the dissolution or liquidation of the Company; (B) the sale or transfer of substantially all of the Company's business and/or assets to a person or entity which is not a "subsidiary" (any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company); or (C) an agreement to merge or consolidate, or otherwise reorganize, with one or more entities which are not subsidiaries (as defined in (B) above), as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Company; or (4) The Board agrees by a majority vote that an event has or is about to occur that, in fairness to the Participants, is tantamount to a Change in Control. A Change of Control shall occur on the first day on which any of the preceding conditions has been satisfied. However, notwithstanding the foregoing, this section 5.7 shall not apply to any Participant who alone or together with one or more other persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of the Company, triggers a "Change in Control" within the meaning of paragraphs (1) and (2) above. 5.8 Payment of Deferred Amounts. A Participant shall have a fully vested, nonforfeitable interest in his or her Deferral Account balance at all times. However, vesting does not confer a right to payment other than in the manner elected by the Participant pursuant to section 5.4 (subject to any modification that may occur pursuant to section 5.5, 5.7 or 5.9). Upon the expiration of a deferral period selected by the Participant in one or more deferral elections, the Company shall pay to such Participant (or to the Participant's Beneficiary, in the case of the Participant's death) an amount equal to the balance of the Participant's Account attributable to such expiring deferral elections, plus assumed earnings (determined by the Company pursuant to section 5.5) thereon. 5.9 Acceleration of Payment. The Committee, in its discretion, upon receipt of a written request from a Participant, may accelerate the payment of all or any portion of the unpaid balance of a Participant's Deferral Account in the event of the Participant's Retirement, death, permanent disability, resignation or termination of employment, or upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe, unforeseeable financial hardship creating an immediate and heavy need for cash that cannot reasonably be satisfied from sources other than an accelerated payment from this Plan. The Committee in making its determination may consider such factors and require such information as it deems appropriate. Article VI. General Provisions 6.1 Unfunded Obligation. The deferred amounts to be paid to Participants pursuant to this Plan constitute unfunded obligations of the Company. Except to the extent specifically provided hereunder, the Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments, including any grantor trust investments which the Company has determined and directed the Administrator to make to fulfill obligations under this Plan shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or Accounts shall not create or constitute a trust or a fiduciary relationship between the Administrator or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim for any changes in the value of any assets which may be invested or reinvested by the Company in an effort to match its liabilities under this Plan. 6.2 Informal Funding Vehicles. Notwithstanding section 6.1, the Company may, but need not, arrange for the establishment and use of a grantor trust or other informal funding vehicle to facilitate the payment of benefits and to discharge the liability of the Company and participating Affiliates under this Plan to the extent of payments actually made from such trust or other informal funding vehicle. Any investments and any creation or maintenance of memorandum accounts or a trust or other informal funding vehicle shall not create or constitute a trust or a fiduciary relationship between the Committee or the Company or an affiliate and a Participant, or otherwise confer on any Participant or Beneficiary or his or her creditors a vested or beneficial interest in any assets of the Company or any Affiliate whatsoever. Participants and Beneficiaries shall have no claim against the Company or any Affiliate for any changes in the value of any assets which may be invested or reinvested by the Company or any Affiliate with respect to this Plan. 6.3 Beneficiary. The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. A Participant may designate a Beneficiary on a form provided by the Administrator, executed by the Participant, and delivered to the Administrator. The Administrator may require the consent of the Participant's spouse to a designation if the designation specifies a Beneficiary other than the spouse. Subject to the foregoing, a Participant may change a Beneficiary designation at any time. Subject to the property rights of any prior spouse, if no Beneficiary is designated, if the designation is ineffective, or if the Beneficiary dies before the balance of the Account is paid, the balance shall be paid to the Participant's surviving spouse, or if there is no surviving spouse, to the Participant's estate. 6.4 Incapacity of Participant or Beneficiary. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Administrator receives a written notice, in a form and manner acceptable to the Administrator, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Administrator finds that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or because he or she is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or to any person or institution considered by the Administrator to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. If a guardian of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Administrator. In the event a person claiming or receiving benefits under the Plan is a minor, payment may be made to the custodian of an account for such person under the Uniform Gifts to Minors Act. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. 6.5 Nonassignment. The right of a Participant or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution, or other legal process. 6.6 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company, nor shall the Plan interfere in any way with the right of the Company to terminate the employment of such Participant at any time without assigning any reason therefor. 6.7 Tax Withholding. Appropriate taxes shall be withheld from cash payments made to Participants pursuant to the Plan. To the extent tax withholding is payable in connection with the Participant's deferral of income rather than in connection with the payment of deferred amounts, such withholding may be made from other wages and salary currently payable to the Participant, or, as determined by the Administrator, the amount of the deferral elected by the Participant may be reduced in order to satisfy required tax withholding for employment taxes and any other taxes. 6.8 Claims Procedure and Arbitration. The Company shall establish a reasonable claims procedure consistent with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Following a Change in Control of the Company (as determined under section 5.8) the claims procedure shall include the following arbitration procedure. Since time will be of the essence in determining whether any payments are due to the Participant under this Plan following a Change in Control, a Participant may submit any claim for payment to arbitration as follows: On or after the second day following the termination of the Participant's employment or other event triggering a right to payment), the claim may be filed with an arbitrator of the Participant's choice by submitting the claim in writing and providing a copy to the Company. The arbitrator must be: (a) a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the Federal Mediation and Conciliation Service or the American Arbitration Association; or (b) a retired judge of the State in which the claimant is a resident who served at the appellate level or higher. The arbitration hearing shall be held within 72 hours (or as soon thereafter as possible) after filing of the claim unless the Participant and the Company agree to a later date. No continuance of said hearing shall be allowed without the mutual consent of the Participant and the Company. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion, and the arbitrator may close the hearing in his or her sole discretion upon deciding he or she has heard sufficient evidence to satisfy issuance of an award. In reaching a decision, the arbitrator shall have no authority to ignore, change, modify, add to or delete from any provision of this Plan, but instead is limited to interpreting this Plan. The arbitrator's award shall be rendered as expeditiously as possible, and unless the arbitrator rules within seven days after the close of the hearing, he will be deemed to have ruled in favor of the Participant. If the arbitrator finds that any payment is due to the Participant from the Company, the arbitrator shall order the Company to pay that amount to the Participant within 48 hours after the decision is rendered. The award of the arbitrator shall be final and binding upon the Participant and the Company. Judgment upon the award rendered by the arbitrator may be entered in any court in any State of the United States. In the case of any arbitration regarding this Agreement, the Participant shall be awarded the Participant's costs, including attorney's fees. Such fee award may not be offset against the deferred compensation due hereunder. The Company shall pay the arbitrator's fee and all necessary expenses of the hearing, including stenographic reporter if employed. 6.9 Termination and Amendment. The Committee may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Committee may reinstate any or all of its provisions. Except as otherwise required by law, the Committee may delegate to the Administrator all or any of its foregoing powers to amend, suspend, or terminate the Plan. Any such amendment, suspension, or termination may affect future deferrals without the consent of any Participant or Beneficiary. However, with respect to deferrals that have already occurred, no amendment, suspension or termination may impair the right of a Participant or a designated Beneficiary to receive payment of the related deferred compensation in accordance with the terms of the Plan prior to the effective date of such amendment, suspension or termination, unless the affected Participant or Beneficiary gives his express written consent to the change. 6.10 Applicable Law. The Plan shall be construed and governed in accordance with applicable federal law and, to the extent not preempted by such federal law, the laws of the State of California. IN WITNESS WHEREOF, The Charles Schwab Corporation has caused its duly authorized officer to execute this Plan on the ____ day of ___________, 1994. THE CHARLES SCHWAB CORPORATION By: ___________________________ Its: _________________________ ATTEST: By: _________________________ Title: _________________________ EX-11 8 EXHIBIT 11.1
EXHIBIT 11.1 THE CHARLES SCHWAB CORPORATION Computation of Earnings per Share (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ------ ------ ------ ------ Net Income $ 57,068 $ 47,221 $174,106 $130,016 ======================================================================================================= Shares Primary: Weighted-average number of common shares outstanding 174,302 173,332 173,825 171,721 Common stock equivalent shares related to option plans 5,286 6,356 5,419 6,280 - ------------------------------------------------------------------------------------------------------- Weighted-average number of common and common equivalent shares outstanding 179,588 179,688 179,244 178,001 ======================================================================================================= Fully Diluted: Weighted-average number of common shares outstanding 174,302 173,332 173,825 171,721 Common stock equivalent shares related to option plans 5,286 6,799 5,499 6,794 - ------------------------------------------------------------------------------------------------------- Weighted-average number of common and common equivalent shares outstanding 179,588 180,131 179,324 178,515 ======================================================================================================= Primary/Fully Diluted Earnings per Share $ .32 $ .26 $ .97 $ .73 =======================================================================================================
EX-12 9 EXHIBIT 12.1
EXHIBIT 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands, unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ------ ------ ------ ------ Earnings before taxes on income $ 96,497 $ 78,058 $ 294,866 $ 214,726 ====================================================================================================================== Fixed charges Interest expense - customer 93,818 84,162 267,024 234,878 Interest expense - other 13,704 9,877 40,659 26,030 Interest portion of rental expense 5,784 5,023 17,045 15,430 - ---------------------------------------------------------------------------------------------------------------------- Total fixed charges (a) 113,306 99,062 324,728 276,338 - ---------------------------------------------------------------------------------------------------------------------- Earnings before taxes on income and fixed charges (b) $ 209,803 $ 177,120 $ 619,594 $ 491,064 ====================================================================================================================== Ratio of earnings to fixed charges (b) divided by (a)(1) 1.9 1.8 1.9 1.8 ====================================================================================================================== Ratio of earnings to fixed charges as adjusted(2) 6.0 6.2 6.1 6.2 ====================================================================================================================== (1) The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such purposes, "earnings" consist of earnings before taxes on income and fixed charges. "Fixed charges" consist of interest expense incurred on payables to customers, long-term debt (including current maturities) and one-third of rental expense, which is estimated to be representative of the interest factor. (2) Because interest expense incurred in connection with payables to customers is completely offset by interest revenue on related investments and margin loans, the Company considers such interest to be an operating expense. Accordingly, the ratio of earnings to fixed charges as adjusted reflects the elimination of such interest expense as a fixed charge.
EX-27 10 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Income and Condensed Consolidated Balance Sheet of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996, and is qualified in its entirety by reference to such financial statements. 1000 9-MOS DEC-31-1996 SEP-30-1996 1937315 4665963 4946546 0 147965 289153 12147205 153909 10568194 0 0 0 293965 1785 0 0 812379 12147205 192156 492998 712172 0 224514 307683 567845 294866 174106 0 0 174106 .97 .97
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