-----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, PgsQaVeJoFyWBy4cI9p1WY4qByoDdhEgGUnSHFGiBofA/wJkbv9PZkQqcAJnuTmr sTXg9WYQ3xQNRVQRWQ42Lg== 0000316709-97-000009.txt : 19970515 0000316709-97-000009.hdr.sgml : 19970515 ACCESSION NUMBER: 0000316709-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 97605668 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 3/31/97 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 March 31, 1997 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. 175,812,642 shares of $.01 par value Common Stock Outstanding on May 1, 1997 THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended March 31, 1997 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 7-14 Part II - Other Information Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signature 15 FORWARD-LOOKING STATEMENTS In addition to historical information, this interim report contains forward-looking statements that reflect management's expectations. These statements relate to, among other things, the Company's strategy, revenues, profit margin, sources of liquidity and capital expenditures. Achievement of the expressed expectations is subject to certain risks and uncertainties that could cause actual results to differ materially from those expectations. See "Description of Business" in Management's Discussion and Analysis of Financial Condition and Results of Operations in this interim report for a discussion of important factors that may cause such differences. 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 March 31, 1997 1996 ---- ---- Revenues Commissions $274,919 $240,913 Mutual fund service fees 94,698 68,835 Principal transactions 69,135 61,634 Interest revenue, net of interest expense of $123,130 in 1997 and $99,009 in 1996 76,723 58,944 Other 20,179 16,455 - ------------------------------------------------------------------------------ Total 535,654 446,781 - ------------------------------------------------------------------------------ Expenses Excluding Interest Compensation and benefits 220,838 195,708 Communications 45,701 42,954 Occupancy and equipment 35,414 29,976 Depreciation and amortization 27,773 24,751 Advertising and market development 35,835 22,203 Commissions, clearance and floor brokerage 22,444 19,533 Professional services 13,881 13,435 Other 23,448 18,551 - ------------------------------------------------------------------------------ Total 425,334 367,111 - ------------------------------------------------------------------------------ Income before taxes on income 110,320 79,670 Taxes on income 43,585 32,727 - ------------------------------------------------------------------------------ Net Income $ 66,735 $ 46,943 ============================================================================== Weighted-average number of common and common equivalent shares outstanding* 180,825 178,887 ============================================================================== Primary/Fully Diluted Earnings Per Share $ .37 $ .26 ============================================================================== Dividends Declared Per Common Share $ .05 $ .04 ==============================================================================
* 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 per share amounts) (Unaudited)
March 31, December 31, 1997 1996 ---- ---- Assets Cash and cash equivalents $ 713,396 $ 633,317 Cash and investments required to be segregated under Federal or other regulations (including resale agreements of $5,896,118 in 1997 and $6,069,930 in 1996) 7,481,623 7,235,971 Receivable from brokers, dealers and clearing organizations 313,006 230,943 Receivable from customers - net 5,436,552 5,012,815 Securities owned - at market value 201,919 127,866 Equipment, office facilities and property - net 322,625 315,376 Intangible assets - net 63,960 68,922 Other assets 109,980 153,558 - ------------------------------------------------------------------------------ Total $14,643,061 $13,778,768 ============================================================================== Liabilities and Stockholders' Equity Drafts payable $ 190,264 $ 225,136 Payable to brokers, dealers and clearing organizations 1,081,633 877,742 Payable to customers 11,792,551 11,176,836 Accrued expenses and other 357,421 360,683 Borrowings 283,317 283,816 - ------------------------------------------------------------------------------ Total liabilities 13,705,186 12,924,213 - ------------------------------------------------------------------------------ Stockholders' equity: Preferred stock - 9,940 shares authorized; $.01 par value per share; none issued Common stock - 500,000 shares authorized; $.01 par value per share; 178,459 shares issued in 1997 and 1996 1,785 1,785 Additional paid-in capital 222,275 200,857 Retained earnings 781,058 723,085 Treasury stock - 1,983 shares in 1997 and 3,391 shares in 1996, at cost (45,805) (60,277) Unearned ESOP shares (4,650) (5,517) Unamortized restricted stock compensation (17,503) (8,658) Foreign currency translation adjustment 715 3,280 - ------------------------------------------------------------------------------ Total stockholders' equity 937,875 854,555 - ------------------------------------------------------------------------------ Total $14,643,061 $13,778,768 ==============================================================================
See Notes to Condensed Consolidated Financial Statements. - 2 - THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, 1997 1996 ---- ---- Cash flows from operating activities Net income $ 66,735 $ 46,943 Noncash items included in net income: Depreciation and amortization 27,773 24,751 Deferred income taxes (5,516) (421) Stock compensation 4,969 3,961 Other 1,099 1,070 Change in securities owned - at market value (74,053) (4,924) Change in other assets 48,975 64,478 Change in accrued expenses and other 14,389 8,549 - ------------------------------------------------------------------------------ Net cash provided before change in customer-related balances 84,371 144,407 - ------------------------------------------------------------------------------ Change in customer-related balances: Payable to customers 624,347 416,033 Receivable from customers (425,478) (111,953) Drafts payable (34,255) (50,579) Payable to brokers, dealers and clearing organizations 205,782 97,920 Receivable from brokers, dealers and clearing organizations (86,222) (24,988) Cash and investments required to be segregated under Federal or other regulations (252,139) (305,344) - ------------------------------------------------------------------------------ Net change in customer-related balances 32,035 21,089 - ------------------------------------------------------------------------------ Net cash provided by operating activities 116,406 165,496 - ------------------------------------------------------------------------------ Cash flows from investing activities Purchase of equipment, office facilities and property - net (32,727) (68,700) Cash payments for business acquired (3,709) - ------------------------------------------------------------------------------ Net cash used by investing activities (32,727) (72,409) - ------------------------------------------------------------------------------ Cash flows from financing activities Proceeds from borrowings 34,000 Purchase of treasury stock (1,024) Dividends paid (8,762) (6,984) Other 5,521 2,161 - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities (3,241) 28,153 - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents (359) (95) - ------------------------------------------------------------------------------ Increase in cash and cash equivalents 80,079 121,145 Cash and cash equivalents at beginning of period 633,317 454,996 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 713,396 $ 576,141 ==============================================================================
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 financial services. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 242 branch offices in 46 states, the Commonwealth of Puerto Rico and the United Kingdom, and four regional telephone service centers. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), is a market maker in Nasdaq securities that provides trade execution services to broker-dealers, including Schwab, and institutional customers. ShareLink, acquired in 1995 to expand the Company's international operations, is a retail discount securities brokerage firm located in the United Kingdom. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission 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 1996 Annual Report to Stockholders, which are incorporated by reference in the Company's 1996 Annual Report on Form 10-K. Prior periods' financial statements have been reclassified to conform to the 1997 presentation. Statement of Financial Accounting Standards No. 125 Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, except for certain financial assets for which the effective date has been delayed until 1998 by SFAS No. 127 - Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of this statement 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. 128 In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 - Earnings per Share. The Company is required to adopt this statement at December 31, 1997. This statement replaces current earnings per share (EPS) reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted- average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. If this statement had been in effect during the current and prior year periods, basic EPS would have been $.38 and $.27 for the quarters ended March 31, 1997 and 1996, respectively. Diluted EPS would not have been different than primary and fully diluted EPS currently reported for the periods. Statement of Financial Accounting Standards No. 129 In February 1997, the Financial Accounting Standards Board issued SFAS No. 129 - Disclosure of Information about Capital Structure. The Company is required to adopt this statement at December 31, 1997. This statement establishes standards for disclosing information about the Company's capital structure. The adoption of this statement will not have an effect on the Company's financial position, results of operations, earnings per share or cash flows. Commitments and Contingencies M&S has been named as one of thirty-three defendant market-making firms in a consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation, which is pending in the United States District Court for 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 - 4 - May 1, 1989 through May 27, 1994. On August 22, 1995, a second consolidated amended class action complaint was filed. On November 26, 1996, a plaintiff class was certified by the Court. 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 certain Nasdaq securities. The consolidated complaint does not set forth any specific amount of damages, although it requests that the actual damages be trebled where permitted by statute. The ultimate outcome of this consolidated action cannot currently be determined. On July 16, 1996, the Department of Justice filed a civil action in the United States District Court for the Southern District of New York, United States of America v. Alex Brown & Sons, Inc., et al., against M&S and twenty- three other market makers in Nasdaq securities alleging violations of the federal antitrust laws in connection with certain customs and practices. On July 16, 1996, the twenty-four market-maker defendants, including M&S, entered into a Stipulation and Order resolving the civil action. 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. Certain parties challenged portions of the Stipulation and Order and, on January 14, 1997, the Court heard arguments on whether the Stipulation and Order should be approved. On April 23, 1997, the Court approved the Stipulation and Order. The objecting parties have 60 days from the date the order approving the Stipulation and Order was entered in which to file an appeal. If the Stipulation and Order is finally approved, after all periods for appeal have passed, the civil action will be dismissed. Between August 12, 1993 and November 17, 1995, Schwab was named as a defendant in eleven class action lawsuits, five of which have been resolved favorably to Schwab and six of which are still pending in state courts in Illinois, 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 the third party who executed the transaction. The class certification was affirmed by the Louisiana Court of Appeals on December 2, 1996. The actions in Illinois and California have been dismissed on the grounds that the claims asserted are preempted by federal law. Plaintiffs have filed appeals in both cases. The action in Texas has been stayed. The ultimate outcome of these actions cannot currently be determined. There are various other 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 Uniform Net Capital Rule under the Securities Exchange Act of 1934 (the Rule) and each compute net capital under the alternative method permitted by this Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from customer transactions or a minimum dollar amount, which is based on the type of business conducted by the broker-dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. At March 31, 1997, Schwab's net capital was $576 million (10% of aggregate debit balances), which was $463 million in excess of its minimum required net capital and $295 million in excess of 5% of aggregate debit balances. At March 31, 1997, M&S' net capital was $9 million (454% of aggregate debit balances), which was $8 million in excess of its minimum required net capital. Schwab and ShareLink had portions of their cash and investments segregated for the exclusive benefit of customers at March 31, 1997, in accordance with applicable regulations. M&S had no such cash reserve requirement at March 31, 1997. - 5 - Cash Flow Information Certain information affecting the cash flows of the Company follows (in thousands): Three Months Ended March 31, 1997 1996 ---- ---- Income taxes paid $ 1,552 $ 370 ======== ======== Interest paid: Customer cash balances $104,740 $ 86,436 Borrowings 9,104 7,403 Stock-lending activities 7,646 4,861 Other 1,914 2,770 -------- -------- Total interest paid $123,404 $101,470 ======== ======== Subsequent Event During April 1997, the Company repurchased and recorded as treasury stock a total of 500,000 shares of its common stock for approximately $16 million. As of April 30, 1997, authorization granted by the Company's Board of Directors allowed for the repurchase of an additional 871,000 shares. - 6 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Description of Business The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide securities brokerage and related financial services for over 4.2 million active customer accounts(a). Customer assets totaled $267.6 billion at March 31, 1997. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 242 branch offices in 46 states, the Commonwealth of Puerto Rico and the United Kingdom. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to broker-dealers and institutional customers. ShareLink, acquired in 1995 to expand the Company's international operations, is a retail discount securities brokerage firm located in the United Kingdom. The Company's strategy is to attract and retain customer assets by focusing on a number of areas within the financial services industry - retail brokerage, mutual funds, support services for independent investment managers, equity securities market-making, electronic brokerage and 401(k) defined contribution plans. To pursue its strategy and its objective of long-term profitable growth, the Company plans to continue to leverage its competitive advantages. These advantages include advertising and marketing programs that have created a national brand, a broad range of products and services, diverse delivery systems and an ongoing investment in technology. The Company's nationwide advertising and marketing programs are designed to distinguish the Schwab brand as well as its products and services. These programs helped the Company open a record 297,000 new customer accounts and gather a record $16.1 billion in net new customer assets during the first quarter of 1997. The Company offers a broad range of products and services to meet customers' investment and financial needs at prices that management believes represent superior value. The Company's branch office network assists investors in developing asset allocation strategies and evaluating their investment choices. Branch staff also refer investors who desire additional guidance to independent fee-compensated investment managers through the Schwab AdvisorSource (trademark) service. In addition, the Company is continuing to enhance and broaden the Mutual Fund OneSource (registered trademark) service, which provides customers with the ability to invest in over 720 mutual funds from 87 fund families without incurring transaction fees. Also, the Company has recently entered into arrangements with two major regional banks allowing them to offer the Mutual Fund OneSource service directly to their customers. The Company invests in diverse delivery systems that uphold the Company's customer service standards. In addition to its branch office network, the Company maintains four regional telephone service centers as well as electronic brokerage channels that provide customers with online and telephonic access. Online channels include PC-based services such as SchwabLink (registered trademark) - a service for investment managers, StreetSmart (registered trademark) - Schwab's trading software, e.Schwab (trademark) - which provides online brokerage services, and SchwabNOW! (trademark) - which provides information and trading services through Schwab's World Wide Web site. Telephonic channels include TeleBroker (registered trademark) - Schwab's touch- tone telephone trading service, and VoiceBroker (trademark) - Schwab's service that uses voice recognition technology to provide individual investors with real-time quotes. - --------- (a) Accounts with balances or activity within the preceding twelve months. - 7 - The Company's ongoing investment in technology is a key element in providing fast and consistent customer service, and reducing processing costs. The Company is a forerunner in placing technology in the hands of customers. During the first quarter of 1997, Schwab added a number of new features to SchwabNOW! (trademark) including Mutual Fund OneSource (registered trademark) Online, which provides information and flexible tools for comparing mutual funds, and MarketBuzz (trademark), which offers company and market information from a variety of news sources. Also during the first quarter of 1997, Schwab World Wide Web trading became available through America Online. The Company faces significant competition from full commission and discount brokerage firms, as well as mutual fund companies. Increasingly, competition has come from banks, software development companies, insurance companies and others as they expand their product lines. A general trend of consolidation in financial services has attracted new competitors and strengthened existing ones. This competition may negatively impact the Company's revenue growth and profit margin. 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. Since transaction-based revenues continue to represent a majority of the Company's revenues, the Company may experience significant variations in revenues from period to period. The Company adjusts its expenses in anticipation of and in response to changes in financial market conditions and customer trading patterns. Certain of the Company's expenses (including variable compensation, portions of communications, and commissions, clearance and floor brokerage) vary directly with changes in financial performance or customer trading activity. Expenses relating to the level of temporary employees, contractors, overtime hours, professional services, and advertising and market development 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 in response to market conditions. However, a significant portion of the Company's expenses such as salaries and wages, occupancy and equipment, and depreciation and amortization do not vary directly, at least in the short term, with fluctuations in revenues or securities trading volumes. Given the nature of the Company's revenues and expenses, and the economic and competitive factors discussed above, the Company's earnings and common stock price may be subject to significant volatility from period to period. The Company's results for any interim period are not necessarily indicative of results for a full year. In addition to historical information, this interim report contains forward-looking statements that reflect management's expectations. These statements relate to, among other things, the Company's strategy (see Description of Business), revenues (see Financial Overview and Principal Transactions), profit margin (see Financial Overview and Principal Transactions), sources of liquidity (see Liquidity and Capital Resources- Liquidity) and capital expenditures (see Liquidity and Capital Resources-Cash Flows and Capital Resources). Achievement of the expressed expectations is subject to certain risks and uncertainties that could cause actual results to differ materially from those expectations. Important factors that may cause such differences are noted throughout this interim report and include, but are not limited to: the effect of customer trading patterns on Company revenues and earnings; changes in technology; the effects of competitors' pricing, product and service decisions and intensified competition; evolving regulation adversely affecting the Company; the uncertainties of litigation; changes in revenues and profit - 8 - margin due to cyclical securities markets and interest rates; and a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices and trading volumes. Three Months Ended March 31, 1997 Compared To Three Months Ended March 31, 1996 Financial Overview Net income for the first quarter of 1997 totaled $67 million, up 42% from first quarter 1996 net income of $47 million. Earnings per share for the first quarter of 1997 increased 42% to $.37 per share from $.26 per share for the first quarter of 1996. First quarter 1997 revenues were $536 million, up 20% from $447 million for the first quarter of 1996, as all revenue categories increased, primarily due to higher trading volume and an increase in customer assets. The Company's strategy of placing technology in the hands of customers and providing diverse delivery systems has facilitated growth in electronic trading at Schwab. During the first quarter of 1997, total daily average trades, which include revenue trades and Mutual Fund OneSource (registered trademark) trades, totaled 104,600, up 30% from 80,500 daily average trades for the same period last year. A total of 34,100 daily average trades were generated through online brokerage channels during the first quarter of 1997, up 86% from 18,300 daily average trades for the same period last year. A total of 14,400 daily average trades were generated through TeleBroker (registered trademark) during the first quarter of 1997, up 8% from 13,300 daily average trades for the same period last year. Assets in customer accounts totaled $267.6 billion at March 31, 1997, an increase of $67.1 billion, or 33%, from a year ago. Customers' equity securities increased $28.0 billion to $108.1 billion, and customer assets in Schwab's Mutual Fund Marketplace (registered trademark) increased $20.5 billion to $78.5 billion. In addition, customer assets in cash and money market funds increased $13.1 billion to $54.4 billion. Schwab added a record 297,000 new customer accounts during the first quarter of 1997, an increase of 21% from the 245,000 new accounts added during the first quarter of 1996. Total operating expenses excluding interest during the first quarter of 1997 were $425 million, up 16% from $367 million for the first quarter of 1996, primarily resulting from additional staff to support the Company's growth and expansion, as well as an increase in advertising and market development spending. The after-tax profit margin for the first quarter of 1997 was 12.5%, up from 10.5% for the first quarter of 1996. The annualized return on stockholders' equity for the first quarter of 1997 was 30%, up from 29% for the first quarter of 1996. The Company experienced a decline in customer trading activity during March 1997 as compared to the first two months of the quarter. Daily average revenue trades in March 1997 were 62,600, down from 70,800 in January 1997 and 71,000 in February 1997. As the Company entered the second quarter of 1997, trading continued to decline with daily average revenue trades of 58,600 in April 1997. The Company's flexibility in its expense structure (as described above in Description of Business) allows adjustments to be made to reflect changes in trading and market activity through various discretionary measures. Since the Company intends to continue its practice of aggressively investing throughout most market cycles, if customer trading activity remains at April levels, second quarter 1997 revenues and profit margin are expected to be lower than the first quarter of 1997. Commissions Commission revenues for the Company were $275 million for the first quarter of 1997, up - 9 - $34 million, or 14%, from the first quarter of 1996. The Company earns commissions when acting as an agent and principal transaction revenues when acting as a principal or a market maker. Commissions earned on customer revenue trades, excluding commissions on trades with specialists, were $273 million for the first quarter of 1997, compared to $238 million for the first quarter of 1996. Daily average revenue trades were 68,200 in the first quarter of 1997, compared to 53,700 for the comparable period in 1996. The Company's total revenue trades have increased as its customer base has continued to grow and customer accounts in general were more active. Average commission per revenue trade declined due to a higher proportion of trades placed through electronic brokerage channels, which provide additional commission discounts from the Company's standard rates. - --------------------------------------------------------------- Three Months Commissions Earned Ended on Customer Revenue March 31, Percent Trades 1997 1996 Change - --------------------------------------------------------------- Customer accounts that traded during the quarter (in thousands) 1,080 905 19% Average customer revenue trades per account 3.85 3.74 3 Total revenue trades (in thousands) 4,161 3,389 23 Average commission per revenue trade $65.55 $70.39 (7) Commissions earned on customer revenue trades (in millions) $ 273 $ 238 15 =============================================================== Mutual Fund Service Fees Mutual fund service fees increased $26 million, or 38%, to $95 million in the first quarter of 1997 from the comparable period in 1996. The increase was primarily attributable to significant increases in customer assets in funds purchased through Schwab's Mutual Fund OneSource (registered trademark) service, and in 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 provided to funds in the Mutual Fund OneSource service, and for transfer agent services, shareholder services, administration and investment management provided to proprietary money market funds. Customer assets held by Schwab that have been purchased through the Mutual Fund OneSource service, excluding SchwabFunds, totaled $41.4 billion at March 31, 1997, compared to $28.7 billion at March 31, 1996, a 44% increase. Customer assets invested in the SchwabFunds increased 35% to $47.3 billion at March 31, 1997 from $35.0 billion at March 31, 1996. Customer assets invested in the Mutual Fund Marketplace (registered trademark), excluding the Mutual Fund OneSource service, totaled $37.1 billion at March 31, 1997, compared to $29.3 billion at March 31, 1996, a 27% increase. Schwab charges a transaction fee on trades placed in the funds included in the Mutual Fund Marketplace (except on trades through the Mutual Fund OneSource service) and these fees are recorded as commission revenues. Principal Transactions Principal transaction revenues increased $7 million, or 12%, to $69 million in the first quarter of 1997 from the comparable period in 1996. This increase was primarily due to higher trading volume handled by M&S, partially offset by lower average revenue per principal transaction mainly due to the impact of the January 1997 implementation of the Securities and Exchange Commission (SEC) Order Handling Rules (see discussion below). In August 1996, the SEC adopted certain new rules and rule amendments, known as the Order Handling Rules, which significantly alter the manner in which orders related to both Nasdaq and - 10 - listed securities will be handled. These rules became effective on January 20, 1997, with respect to exchange-listed stocks and a limited number of Nasdaq securities, and are being phased in with respect to additional Nasdaq securities during 1997. Average revenue per principal transaction declined during the first quarter of 1997 as compared to the first quarter of 1996, and the Company expects further significant declines in this measure as additional securities are phased-in under the Order Handling Rules. The Order Handling Rules, along with other potential regulatory actions and improvements in technology, could impact the manner in which business is currently conducted in the Nasdaq market. In addition, during 1994, the SEC commenced an investigation into the Nasdaq market and the activities of broker- dealers, including M&S, who act as market makers in Nasdaq securities. On August 8, 1996, the SEC issued a report of its investigation, and the National Association of Securities Dealers consented to sanctions for failing to enforce compliance with its rules and the federal securities laws. The SEC is continuing its investigation and has stated that further enforcement proceedings have not been precluded. These new rules, regulatory actions and changes in market customs and practices are expected to have a material adverse impact on M&S' principal transaction revenues, M&S' profit margin and on the manner in which M&S conducts its business. See "Commitments and Contingencies" note in the Notes to Condensed Consolidated Financial Statements regarding certain civil litigation relating to various principal transaction activities. Interest Revenue, Net of Interest Expense Interest revenue, net of interest expense (referred to as net interest revenue), increased $18 million, or 30%, to $77 million in the first quarter of 1997 from the comparable period in 1996 as shown in the following table (in millions): - ----------------------------------------------------------- Three Months Ended March 31, 1997 1996 - ----------------------------------------------------------- Interest Revenue Margin loans to customers $ 99 $ 77 Investments, customer-related 94 76 Other 7 5 - ----------------------------------------------------------- Total 200 158 - ----------------------------------------------------------- Interest Expense Customer cash balances 109 86 Stock-lending activities 8 5 Borrowings 5 4 Other 1 4 - ----------------------------------------------------------- Total 123 99 - ----------------------------------------------------------- Net Interest Revenue $ 77 $ 59 =========================================================== Customer-related daily average balances, interest rates and average net interest margin for the first quarters of 1997 and 1996 are summarized in the following table (dollars in millions): - ----------------------------------------------------------------------- Three Months Ended March 31, 1997 1996 - ----------------------------------------------------------------------- Interest-Earning Assets (customer-related): Investments: Average balance outstanding $ 7,229 $ 5,637 Average interest rate 5.29% 5.39% Margin loans to customers: Average balance outstanding $ 5,350 $ 4,026 Average interest rate 7.49% 7.67% Average yield on interest-earning assets 6.22% 6.34% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $ 10,098 $ 7,791 Average interest rate 4.37% 4.46% Other interest-bearing sources: Average balance outstanding $ 978 $ 649 Average interest rate 4.38% 4.45% Average noninterest-bearing portion $ 1,503 $ 1,223 Average interest rate on funding sources 3.85% 3.89% Summary: Average yield on interest-earning assets 6.22% 6.34% Average interest rate on funding sources 3.85% 3.89% - ---------------------------------------------------------------------- Average net interest margin 2.37% 2.45% ====================================================================== - 11 - The increase in net interest revenue from the prior year's first quarter was primarily due to higher levels of average earning assets, partially offset by a decrease in average net interest margin. Expenses Excluding Interest Compensation and benefits expense for the first quarter of 1997 increased $25 million, or 13%, to $221 million from the prior year's first 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 first quarters of 1997 and 1996, variable compensation represented 22% and 25%, respectively, of total compensation and benefits expense. At March 31, 1997, the Company had full-time, part-time and temporary employees, and persons employed on a contract basis that represented the equivalent of approximately 11,100 full-time employees, compared to approximately 9,900 at March 31, 1996. Compensation for temporary employees, contractors and overtime hours accounted for $31 million and $23 million of total compensation and benefits expense during the first quarters of 1997 and 1996, respectively. Advertising and market development expense increased $14 million, or 61%, to $36 million from the prior year's first quarter primarily due to increased media, print and direct mail advertisements relating to campaigns covering Mutual Fund OneSource (registered trademark) and e.Schwab (trademark), as well as new product and service offerings. The Company was selected as the official investment firm for the Professional Golf Association Tour, which also contributed to the increase in advertising and market development expense. The Company's effective income tax rate for the first quarter of 1997 was 39.5% compared to 41.1% for the comparable period in 1996. 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 $11.4 billion and $10.9 billion at March 31, 1997 and December 31, 1996, respectively. 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 $210 million was outstanding at March 31, 1997. At quarter end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC - - $10 million maturing in 1998 and $15 million maturing in 1999. Borrowings under these subordinated lending arrangements qualify as regulatory capital for Schwab. For use in its brokerage operations, Schwab maintained uncommitted, unsecured bank credit lines totaling $495 million at March 31, 1997. Schwab used such borrowings for five days during the first three months of 1997, with the daily amounts borrowed averaging $61 million. These lines were unused at March 31, 1997. M&S M&S' liquidity needs are generally met through earnings generated by its operations. Most of M&S' assets are liquid, consisting primarily of receivables from brokers, dealers and clearing organizations, cash and cash equivalents, and marketable securities. M&S may borrow up to - 12 - $35 million under a subordinated lending arrangement with CSC. Borrowings under this arrangement qualify as regulatory capital for M&S. This facility was unused at March 31, 1997. CSC CSC's liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. 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 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 March 31, 1997, Schwab had $576 million of net capital (10% of aggregate debit balances), which was $463 million in excess of its minimum required net capital. At March 31, 1997, M&S had $9 million of net capital (454% of aggregate debit balances), which was $8 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 $278 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 1997 to 2005 and fixed interest rates ranging from 5.32% to 7.72% with interest payable semiannually. The Medium-Term Notes were rated A3 by Moody's Investors Service and BBB+ by Standard & Poor's Ratings Group at March 31, 1997 and December 31, 1996. As of March 31, 1997, CSC had a prospectus supplement on file with the SEC enabling CSC to issue up to $196 million in Senior or Senior Subordinated Medium-Term Notes, Series A. These notes remained unissued at March 31, 1997. 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 for which 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 was not used in the first quarter of 1997. 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 $95 million for the first three months of 1997, up 32% from $72 million for the first three months of 1996. Depreciation expense totaled $25 million for the first quarter of 1997, as compared to $22 million for same period in the prior year. Amortization expense totaled $3 million for both the first quarter of 1997 and 1996. During the first three months of 1997, the Company's capital expenditures totaled $33 million for equipment and office facilities relating to continued enhancements of its data processing and telecommunications systems. In addition, the Company opened four new branch offices during the first three months of 1997 and three more during April 1997. As has been the case recently, capital expenditures will vary from period to period as business conditions change. During the first three months of 1997, the Company paid common stock cash dividends totaling $9 million, up from $7 million paid during the first three months of 1996. The Company monitors both the relative composition and absolute level of its capital - 13 - structure. The Company's stockholders' equity at March 31, 1997 totaled $938 million. In addition, the Company had borrowings of $283 million that bear interest at a weighted-average rate of 6.46%. These borrowings, together with the Company's equity, provided total financial capital of $1,221 million at March 31, 1997, up $82 million, or 7% from the December 31, 1996 level of $1,139 million. PART II - OTHER INFORMATION Item 1. Legal Proceedings The discussion of legal proceedings in Notes to Condensed Consolidated Financial Statements, under "Commitments and Contingencies" in Part I - Financial Information, Item 1., is 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 None. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this quarterly report on Form 10-Q. Exhibit Number Exhibit - ------- --------------------------------------------------------------------- 10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan, restated to include amendments through February 26, 1997, with form of Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan (1987)) attached, (supersedes Exhibit 10.159 to the Registrant's Form 10-Q for the quarter ended September 30, 1996). 10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to include amendments through February 26, 1997, with form of Non- Qualified Stock Option Agreement attached, (supersedes Exhibit 10.160 to the Registrant's Form 10-Q for the quarter ended September 30, 1996). 11.1 Computation of Earnings Per Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 27.1 Financial Data Schedule (electronic only). - ------------------------------------------------------------------------------ (b) Reports on Form 8-K None. - 14 - 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: May 14, 1997 /s/ Steven L. Scheid --------------------------- Steven L. Scheid Executive Vice President and Chief Financial Officer -15- EX-10 2 EXHIBIT 10.166 Exhibit 10.166 THE CHARLES SCHWAB CORPORATION 1987 EXECUTIVE OFFICER STOCK OPTION PLAN (Restated to include Amendments through February 26, 1997) Article 1. Introduction. The purpose of the 1987 Executive Stock Option Plan, as Amended and Restated (the "Plan") is to enable The Charles Schwab Corporation 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. The Plan was initially adopted on March 24, 1987, and was amended on September 17, 1996. The Plan is hereby restated and amended as of February 26, 1997, and the terms of this Restatement shall apply to all awards granted under the Plan on or after such date. The Plan shall terminate not more than ten (10) years from the date the Plan initially was adopted. The Plan will provide Awards in the form of Restricted Shares, Performance Share Awards or Options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Article 2. Administration. 2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more Non-Employee Directors, who shall be appointed by the Board. 2.2 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. Article 3. Limitation on Awards. The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed 1,284,000 (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. Article 4. Eligibility. 4.1 General Rule. Key Employees shall be eligible for designation as Participants by the Committee. 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. 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. 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. 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. 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 Participant'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; provided that upon an Optionee's Retirement, the exercisability of all outstanding Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee's Retirement. Options may also be awarded in combination with Restricted Shares, and such an Award may provide that the Options will not be exercisable unless the related Restricted Shares are forfeited. In addition, Options 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 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. 5.7 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. 5.8 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant, 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 12.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. 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. 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 that the Committee may at any time accept payment pursuant to Section 6.2 or 6.3. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased. 6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. Article 7. Restricted Shares and Performance Share Awards. 7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the grant. Restricted Shares or Performance Share Awards may also be awarded in combination with Options, and such an Award may provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related Options 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. 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. Withholding Taxes. 12.1 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. 12.2 Nonstatutory Options, Restricted Shares or Performance Share Awards. The Committee may permit an Optionee who exercises Options, 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 13. 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 13 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 14. Future of Plans. 14.1 Term of the Plan. The Plan, as set forth herein, shall become effective on February 26, 1997. The Plan shall remain in effect until it is terminated under Section 14.2, except that no Awards shall be granted after March 24, 1997. 14.2 Amendment or Termination. The Board may at any time terminate this Plan, and the Board or the Committee make such modifications of the Plan as it shall deem advisable; 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. 14.3 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 15. Definitions. 15.1 "Award" means any award of an Option, a Restricted Share or a Performance Share Award under the Plan. 15.2 "Award Year" means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted. 15.3 "Board" means the Company's Board of Directors, as constituted from time to time. 15.4 "Change in Control" means the occurrence of any of the following events after the effective date of the Plan as set out in Section 14.1: (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. 15.5 "Code" means the Internal Revenue Code of 1986, as amended. 15.6 "Committee" means the Compensation Committee of the Board, as constituted from time to time. 15.7 "Common Share" means one share of the common stock of the Company. 15.8 "Company" means The Charles Schwab Corporation, a Delaware corporation. 15.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 15.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 15.11 "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. 15.12 "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. 15.13 "Key Employee" means a key common-law employee of the Company or any Subsidiary, as determined by the Committee. 15.14 "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. 15.15 "Non-Employee Director" means a member of the Board who is not a common-law employee. 15.16 "Option" means an employee stock option not described in sections 422 through 424 of the Code, including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share. 15.17 "Optionee" means an individual, or his or her estate, legatee or heirs at law that holds an Option. 15.18 "Participant" means a Non-Employee Director or Key Employee who has received an Award. 15.19 "Performance Share Award" means the conditional right to receive in the future one Common Share, awarded to a Participant under the Plan. 15.20 "Plan" means this 1987 Executive Stock Option Plan of The Charles Schwab Corporation, as it may be amended from time to time. 15.21 "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. 15.22 "Restricted Share" means a Common Share awarded to a Participant under the Plan. 15.23 "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. 15.24 "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. 15.25 "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. 15.26. "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. 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 "Share"), 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 no 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 3 EXHIBIT 10.167 Exhibit 10.167 THE CHARLES SCHWAB CORPORATION 1987 STOCK OPTION PLAN (Restated to include Amendments through February 26, 1997) Article 1. Introduction. The purpose of the 1987 Stock Option Plan, as Amended and Restated (the "Plan") is to enable The Charles Schwab Corporation 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. The Plan was initially adopted on March 24, 1987, and was amended on July 29, 1987, April 17, 1989 and September 17, 1996. The Plan is hereby restated and amended as of February 26, 1997, and the terms of this Restatement shall apply to all awards granted under the Plan on or after such date. The Plan shall terminate not more than ten (10) years from the date the Plan initially was adopted. The Plan will provide for Awards in the form of Restricted Shares, Performance Share Awards or Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Article 2. Administration. 2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more Non-Employee Directors, who shall be appointed by the Board. 2.2 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. Article 3. Limitation on Awards. The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed 1,616,000 (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. Article 4. Eligibility. 4.1 General Rule. Key Employees shall be eligible for designation as Participants by the Committee. 4.2 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. 4.3 Attribution Rules. For purposes of Section 4.2, 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. 4.4 Outstanding Stock. For purposes of Section 4.2, "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. 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). 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 4.2. 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 4.2 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 Participant'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; provided that upon an Optionee's Retirement, the exercisability of all outstanding Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee's Retirement. 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, 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 12.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement Option is not intended to qualify as an ISO. The Exercise Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee's employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate. 5.10 Options Granted to Non-United States Key Employees. In the case of Key Employees who are subject to the tax laws of a foreign jurisdiction, the Company may issue Options to such Key Employees that contain terms required to conform with any requirements for favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the laws of such foreign jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum to the Plan specifically applicable to such Options. Article 6. Payment for Option Shares. 6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee may specify in the Stock Option Agreement that payment may be made pursuant to Section 6.2 or 6.3. (b) In the case of an NSO, the Committee may at any time accept payment pursuant to Section 6.2 or 6.3. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased. 6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. Article 7. Restricted Shares and Performance Share Awards. 7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the grant. Restricted Shares or Performance Share Awards may also be awarded in combination with NSOs, and such an Award may provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related NSOs are exercised. 7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. 7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. Common Shares shall be issued pursuant to Performance Share Awards in full or in installments upon satisfaction of the issuance conditions specified in the Stock Award Agreement. The Committee shall select the vesting conditions in the case of Restricted Shares, or issuance conditions in the case of Performance Share Awards, which may be based upon the Participant's service, the Participant's performance, the Company's performance or such other criteria as the Committee may adopt. 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. 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. Withholding Taxes. 12.1 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. 12.2 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 13. 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 13 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 14. Future of Plans. 14.1 Term of the Plan. The Plan, as set forth herein, shall become effective on February 26, 1997. The Plan shall remain in effect until it is terminated under Section 15.2, except that no Awards shall be made after March 24, 1997. 14.2 Amendment or Termination. The Board may at any time terminate this Plan, and the Board or the Committee make such modifications of the Plan as it shall deem advisable; 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. 14.3 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 15. Definitions. 15.1 "Award" means any award of an Option, a Restricted Share or a Performance Share Award under the Plan. 15.2 "Award Year" means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted. 15.3 "Board" means the Company's Board of Directors, as constituted from time to time. 15.4 "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. 15.5 "Code" means the Internal Revenue Code of 1986, as amended. 15.6 "Committee" means the Compensation Committee of the Board, as constituted from time to time. 15.7 "Common Share" means one share of the common stock of the Company. 15.8 "Company" means The Charles Schwab Corporation, a Delaware corporation. 15.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 15.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 15.11 "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. 15.12 "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. 15.13 "ISO" means an incentive stock option described in section 422(b) of the Code. 15.14 "Key Employee" means a key common-law employee of the Company or any Subsidiary, as determined by the Committee. 15.15 "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. 15.16 "Non-Employee Director" means a member of the Board who is not a common-law employee. 15.17 "NSO" means an employee stock option not described in sections 422 through 424 of the Code. 15.18 "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. 15.19 "Optionee" means an individual, or his or her estate, legatee or heirs at law that holds an Option. 15.20 "Participant" means a Non-Employee Director or Key Employee who has received an Award. 15.21 "Performance Share Award" means the conditional right to receive in the future one Common Share, awarded to a Participant under the Plan. 15.22 "Plan" means this 1987 Stock Option Plan of The Charles Schwab Corporation, as it may be amended from time to time. 15.23 "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. 15.24 "Restricted Share" means a Common Share awarded to a Participant under the Plan. 15.25 "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. 15.26 "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. 15.27 "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. 15.28 "Retirement" shall mean any termination of employment of an Optionee for any reason other than death at any time after the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any such Stock Option Agreement. 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. 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 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 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 0ption. 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-11 4 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 March 31, 1997 1996 ---- ---- Net Income $ 66,735 $ 46,943 ======================================================================================== Shares Primary: Weighted-average number of common shares outstanding 175,179 173,303 Common stock equivalent shares related to option plans 5,646 5,584 - ---------------------------------------------------------------------------------------- Weighted-average number of common and common equivalent shares outstanding 180,825 178,887 ======================================================================================== Fully Diluted: Weighted-average number of common shares outstanding 175,179 173,303 Common stock equivalent shares related to option plans 5,646 5,796 - ---------------------------------------------------------------------------------------- Weighted-average number of common and common equivalent shares outstanding 180,825 179,099 ======================================================================================== Primary/Fully Diluted Earnings Per Share $ .37 $ .26 ========================================================================================
EX-12 5 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 March 31, 1997 1996 ---- ---- Earnings before taxes on income $ 110,320 $ 79,670 - -------------------------------------------------------------------------------------------------- Fixed charges Interest expense - customer 108,790 86,391 Interest expense - other 14,340 12,618 Interest portion of rental expense 6,226 5,427 - -------------------------------------------------------------------------------------------------- Total fixed charges (A) 129,356 104,436 - -------------------------------------------------------------------------------------------------- Earnings before taxes on income and fixed charges (B) $ 239,676 $ 184,106 ================================================================================================== Ratio of earnings to fixed charges (B) divided by (A)* 1.9 1.8 ================================================================================================== Ratio of earnings to fixed charges excluding customer interest expense** 6.4 5.4 ================================================================================================== * 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, borrowings and one-third of rental expense, which is estimated to be representative of the interest factor. ** 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 excluding customer interest expense reflects the elimination of such interest expense as a fixed charge.
EX-27 6 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 March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1000 3-MOS DEC-31-1997 MAR-31-1997 2,298,901 5,749,558 5,896,118 0 201,919 322,625 14,643,061 190,264 12,874,184 0 0 0 283,317 1,785 0 0 936,090 14,643,061 69,135 199,853 274,919 0 94,698 123,130 220,838 110,320 66,735 0 0 66,735 $0.37 $0.37
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