-----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, RQbZ1s3C8FhFU5g0UjiopAPOsRasDRieiWhD/ZipxDPDDQXp9W1YkhpUzOEq7jxn yZkKD+ujsUbr6WBGgHVc9g== 0000316709-02-000029.txt : 20020813 0000316709-02-000029.hdr.sgml : 20020813 20020813172758 ACCESSION NUMBER: 0000316709-02-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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: 02730887 BUSINESS ADDRESS: STREET 1: 120 KEARNY STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST STREET 2: (SF120KNY-9) CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 body.txt BODY, 10-Q, JUNE 30, 2002 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 June 30, 2002 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) 120 Kearny Street, San Francisco, CA 94108 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 627-7000 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. 1,364,882,212 shares of $.01 par value Common Stock Outstanding on July 31, 2002 THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended June 30, 2002 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 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 - 27 Part II - Other Information Item 1. Legal Proceedings 27 Item 2. Changes in Securities and Use of Proceeds 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 - 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 Signature 29
Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statement of Income (In millions, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Asset management and administration fees $ 447 $ 408 $ 891 $ 819 Commissions 294 341 597 749 Interest revenue, net of interest expense (1) 218 232 439 489 Principal transactions 49 55 100 150 Other 41 35 81 64 - ------------------------------------------------------------------------------------------------------------------------------------ Total 1,049 1,071 2,108 2,271 - ------------------------------------------------------------------------------------------------------------------------------------ Expenses Excluding Interest Compensation and benefits 470 479 941 972 Other compensation - merger retention programs 8 15 22 30 Occupancy and equipment 117 122 236 245 Communications 66 89 137 185 Depreciation and amortization 81 83 164 167 Advertising and market development 52 50 105 144 Professional services 47 50 96 106 Commissions, clearance and floor brokerage 17 23 35 51 Goodwill amortization 16 32 Restructuring and other charges 3 145 30 145 Other 32 25 56 56 - ------------------------------------------------------------------------------------------------------------------------------------ Total 893 1,097 1,822 2,133 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before taxes on income (loss) and extraordinary gain 156 (26) 286 138 Tax expense (benefit) on income (loss) 58 (7) 106 60 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before extraordinary gain 98 (19) 180 78 Extraordinary gain on sale of corporate trust business, net of tax 121 12 121 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income $ 98 $ 102 $ 192 $ 199 ==================================================================================================================================== Weighted-Average Common Shares Outstanding - Diluted 1,385 1,405 1,387 1,407 ==================================================================================================================================== Earnings Per Share - Basic Income (loss) before extraordinary gain $ .07 $ (.01) $ .13 $ .06 Extraordinary gain, net of tax $ .08 $ .01 $ .08 Net income $ .07 $ .07 $ .14 $ .14 Earnings Per Share - Diluted Income (loss) before extraordinary gain $ .07 $ (.01) $ .13 $ .06 Extraordinary gain, net of tax $ .08 $ .01 $ .08 Net income $ .07 $ .07 $ .14 $ .14 ==================================================================================================================================== Dividends Declared Per Common Share $.0110 $.0110 $.0220 $.0220 ==================================================================================================================================== (1) Interest revenue is presented net of interest expense. Interest expense for the three months ended June 30, 2002 and 2001 was $92 million and $257 million, respectively. Interest expense for the six months ended June 30, 2002 and 2001 was $186 million and $589 million, respectively. See Notes to Condensed Consolidated Financial Statements. -1-
THE CHARLES SCHWAB CORPORATION Condensed Consolidated Balance Sheet (In millions, except share and per share amounts) (Unaudited) June 30, December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 2,498 $ 4,407 Cash and investments segregated and on deposit for federal or other regulatory purposes(1) (including resale agreements of $14,505 in 2002 and $14,811 in 2001) 17,615 17,741 Securities owned - at market value (including securities pledged of $383 in 2002 and $185 in 2001) 2,193 1,700 Receivables from brokers, dealers and clearing organizations 182 446 Receivables from brokerage clients - net 8,468 9,620 Loans to banking clients - net 4,247 4,046 Equipment, office facilities and property - net 961 1,058 Goodwill - net 626 628 Other assets 853 818 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 37,643 $ 40,464 ==================================================================================================================================== Liabilities and Stockholders' Equity Deposits from banking clients $ 4,357 $ 5,448 Drafts payable 223 396 Payables to brokers, dealers and clearing organizations 880 833 Payables to brokerage clients 24,643 26,989 Accrued expenses and other liabilities 1,170 1,327 Short-term borrowings 1,274 578 Long-term debt 751 730 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 33,298 36,301 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock - 9,940,000 shares authorized; $.01 par value per share; none issued Common stock - 3 billion shares authorized; $.01 par value per share; 1,391,919,181 and 1,391,673,494 shares issued in 2002 and 2001, respectively 14 14 Additional paid-in capital 1,736 1,726 Retained earnings 2,914 2,794 Treasury stock - 22,576,142 and 23,110,972 shares in 2002 and 2001, respectively, at cost (262) (295) Unamortized stock-based compensation (31) (39) Accumulated other comprehensive loss (26) (37) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 4,345 4,163 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 37,643 $ 40,464 ==================================================================================================================================== (1) Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated for federal or other regulatory purposes were $17,380 million and $18,261 million at June 30, 2002 and December 31, 2001, respectively. On July 2, 2002, the Company withdrew $19 million of excess segregated cash. As of January 3, 2002, the Company had deposited $710 million to meet its segregated cash requirement. See Notes to Condensed Consolidated Financial Statements. -2-
THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statement of Cash Flows (In millions) (Unaudited) Six Months Ended June 30, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $ 192 $ 199 Adjustments to reconcile net income to net cash used for operating activities: Depreciation and amortization 164 167 Goodwill amortization 32 Compensation payable in common stock 13 16 Deferred income taxes 86 (21) Tax benefits from stock options exercised and other stock-based compensation 4 23 Non-cash restructuring and other charges 3 28 Extraordinary gain on sale of corporate trust business, net of tax (12) (121) Other (3) 3 Net change in: Cash and investments segregated and on deposit for federal or other regulatory purposes 55 (3,972) Securities owned (excluding securities available for sale) (25) (56) Receivables from brokers, dealers and clearing organizations 260 (42) Receivables from brokerage clients 1,123 4,612 Other assets (136) (12) Drafts payable (173) (260) Payables to brokers, dealers and clearing organizations 47 (13) Payables to brokerage clients (2,253) (1,964) Accrued expenses and other liabilities (63) (153) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used for operating activities (718) (1,534) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Purchases of securities available for sale (1,075) (720) Proceeds from sales of securities available for sale 361 351 Proceeds from maturities, calls and mandatory redemptions of securities available for sale 185 241 Net increase in loans to banking clients (396) (318) Proceeds from sale of banking client loans 196 Purchase of equipment, office facilities and property - net (72) (208) Cash payments for business combinations and investments, net of cash received 2 (23) Proceeds from sale of Canadian operations 26 Proceeds from sale of corporate trust business 273 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (773) (404) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net decrease in deposits from banking clients (1,091) (171) Net change in short-term borrowings 696 (9) Proceeds from long-term debt 100 Repayment of long-term debt (82) (24) Dividends paid (30) (30) Purchase of treasury stock (31) (144) Proceeds from stock options exercised 19 14 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (419) (364) - ------------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 1 - ------------------------------------------------------------------------------------------------------------------------------------ Decrease in Cash and Cash Equivalents (1,909) (2,302) Cash and Cash Equivalents at Beginning of Period 4,407 4,876 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 2,498 $ 2,574 ==================================================================================================================================== See Notes to Condensed Consolidated Financial Statements. -3-
THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Amounts and Ratios) (Unaudited) 1. Basis of Presentation The Charles Schwab Corporation (CSC) is a financial holding company engaged, through its subsidiaries, in securities brokerage and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 394 domestic branch offices in 48 states, as well as a branch in the Commonwealth of Puerto Rico. U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to as U.S. Trust) is a wealth management firm that through its subsidiaries also provides fiduciary services and private banking services with 34 offices in 12 states. Other subsidiaries include Charles Schwab Europe, a retail securities brokerage firm located in the United Kingdom, Charles Schwab Investment Management, Inc., the investment advisor for Schwab's proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in Nasdaq and other securities providing trade execution services primarily to broker-dealers and institutional clients, and CyberTrader, Inc. (CyberTrader), an electronic trading technology and brokerage firm providing services to highly active, online investors. The accompanying unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the Company). These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the U.S. All adjustments were of a normal recurring nature, except as discussed in Note "2 - Accounting Change." Certain items in prior periods' financial statements have been reclassified to conform to the 2002 presentation. 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 2001 Annual Report to Stockholders on Form 10-K and the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2002. The Company's results for any interim period are not necessarily indicative of results for a full year or any other interim period. 2. Accounting Change Statement of Financial Standards (SFAS) No. 142 - Goodwill and Other Intangible Assets, was issued in June 2001. Under the provisions of SFAS No. 142, companies are no longer permitted to amortize goodwill and certain intangible assets with an indefinite useful life. Instead, these assets must be reviewed at least annually for possible impairment under new criteria. The Company adopted SFAS No. 142 and accordingly discontinued the amortization of goodwill as of January 1, 2002. During the second quarter of 2002, the Company completed the initial transitional goodwill impairment test as required and did not record any impairment charges. Except for the cessation of goodwill amortization, the adoption of SFAS No. 142 did not have a material impact on the Company's financial position, results of operations, earnings per share (EPS), or cash flows. The decrease in goodwill during the first half of 2002 was due to the sale of the Company's Canadian operations, partially offset by the effects of foreign currency translation adjustments. The carrying amount of goodwill, net of accumulated amortization, attributable to each of the Company's reportable segments is as follows: - -------------------------------------------------------------------------------- June 30, December 31, 2002 2001 - -------------------------------------------------------------------------------- Individual Investor $ 438 $ 440 Institutional Investor 5 5 Capital Markets 25 25 U.S. Trust 158 158 - -------------------------------------------------------------------------------- Total $ 626 $ 628 ================================================================================ The table below compares net income and EPS for the three and six months ended June 30, 2002, which excludes goodwill amortization, with net income and EPS for the three and six months ended June 30, 2001, which has been adjusted to exclude goodwill amortization. -4- - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 (Reported) (Adjusted)(Reported) (Adjusted) - -------------------------------------------------------------------------------- Net income: Reported income (loss) before extraordinary gain $ 98 $ (19) $ 180 $ 78 Add: Goodwill amortization, net of tax 16 32 - -------------------------------------------------------------------------------- Reported/adjusted income (loss) before extraordinary gain 98 (3) 180 110 Extraordinary gain, net of tax 121 12 121 - -------------------------------------------------------------------------------- Reported/adjusted net income $ 98 $ 118 $ 192 $ 231 ================================================================================ Basic and diluted EPS: Reported earnings (loss) per share before extraordinary gain $ .07 $(.01) $ .13 $ .06 Add: Goodwill amortization .01 .02 - -------------------------------------------------------------------------------- Reported/adjusted EPS before extraordinary gain .07 .13 .08 Extraordinary gain, net of tax .08 .01 .08 - -------------------------------------------------------------------------------- Reported/adjusted EPS $ .07 $ .08 $ .14 $ .16 ================================================================================ 3. New Accounting Standards Long-Lived Assets: SFAS No.144 - Accounting for the Impairment or Disposal of Long-Lived Assets was issued in August 2001 and addresses the financial accounting and reporting for the impairment or disposal of long-lived assets (e.g., equipment and office facilities). This statement supersedes SFAS No. 121 - - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and certain accounting and reporting provisions of Accounting Principles Board Opinion No. 30 - Reporting the Results of Operations. The Company adopted this statement on January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company's financial position, results of operations, EPS, or cash flows. SFAS No. 146 - Accounting for Costs Associated with Exit or Disposal Activities was issued in June 2002 and addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3 - Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 may affect the timing of recognizing future restructuring costs, as well as the amounts recognized. The Company is required to adopt this statement effective on January 1, 2003, but early adoption is encouraged by the Financial Accounting Standards Board. 4. Restructuring In the second quarter of 2001, the Company initiated a restructuring plan to reduce operating expenses. The restructuring plan included a workforce reduction, a reduction in operating facilities, and the removal of certain systems hardware, software, and equipment from service. Included in these initiatives are costs associated with the withdrawal from certain international operations. The Company recorded pre-tax restructuring charges of $3 million and $30 million for the second quarter of 2002 and the first half of 2002, respectively. A summary of the activity in the restructuring liability for the second quarter of 2002 and the six months ended June 30, 2002 is as follows: - -------------------------------------------------------------------------------- Three months ended Workforce Facilities Systems June 30, 2002 Reduction Reduction Removal Total - -------------------------------------------------------------------------------- Balance at March 31, 2002 $ 42 $ 94 $ 3 $ 139 Restructuring charges 3 3 Utilization: Cash payments (13) (15) (2) (30) Non-cash charges (1) (1) (1) - -------------------------------------------------------------------------------- Balance at June 30, 2002 $ 31 (2) $ 79 (3) $ 1 (4) $ 111 ================================================================================ - -------------------------------------------------------------------------------- Six months ended Workforce Facilities Systems June 30, 2002 Reduction Reduction Removal Total - -------------------------------------------------------------------------------- Balance at December 31, 2001 $ 74 $ 97 $ 4 $ 175 Restructuring charges 18 11 1 30 Utilization: Cash payments (58) (29) (4) (91) Non-cash charges (1) (3) (3) - -------------------------------------------------------------------------------- Balance at June 30, 2002 $ 31 (2) $ 79 (3) $ 1 (4) $ 111 ================================================================================ (1) Primarily includes charges for officers' stock-based compensation. (2) The Company expects to substantially utilize the remaining workforce reduction liability through cash payments for severance pay and benefits over the respective severance periods through 2003. (3) The Company expects to utilize the remaining facilities reduction liability through cash payments for the net lease expense over the respective lease terms through 2017. (4) The Company expects to substantially utilize the remaining systems removal liability in the third quarter of 2002. -5- 5. Sale of Corporate Trust Business In June 2001, U.S. Trust sold its Corporate Trust business to The Bank of New York Company, Inc. The Company recorded an extraordinary gain of $221 million, or $121 million after tax, on this sale in the second quarter of 2001. During the first quarter of 2002, the Company recorded an extraordinary gain of $22 million, or $12 million after tax, which represented the remaining proceeds from this sale that were realized upon satisfaction of certain client retention requirements. 6. Allowance for Credit Losses on Banking Loans and Nonperforming Assets Loans to banking clients of $4.2 billion at June 30, 2002 and $4.0 billion at December 31, 2001 are presented net of the related allowance for credit losses. The allowance for credit losses on banking loans was $23 million at June 30, 2002 and $21 million at December 31, 2001. Recoveries and charge-offs were not material for each of the three- and six-month periods ended June 30, 2002 and 2001. Nonperforming assets consisted of non-accrual loans of $4 million at June 30, 2002 and $5 million at December 31, 2001. 7. Loan Securitization During the second quarter of 2002, U.S. Trust securitized and sold residential mortgage loans originated through its private banking business. This transaction was accounted for as a sale under the requirements of SFAS No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. U.S. Trust received $196 million in proceeds from the sale and recognized a gain of $1 million. The senior mortgage pass-through certificates that were created by the securitization process were sold to third parties. U.S. Trust retained all other securities created by the process, primarily comprised of subordinated securities with total par value of $5 million. Any credit losses on the securitized loans will be assigned to U.S. Trust, as holder of the subordinated securities, up to the $5 million par value. The estimated fair value of the retained securities was $6 million at June 30, 2002 and was included in securities owned on the Company's condensed consolidated balance sheet. U.S. Trust has not guaranteed the mortgage loans as this transaction was structured without recourse to U.S. Trust or the Company. 8. Comprehensive Income Comprehensive income includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. Comprehensive income is as follows: - -------------------------------------------------------------------------------- Three Six Months Ended Months Ended June 30, June 30, 2002 2001 2002 2001 - ------------------------------------------------------------------------------- Net income $ 98 $102 $192 $199 Other comprehensive income (loss): Cumulative effect of accounting change for adoption of SFAS No. 133 (12) Net gain (loss) on cash flow hedging instruments (8) 4 (2) (7) Foreign currency translation adjustment 6 4 6 (6) Change in net unrealized gain (loss) on securities available for sale 14 (5) 7 3 - -------------------------------------------------------------------------------- Total comprehensive income, net of tax $110 $105 $203 $177 ================================================================================ 9. Earnings Per Share 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 reduction in EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. EPS under the basic and diluted computations are as follows: -6- - -------------------------------------------------------------------------------- Three Six Months Ended Months Ended June 30, June 30, 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Net income $ 98 $ 102 $ 192 $ 199 ================================================================================ Weighted-average common shares outstanding - basic 1,367 1,378 1,366 1,378 Common stock equivalent shares related to stock incentive plans 18 27 21 29 - -------------------------------------------------------------------------------- Weighted-average common shares outstanding - diluted 1,385 1,405 1,387 1,407 ================================================================================ Basic EPS: Income (loss) before extraordinary gain $ .07 $(.01) $ .13 $ .06 Extraordinary gain, net of tax $ .08 $ .01 $ .08 Net income $ .07 $ .07 $ .14 $ .14 ================================================================================ Diluted EPS: Income (loss) before extraordinary gain (1) $ .07 $(.01) $ .13 $ .06 Extraordinary gain, net of tax $ .08 $ .01 $ .08 Net income $ .07 $ .07 $ .14 $ .14 ================================================================================ (1) For the three months ended June 30, 2001 this computation excludes common stock equivalent shares related to stock incentive plans of 27 million because inclusion of such shares would be antidilutive. The computation of diluted EPS for the six months ended June 30, 2002 and 2001, respectively, excludes outstanding stock options to purchase 102 million and 60 million shares, respectively, because the exercise prices for those options were greater than the average market price of the common shares, and therefore the effect would be antidilutive. 10. Regulatory Requirements CSC is a financial holding company, which is a type of bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended (the Act). Under the Act, the Federal Reserve Board has established consolidated capital requirements for bank holding companies. CSC is subject to those requirements. The regulatory capital and ratios of the Company, U.S. Trust, and United States Trust Company of New York (U.S. Trust NY) are as follows: - -------------------------------------------------------------------------------- 2002 2001 ---------------- ----------------- June 30, Amount Ratio(1) Amount Ratio(1) - -------------------------------------------------------------------------------- Tier 1 Capital: Company $ 3,781 22.7% $ 3,786 19.5% U.S. Trust(2) $ 606 17.1% $ 657 21.8% U.S. Trust NY(2) $ 379 13.3% $ 429 18.2% Total Capital: Company $ 3,807 22.8% $ 3,813 19.7% U.S. Trust(2) $ 629 17.7% $ 678 22.5% U.S. Trust NY(2) $ 399 14.0% $ 447 18.9% Tier 1 Leverage: Company $ 3,781 10.2% $ 3,786 10.5% U.S. Trust(2) $ 606 9.3% $ 657 11.9% U.S. Trust NY(2) $ 379 7.4% $ 429 10.3% - ------------------------------------------------------------------------------- (1) Minimum tier 1 capital, total capital, and tier 1 leverage ratios are 4%, 8%, and 3%-5%, respectively, for bank holding companies and banks. Well-capitalized tier 1 capital, total capital, and tier 1 leverage ratios are 6%, 10%, and 5%, respectively. Each of CSC's other depository institution subsidiaries exceed the well-capitalized standards set forth by the banking regulatory authorities. (2) The decreases in capital amounts and ratios from 2001 to 2002 were primarily due to a $100 million dividend payment to CSC during the third quarter of 2001. Based on their respective regulatory capital ratios at June 30, 2002 and 2001, the Company, U.S. Trust, and U.S. Trust NY are considered well capitalized (the highest category). There are no conditions or events that management believes have changed the Company's, U.S. Trust's, or U.S. Trust NY's well-capitalized status. Schwab and SCM are subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 (the Rule). Schwab and SCM compute net capital under the alternative method permitted by the Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement, which is based on the type of business conducted by the broker-dealer. The minimum dollar requirement for both Schwab and SCM 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 requirement. At June 30, 2002, Schwab's net capital was $1.1 billion (13% of aggregate debit balances), which was $952 million in excess of its minimum required net capital and $698 million in excess of 5% of aggregate debit balances. At June 30, 2002, SCM's net capital was $133 million, which was $132 million in excess of its minimum required net capital. -7- 11. Commitments and Contingent Liabilities The nature of the Company's business subjects it to claims, lawsuits, regulatory examinations, and other proceedings in the ordinary course of business. The results of these matters cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the Company's results of operations in any future period, depending partly on the results for that period, and a substantial judgment could have a material adverse impact on the Company's financial condition and results of operations. However, it is the opinion of management, after consultation with legal counsel, that the ultimate outcome of current matters will not have a material adverse impact on the financial condition or operating results of the Company. For further discussion of legal proceedings, see Part II - Other Information, Item 1 - Legal Proceedings. 12. Segment Information The Company structures its segments according to its various types of clients and the services provided to those clients. These segments have been aggregated, based on similarities in economic characteristics, types of clients, services provided, distribution channels, and regulatory environment, into four reportable segments - Individual Investor, Institutional Investor, Capital Markets, and U.S. Trust. Financial information for the Company's reportable segments is presented in the following table. The Company periodically reallocates certain revenues and expenses among the segments to align them with the changes in the Company's organizational structure. Previously-reported segment information has been revised to reflect changes during the year in the Company's internal organization. The Company evaluates the performance of its segments based on adjusted operating income before taxes, which excludes restructuring and other charges, merger- and acquisition-related charges, and extraordinary gains. Intersegment revenues are not material and are therefore not disclosed. Total revenues, income before taxes on income and extraordinary gain, and net income are equal to the Company's consolidated amounts as reported in the condensed consolidated statement of income. - -------------------------------------------------------------------------------- Three Six Months Ended Months Ended June 30, June 30, 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Revenues Individual Investor $ 598 $ 626 $1,214 $1,318 Institutional Investor 210 203 423 416 Capital Markets 65 78 128 204 U.S. Trust 176 164 343 333 - -------------------------------------------------------------------------------- Total $1,049 $1,071 $2,108 $2,271 ================================================================================ Operating income before taxes Individual Investor $ 66 $ 47 $ 131 $ 112 Institutional Investor 55 68 119 139 Capital Markets 4 9 13 30 U.S. Trust (1) 45 25 80 62 - -------------------------------------------------------------------------------- Operating income before taxes 170 149 343 343 Restructuring and other charges (2) (3) (145) (30) (145) Merger- and acquisition-related charges (3) (11) (30) (27) (60) - -------------------------------------------------------------------------------- Income (loss) before taxes on income (loss) and extraordinary gain 156 (26) 286 138 Tax expense (benefit) on income 58 (7) 106 60 Extraordinary gain on sale of corporate trust business, net of tax 121 12 121 - -------------------------------------------------------------------------------- Net Income $ 98 $ 102 $ 192 $ 199 ================================================================================ (1) Excludes an extraordinary pre-tax gain of $22 million for the six months ended June 30, 2002 and $221 million for the three and six months ended June 30, 2001. (2) Restructuring charges include costs relating to workforce, facilities, systems hardware, software, and equipment reductions. In 2001, other charges include a regulatory fine, professional service fees for operational and risk management remediation, and the write-off of certain software development costs. (3) Includes retention program compensation related to the merger with USTC, and intangible asset amortization and retention program compensation related to the acquisition of CyberTrader. The retention programs related to the acquisition of CyberTrader and the merger with USTC ended in March 2002 and May 2002, respectively. For 2001, amount also includes goodwill amortization, which ceased on January 1, 2002 upon the adoption of SFAS No. 142 (see note "2 - Accounting Change"). -8- 13. Supplemental Cash Flow Information Certain information affecting the cash flows of the Company follows: - -------------------------------------------------------------------------------- Six Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Income taxes paid $ 15 $ 62 ================================================================================ Interest paid: Brokerage client cash balances $ 101 $ 468 Deposits from banking clients 41 76 Long-term debt 27 29 Stock-lending activities 1 15 Short-term borrowings 13 11 Other 2 - -------------------------------------------------------------------------------- Total interest paid $ 183 $ 601 ================================================================================ Non-cash investing and financing activities: Common stock and options issued for purchase of businesses $ 3 $ 36 ================================================================================ 14. Subsequent Events During the period July 1, 2002 through July 31, 2002, CSC repurchased and recorded as treasury stock a total of 6 million shares of its common stock for $59 million. As of July 31, 2002, authorization granted by CSC's Board of Directors allows for future repurchases of up to $309 million. On August 12, 2002, the Company announced a plan to adjust capacity in its Retail business by reducing phone-based client support staff. The Company expects to record a pre-tax charge in the third quarter of 2002 to reflect this restructuring. In addition, the Company is and will be evaluating its staffing and facilities, as well as its spending for professional services, development projects, and advertising, in light of the difficult market environment. Although no decisions have been made at this time, additional restructuring charges are likely during the remaining months of 2002. The Company's objective is to identify and implement actions to further reduce its annual operating expense base. -9- THE CHARLES SCHWAB CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Description of Business The Company: The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide securities brokerage and related financial services for 8.0 million active client accounts(a). Client assets in these accounts totaled $797.0 billion at June 30, 2002. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 394 domestic branch offices in 48 states, as well as a branch in the Commonwealth of Puerto Rico. U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to as U.S. Trust) is a wealth management firm that through its subsidiaries also provides fiduciary services and private banking services with 34 offices in 12 states. Other subsidiaries include Charles Schwab Europe (CSE), a retail securities brokerage firm located in the United Kingdom, Charles Schwab Investment Management, Inc., the investment advisor for Schwab's proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in Nasdaq and other securities providing trade execution services primarily to broker-dealers and institutional clients, and CyberTrader, Inc. (CyberTrader), an electronic trading technology and brokerage firm providing services to highly active, online investors. The Company provides financial services to individuals, institutional clients, and broker-dealers through four segments - Individual Investor, Institutional Investor, Capital Markets, and U.S. Trust. The Individual Investor segment includes the Company's domestic and international retail operations. The Institutional Investor segment provides custodial, trading, and support services to independent financial advisors, serves company 401(k) plan sponsors and third-party administrators, and supports company stock option plans and stock purchase programs. The Capital Markets segment provides trade execution services in Nasdaq, exchange-listed, and other securities primarily to broker-dealers, including Schwab, and institutional clients. The U.S. Trust segment provides investment and wealth management, fiduciary services, and private banking services to individual and institutional clients. Business Strategy: Commencing in 2001, the Company focused on aligning its infrastructure and resources with six strategic priorities, which include: - - providing the spectrum of affluent investors with the advice, relationships, and choices that support their desired investment outcomes; - - delivering the information, technology, service, and pricing needed to remain a leader in serving active traders; - - providing individual investing services through employers, including retirement and option plans as well as personal brokerage accounts; - - offering selected banking services and developing investment products that give clients greater control and understanding of their finances; - - retaining a strong capital markets business to address investors' financial product and trade execution needs; and - - continuing to provide high quality service to clients with smaller investment portfolios. For further discussion of the Company's business strategy, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Description of Business - Business Strategy" in the Company's 2001 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2001. See also Item 1 - Business - Narrative Description of Business - "Products, Services, and Advice Offerings" in the Company's Form 10-K for the year ended December 31, 2001. Significant recent developments relating to these strategic priorities, as well as other significant developments, follows: Services for Affluent Investors: During the second quarter of 2002, the Company announced the nationwide launch of its full-service advice and relationship service offer, including the Schwab Advisor Network(TM), Schwab Private Client, and Schwab Equity Ratings(TM). This nationwide rollout also included a new advertising campaign designed to differentiate Schwab's service model from those of other full-service firms. The Schwab Advisor Network is the successor to the Schwab AdvisorSource(R) referral program, with over 320 participating independent, fee-based investment advisors (IAs), who have an average of 17 years of experience and $500 million of assets under management. These IAs provide customized and personalized portfolio management and financial planning services to investors who prefer to delegate their financial management responsibilities to an independent professional. The Schwab Advisor Network strengthens the Schwab/advisor/client relationship through a pricing model that allows for sharing fee income on referred accounts, and features IAs more prominently in advertising that targets affluent investors. During the second quarter of 2002, Schwab held a series of regional conferences designed to provide IAs with information, ideas, and contacts to help them develop their businesses. Schwab also upgraded its Centerpiece(R) portfolio (a) Accounts with balances or activity within the precedings eight months. -10- management software to help IAs with fixed income tracking, analytics, and enhanced reporting capabilities. Schwab Private Client is a fee-based service designed to help clients who want access to an ongoing, one-on-one advice relationship with a designated Schwab consultant while retaining control over their investment decisions. Schwab Private Client provides expanded financial planning, asset management capabilities, and enhanced portfolio tracking and performance reporting. In the second quarter of 2002, following a 12 month pilot program, the Schwab Private Client service was expanded to include over 150 designated Schwab consultants and their support teams, serving 360 branch offices nationwide. Schwab Equity Ratings provide clients with an objective stock rating system on more than 3,000 stocks, assigning each equity a single grade: A, B, C, D, or F. On average, A-rated stocks are expected to strongly outperform the overall market over the next 12 months, while F-rated stocks are expected to strongly under-perform the market. Rated stocks are ranked and the number of 'buy consideration' ratings - As and Bs - equals the number of 'sell consideration' ratings - Ds and Fs. Schwab Equity Ratings leverages Schwab's November 2000 acquisition of Chicago Investment Analytics, Inc. (CIA) by applying CIA's research and technology strengths to a systematic ratings methodology that complements the variety of perspectives already available to clients from Goldman Sachs, Standard & Poor's, Argus, and First Call. Banking and Other Financial Products: In the second quarter of 2002, the Company filed applications with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to establish a national bank and to obtain deposit insurance for the bank. Subject to regulatory approvals, the Company expects to commence banking operations in early 2003. Capital Markets: The Company expanded its trade execution capabilities and financial product offerings during the second quarter of 2002. Through selective hirings, the Company expanded its institutional equity capabilities to focus on improving execution capabilities for all clients. Additionally, through an agreement with Goldman Sachs, clients now have access to OptEx(SM) (a service mark of Goldman, Sachs & Co.), which uses advanced technology to scan the entire options marketplace and route orders automatically based on the best price available nationwide and other execution quality factors. The Schwab BondSource(TM) service was expanded to link Schwab with 50 other broker-dealers, allowing clients to choose fixed income securities from a network that supports trading in all U.S. Treasury securities, over 450 U.S. agency securities, 1,200 corporate bonds, and 3,500 municipal bond issues. The Schwab CDSource(TM) service, which allows clients to invest in time deposits from over 110 participating banks, handled $620 million of client deposits during the second quarter of 2002, more than double the year-earlier volume. Client assets in fixed income securities were a record $116.5 billion at June 30, 2002, an increase of $21.1 billion, or 22%, from a year ago. Other Significant Developments: The Company continued to combine people and technology through several important technology-based initiatives during the second quarter of 2002. Schwab enhanced its MarketPlace internal Web site to include an 'Investment Products' home page with lists of investment perspectives across various products, sectors, and styles. Schwab also expanded MarketPlace to include a tool that allows Schwab representatives to conduct cash flow analysis on their clients' bond holdings. Mutual fund-based investing remains an important element of the Company's Core & Explore(R) investing philosophy. In the second quarter of 2002, Schwab expanded its proprietary funds offering by introducing the Schwab MarketMasters Funds(TM), a suite of four funds that employ third-party investment managers to oversee portions of the fund assets according to specific investment styles. By combining different styles and strategies, MarketMasters Funds are designed to spread investment risk and reduce volatility. Schwab also introduced the Schwab Core Equity Fund(TM), a large-cap fund that combines the equity selection capabilities of Schwab Equity Ratings with the diversification and convenience of a mutual fund. The portfolio managers of the Schwab Core Equity Fund primarily purchase stocks that have a Schwab Equity Rating of A or B, but may also purchase lower-rated stocks in order to maintain a risk profile similar to the Standard & Poor's 500 Index. Restructuring: On August 12, 2002, the Company announced a plan to adjust capacity in its Retail business by reducing phone-based client support staff. The Company will close its service center in Austin, Texas as part of this plan and will work to sublease the facility. This closing will eliminate approximately 300 jobs, and the Company will also eliminate approximately 75 support and administrative positions across its four other service centers located in Denver, Indianapolis, Orlando, and Phoenix. As a result of these measures, the Company expects to incur pre-tax restructuring charges of approximately $36 million in the third quarter of 2002, including approximately $25 million in facilities reduction charges and approximately $11 million in workforce reduction charges. The Company estimates that this restructuring will result in pre-tax expense savings of approximately $26 million for full-year 2003. The Company continues to serve its clients on the phone through its remaining service centers. In addition, the Company is and will be evaluating its staffing and facilities, as well as its spending for -11- professional services, development projects, and advertising, in light of the difficult market environment. Although no decisions have been made at this time, additional restructuring charges are likely during the remaining months of 2002 as the Company works toward its objective of identifying and implementing actions to further reduce its annual operating expense base by approximately $200 million in 2003. A portion of any improvement in profitability will likely be used to enhance employee bonuses. Risk Management For discussion on the Company's principal risks and some of the policies and procedures for risk identification, assessment, and mitigation, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Risk Management" in the Company's 2001 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2001. See Liquidity and Capital Resources of this report for a discussion on liquidity risk; and see Item 3 - Quantitative and Qualitative Disclosures About Market Risk for additional information relating to market risk. The Company will enter into a number of new insurance policies during the quarter ended September 30, 2002 to replace policies which are expiring. Given the current state of the insurance market, the Company may be confronted with higher levels of rates and deductibles and with narrower coverages than have been available in the recent past. There can be no assurance that these changes will not have a material adverse effect on the Company's results of operations in any future period, depending partly on the results for that period. Given the nature of the Company's revenues, expenses, and risk profile, the Company's earnings and CSC's common stock price has been and may continue to 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 or any other interim period. Risk is inherent in the Company's business. Consequently, despite the Company's attempts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to mitigate risk, there can be no assurance that the Company will not suffer unexpected losses due to operating or other risks. Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as "believe," "expect," "intend," "plan," "will," "may," and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management's beliefs, objectives, and expectations as of the date hereof, are necessarily estimates based on the best judgment of the Company's senior management. These statements relate to, among other things, the Company's ability to achieve its strategic priorities (see Description of Business - Business Strategy), the impact of the restructuring plan on the Company's results of operations (see Description of Business - Restructuring), insurance coverage (see Description of Business - Risk Management), sources of liquidity and capital (see Liquidity and Capital Resources - Liquidity and - Commitments), the Company's cash position, cash flows, and capital expenditures (see Liquidity and Capital Resources - Cash Flows and Capital Resources) and contingent liabilities (see Part II - Other Information, Item 1 - Legal Proceedings). Achievement of the expressed expectations is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed expectations described in these statements. Important factors that may cause such differences are noted in this interim report and include, but are not limited to: the effect of client trading patterns on Company revenues and earnings; changes in revenues and profit margin due to cyclical securities markets and fluctuations in interest rates; the level and continuing volatility of equity prices; a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices, trading volumes, and investor confidence; the Company's inability to attract and retain key personnel; the timing and impact of changes in the Company's level of investments in personnel, technology, or advertising; changes in technology; computer system failures and security breaches; evolving legislation, regulation, accounting pronouncements, and changing industry practices adversely affecting the Company; adverse results of litigation; the inability to obtain external financing at acceptable rates; significant changes to the terms of the Company's insurance coverage; a significant decline in the real estate market, including the Company's ability to sublease certain properties; and the effects of competitors' pricing, product, and service decisions, and intensified industry competition and consolidation. Critical Accounting Policies Certain of the Company's accounting policies that involve a higher degree of judgment and complexity are discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition - Critical Accounting Policies" in the Company's 2001 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the -12- Company's Form 10-K for the year ended December 31, 2001. There have been no material changes to these critical accounting policies in the first half of 2002. Three Months Ended June 30, 2002 Compared To Three Months Ended June 30, 2001 All references to earnings per share information in this report reflect diluted earnings per share unless otherwise noted. FINANCIAL OVERVIEW The Company's financial performance in the second quarter of 2002 was adversely affected by declines in client trading activity as investor confidence continued to be weighed down by mixed economic news, ongoing corporate accounting and governance concerns, and geopolitical developments. In the difficult market environment that prevailed during the second quarter of 2002, daily average revenue trades decreased 20% and average revenue per equity share traded in the Capital Markets segment decreased 27% from year-earlier levels. As a result of these two factors, the Company's trading revenues in the second quarter of 2002 decreased 13% from the second quarter of 2001. Non-trading revenues, which include asset management and administration fees, interest revenue, net of interest expense (referred to as net interest revenue), and other revenues, increased 5% in the second quarter of 2002 compared to the year-ago level. The increase in non-trading revenues was primarily due to a 10% increase in asset management and administration fees, partially offset by a 6% decrease in net interest revenue. The increase in asset management and administration fees primarily resulted from an increase in assets in, and service fees earned on, Schwab's proprietary funds (collectively referred to as the SchwabFunds). Higher balance-related account fees also contributed to the increase in asset management and administration fees. Average margin loans to clients in the second quarter of 2002 decreased 22% from year-ago levels, which primarily caused the decline in net interest revenue. Total expenses excluding interest during the second quarter of 2002 were $893 million, down 19% from $1.1 billion during the second quarter of 2001. This decrease resulted primarily from the Company's continued expense reduction measures, including the restructuring plan implemented during 2001. In evaluating the Company's financial performance, management uses adjusted operating income, which excludes non-operating items as detailed in the following table. The Company's after-tax operating income for the second quarter of 2002 was $106 million, up 9% from the second quarter of 2001, and its after-tax operating profit margin for the second quarter of 2002 was 10.1%, up from 9.1% for the second quarter of 2001. A reconciliation of the Company's operating income to net income is shown in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended June 30, Percent 2002 2001 Change - -------------------------------------------------------------------------------- Operating income, after tax $106 $ 97 9% Non-operating items: Extraordinary gain (1) 221 Restructuring charges (2) (3) (117) (97) Other charges (3) (28) Merger- and acquisition-related charges (4) (11) (30) (63) - -------------------------------------------------------------------------------- Total non-operating items (14) 46 n/m Tax effect 6 (41) n/m - -------------------------------------------------------------------------------- Total non-operating items, after tax (8) 5 n/m - -------------------------------------------------------------------------------- Net income $ 98 $102 (4%) ================================================================================ (1) The Company recorded an extraordinary pre-tax gain, net of closing and exit costs, from the sale of USTC's Corporate Trust business to The Bank of New York Company, Inc. in June 2001. (2) Primarily includes costs relating to a workforce reduction, a reduction in operating facilities, and the removal of certain systems hardware, software, and equipment from service. (3) For 2001, includes a regulatory fine assessed to USTC and United States Trust Company of New York (U.S. Trust NY), professional service fees for operational and risk management remediation at USTC and U.S. Trust NY, and the write-off of certain software development costs at CSE. (4) Includes retention program compensation related to the merger with USTC, and intangible asset amortization and retention program compensation related to the acquisition of CyberTrader. The retention programs related to the acquisition of CyberTrader and the merger with USTC ended in March 2002 and May 2002, respectively. For the three months ended June 30, 2001, amount also includes goodwill amortization, which ceased on January 1, 2002 upon the adoption of Statement of Financial Accounting Standards No. 142. n/m Not meaningful The Company's operating income before taxes for the second quarter of 2002 was $170 million, up $21 million, or 14%, from the second quarter of 2001 due to increases of $19 million, or 40%, in the Individual Investor segment and $20 million, or 80%, in the U.S. Trust segment, partially offset by decreases of $13 million, or 19%, in the Institutional Investor segment and $5 million, or 56%, in the Capital Markets segment. The increase in the Individual Investor segment was primarily due to lower expenses resulting from the Company's workforce reduction under its restructuring plan. Most of the employees affected by the restructuring plan were from Schwab's retail brokerage division, which is included in the Individual Investor segment. As certain technology, corporate, and general administrative expenses are allocated to segments based upon their full-time equivalent employees, a proportionately larger allocation of expenses was assigned to the Institutional Investor segment for the second quarter of -13 2002, which, along with an increase in certain direct costs, resulted in the operating income decline in that segment. The increase in the U.S. Trust segment was primarily due to higher net interest revenue, as well as lower expenses. The decrease in the Capital Markets segment was primarily due to lower average revenue per equity share traded and lower levels of trading activity. The Company's net income for the second quarter of 2002 was $98 million, or $.07 per share, compared to $102 million, or $.07 per share, for the second quarter of 2001. The Company's after-tax profit margin for the second quarter of 2002 was 9.3%, down from 9.5% for the second quarter of 2001. The annualized return on stockholders' equity for the second quarter of 2002 was 9%, unchanged from the same period last year. REVENUES Revenues declined $22 million, or 2%, to $1.0 billion in the second quarter of 2002 compared to the second quarter of 2001, due to a $47 million, or 14%, decrease in commission revenues, a $14 million, or 6%, decrease in net interest revenue, and a $6 million, or 11%, decrease in principal transaction revenues. These declines were partially offset by a $39 million, or 10%, increase in asset management and administration fees and a $6 million, or 17%, increase in other revenues. As trading volumes decreased 12% during the second quarter of 2002 from the second quarter of 2001, the Company's non-trading revenues represented 67% of total revenues as compared to 63% for the second quarter of 2001 as shown in the following table: - -------------------------------------------------------------------------------- Three Months Ended June 30, Composition of Revenues 2002 2001 - -------------------------------------------------------------------------------- Commissions 28% 32% Principal transactions 5 5 - -------------------------------------------------------------------------------- Total trading revenues 33 37 - -------------------------------------------------------------------------------- Asset management and administration fees 43 38 Net interest revenue 21 22 Other 3 3 - -------------------------------------------------------------------------------- Total non-trading revenues 67 63 - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================ While the Individual Investor and Institutional Investor segments generate both trading and non-trading revenues, the Capital Markets segment generates primarily trading revenues and the U.S. Trust segment generates primarily non-trading revenues. The $22 million decline in revenues from the second quarter of 2001 was due to decreases in revenues of $28 million, or 4%, in the Individual Investor segment and $13 million, or 17%, in the Capital Markets segment, partially offset by increases of $7 million, or 3%, in the Institutional Investor segment and $12 million, or 7%, in the U.S. Trust segment. See note "12 - Segment Information" in the Notes to Condensed Consolidated Financial Statements for financial information by segment. Asset Management and Administration Fees Asset management and administration fees include mutual fund service fees, as well as fees for other asset-based financial services provided to individual and institutional clients. The Company earns mutual fund service fees for recordkeeping and shareholder services provided to third-party funds, and for transfer agent services, shareholder services, administration, and investment management provided to its proprietary funds. These fees are based upon the daily balances of client assets invested in third-party funds and upon the average daily net assets of the Company's proprietary funds. Mutual fund service fees are earned through the Individual Investor, Institutional Investor, and U.S. Trust segments. The Company also earns asset management and administration fees for financial services, including investment management and consulting, trust and fiduciary services, financial and estate planning, and private banking services, provided to individual and institutional clients. These fees are primarily based on the value and composition of assets under management and are earned through the U.S. Trust, Individual Investor, and Institutional Investor segments. Asset management and administration fees were $447 million for the second quarter of 2002, up $39 million, or 10%, from the second quarter of 2001, as shown in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended Asset Management June 30, Percent and Administration Fees 2002 2001 Change - -------------------------------------------------------------------------------- Mutual fund service fees: Proprietary funds (SchwabFunds(R)and Excelsior(R)) $217 $200 9% Mutual Fund OneSource(R) 72 73 (1) Other 10 7 43 Asset management and related services 148 128 16 - -------------------------------------------------------------------------------- Total $447 $408 10% ================================================================================ The increase in asset management and administration fees was primarily due to increases in SchwabFunds assets, which led to an increase in service fees, and higher balance-related account fees. -14- Assets in client accounts were $797.0 billion at June 30, 2002, a decrease of $61.3 billion, or 7%, from a year ago as shown in the following table. This decrease from a year ago included net new client assets of $58.3 billion, offset by net market losses of $119.6 billion related to client accounts. - -------------------------------------------------------------------------------- Change in Client Assets and Accounts (In billions, at quarter end, June 30, Percent except as noted) 2002 2001 Change - -------------------------------------------------------------------------------- Assets in client accounts Schwab One(R), other cash equivalents and deposits from banking clients $ 28.6 $ 27.0 6% Proprietary funds (SchwabFunds(R) and Excelsior(R)): Money market funds 126.7 122.7 3 Equity and bond funds 30.9 30.6 1 - -------------------------------------------------------------------------------- Total proprietary funds 157.6 153.3 3 - -------------------------------------------------------------------------------- Mutual Fund Marketplace(R)(1): Mutual Fund OneSource(R) 81.6 93.0 (12) Mutual Fund clearing services 21.9 21.0 4 All other 75.9 74.4 2 - -------------------------------------------------------------------------------- Total Mutual Fund Marketplace 179.4 188.4 (5) - -------------------------------------------------------------------------------- Total mutual fund assets 337.0 341.7 (1) - -------------------------------------------------------------------------------- Equity and other securities (1) 323.3 405.7 (20) Fixed income securities 116.5 95.4 22 Margin loans outstanding (8.4) (11.5) (27) - -------------------------------------------------------------------------------- Total client assets $797.0 $ 858.3 (7%) ================================================================================ Net change in assets in client accounts (for the quarter ended) Net new client assets $ 11.5 $ 11.3 Net market gains (losses) (72.2) 41.2 - ------------------------------------------------------------------ Net growth (decline) $(60.7) $ 52.5 ================================================================== New client accounts (in thousands, for the quarter ended) 224.6 265.9 (16%) Active client accounts (in millions) (2) 8.0 7.7 4% - -------------------------------------------------------------------------------- Active online Schwab client accounts (in millions) (3) 4.3 4.3 Online Schwab client assets $308.2 $ 349.2 (12%) - -------------------------------------------------------------------------------- (1) Excludes money market funds and all proprietary money market, equity, and bond funds. (2) Active accounts are defined as accounts with balances or activity within the preceding eight months. (3) Active online accounts are defined as all accounts within a household that has had at least one online session within the past twelve months. Commissions The Company earns commission revenues by executing client trades primarily through the Individual Investor and Institutional Investor segments. These revenues are affected by the number of client accounts that trade, the average number of commission-generating trades per account, and the average commission per trade. Commission revenues for the Company were $294 million for the second quarter of 2002, down $47 million, or 14%, from the second quarter of 2001. The Company's client trading activity is shown in the following table (in thousands): - -------------------------------------------------------------------------------- Three Months Ended June 30, Percent Daily Average Trades 2002 2001 Change - -------------------------------------------------------------------------------- Revenue Trades Online 107.8 134.5 (20%) TeleBroker(R)and Schwab by Phone(TM) 5.7 7.6 (25) Regional client telephone service centers, branch offices, and other 15.6 18.3 (15) - -------------------------------------------------------------------------------- Total 129.1 160.4 (20%) ================================================================================ Mutual Fund OneSource(R) Trades Online 46.6 34.9 34% TeleBroker and Schwab by Phone .4 .4 Regional client telephone service centers, branch offices, and other 10.5 17.3 (39) - -------------------------------------------------------------------------------- Total 57.5 52.6 9% ================================================================================ Total Daily Average Trades Online 154.4 169.4 (9%) TeleBroker and Schwab by Phone 6.1 8.0 (24) Regional client telephone service centers, branch offices, and other 26.1 35.6 (27) - -------------------------------------------------------------------------------- Total 186.6 213.0 (12%) ================================================================================ As shown in the following table, the total number of revenue trades executed by the Company has decreased 18% as the number of client accounts that traded and client trading activity per account that traded have declined. -15- - -------------------------------------------------------------------------------- Three Months Ended Commissions Earned on June 30, Percent Client Revenue Trades 2002 2001 Change - -------------------------------------------------------------------------------- Client accounts that traded during the quarter (in thousands) 1,345 1,426 (6%) Average client revenue trades per account that traded 6.1 7.1 (14) Total revenue trades (in thousands) 8,253 10,098 (18) Trading frequency proxy (1) 3.6 4.2 (14) Number of trading days 64 63 2 Average commission per revenue trade $38.02 $34.50 10 Commissions earned on client revenue trades (in millions) (2) $ 314 $ 348 (10) - -------------------------------------------------------------------------------- (1) Represents annualized revenue trades per $100,000 in client assets. (2) Includes certain non-commission revenues relating to the execution of client trades. Excludes commissions on trades relating to specialist operations and U.S. Trust commissions on trades. Net Interest Revenue Net interest revenue is the difference between interest earned on assets (mainly margin loans to clients, investments required to be segregated for clients, private banking loans, and securities available for sale) and interest paid on liabilities (mainly brokerage client cash balances and banking deposits). Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and hedging strategies. Substantially all of the Company's net interest revenue is earned through the Individual Investor, Institutional Investor, and U.S. Trust segments. Net interest revenue was $218 million for the second quarter of 2002, down $14 million, or 6%, from the second quarter of 2001 as shown in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended June 30, Percent 2002 2001 Change - -------------------------------------------------------------------------------- Interest Revenue Margin loans to clients $ 128 $ 211 (39%) Investments, client-related 82 161 (49) Private banking loans 59 58 2 Securities available for sale 22 21 5 Other 19 38 (50) - -------------------------------------------------------------------------------- Total 310 489 (37) - -------------------------------------------------------------------------------- Interest Expense Brokerage client cash balances 46 195 (76) Deposits from banking clients 24 34 (29) Long-term debt 14 14 Short-term borrowings 7 5 40 Stock-lending activities 1 5 (80) Other 4 n/m - -------------------------------------------------------------------------------- Total 92 257 (64) - -------------------------------------------------------------------------------- Net interest revenue $ 218 $ 232 (6%) ================================================================================ n/m Not meaningful Client-related and other daily average balances, interest rates, and average net interest spread for the second quarters of 2002 and 2001 are summarized in the following table (dollars in millions): -16- - -------------------------------------------------------------------------------- Three Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Interest-Earning Assets (client-related and other): Investments (client-related): Average balance outstanding $ 17,444 $ 14,377 Average interest rate 1.89% 4.50% Margin loans to clients: Average balance outstanding $ 8,913 $ 11,464 Average interest rate 5.77% 7.38% Private banking loans: Average balance outstanding $ 4,094 $ 3,269 Average interest rate 5.75% 7.12% Securities available for sale: Average balance outstanding $ 1,557 $ 1,317 Average interest rate 5.47% 6.45% Average yield on interest-earning assets 3.64% 5.95% Funding Sources (client-related and other): Interest-bearing brokerage client cash balances: Average balance outstanding $ 22,935 $ 22,247 Average interest rate .81% 3.52% Interest-bearing banking deposits: Average balance outstanding $ 3,798 $ 3,296 Average interest rate 2.46% 4.14% Other interest-bearing sources: Average balance outstanding $ 1,072 $ 1,154 Average interest rate 2.27% 4.58% Average noninterest-bearing portion $ 4,203 $ 3,730 Average interest rate on funding sources .95% 3.20% Summary: Average yield on interest-earning assets 3.64% 5.95% Average interest rate on funding sources .95% 3.20% - -------------------------------------------------------------------------------- Average net interest spread 2.69% 2.75% ================================================================================ The decrease in net interest revenue from the second quarter of 2001 was primarily due to levels of, and lower rates received on, margin loans to clients, as well as lower rates received on client-related investments, partially offset by lower rates paid on brokerage client cash balances and higher average balances of client-related investments. Principal Transactions Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity, and net gains from market-making activities in Nasdaq and other equity securities effected through the Capital Markets segment. Factors that influence principal transaction revenues include the volume of client trades, market price volatility, average revenue per share traded, and changes in regulations and industry practices. Principal transaction revenues were $49 million for the second quarter of 2002, down $6 million, or 11%, from the second quarter of 2001, as shown in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended June 30, Percent Principal Transactions 2002 2001 Change - -------------------------------------------------------------------------------- Fixed income securities $ 25 $ 16 56% Nasdaq and other equity securities 21 33 (36) Other 3 6 (50) - -------------------------------------------------------------------------------- Total $ 49 $ 55 (11%) ================================================================================ The decrease in principal transaction revenues was primarily due to lower average revenue per equity share traded, which in turn was primarily caused by market conditions, and lower share volume handled by SCM. This decrease was substantially offset by higher revenues from client fixed income securities trading activity. Other Revenues Other revenues were $41 million for the second quarter of 2002, up $6 million, or 17%, from the second quarter of 2001. This increase was primarily due to net gains on investments in 2002, compared to net losses on investments in 2001, a settlement of a lawsuit in 2002, and higher trade-related service fees, partially offset by a decrease in payments for order flow. EXPENSES EXCLUDING INTEREST Total expenses excluding interest for the second quarter of 2002 declined $204 million, or 19%, from the second quarter of 2001. The Company's initiatives under its restructuring plan and other expense reduction measures have resulted in decreases in most expense categories during the second quarter of 2002 when compared to the second quarter of 2001. The Company recorded total pre-tax charges of $3 million in the second quarter of 2002 for restructuring charges under its restructuring plan. In the second quarter of 2001, the Company recorded total pre-tax restructuring and other charges of $145 million. Compensation and benefits expense was $470 million for the second quarter of 2002, down $9 million, or 2%, from the second quarter of 2001 primarily due to a reduction in full-time equivalent employees, partially offset by the accrual of discretionary bonuses to employees in the second quarter of 2002. The following table shows a comparison of certain compensation and benefits components and employee data (in thousands): -17- - -------------------------------------------------------------------------------- Three Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Compensation and benefits expense as a % of total revenues 45% 45% Variable compensation as a % of compensation and benefits expense 14% 10% Compensation for temporary employees, contractors and overtime hours as a % of compensation and benefits expense 6% 6% Full-time equivalent employees (at end of quarter) (1) 19.1 22.4 Revenues per average full-time equivalent employee $ 54.5 $ 46.0 - -------------------------------------------------------------------------------- (1) Includes full-time, part-time, and temporary employees, and persons employed on a contract basis. Communications expense was $66 million for the second quarter of 2002, down $23 million, or 26%, from the second quarter of 2001. This decrease was primarily due to lower client trading volumes and the Company's expense reduction measures. Goodwill amortization expense for the second quarter of 2001 was $16 million. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 - Goodwill and Other Intangible Assets. Upon adoption of SFAS No. 142, amortization of the existing goodwill ceased and therefore there was no such expense in the second quarter of 2002. The Company did not record any goodwill impairment charges in the second quarter of 2002 upon completion of the initial transitional impairment test under SFAS No. 142. The Company's effective income tax rate was 37.2% for the second quarter of 2002, down from 47.7% for the second quarter of 2001. The decrease was primarily due to the cessation of goodwill amortization upon the adoption of SFAS No. 142 in 2002, as well as a regulatory fine at U.S. Trust in 2001 which was nondeductible for tax purposes. Six Months Ended June 30, 2002 Compared To Six Months Ended June 30, 2001 FINANCIAL OVERVIEW In the difficult market environment that prevailed during the first half of 2002, daily average revenue trades decreased 22% and average revenue per equity share traded in the Capital Markets segment decreased 48% from year-earlier levels. As a result of these two factors, the Company's trading revenues in the first half of 2002 decreased 22% from the first half of 2001 and total revenues decreased 7% for the same period. Non-trading revenues increased 3% in the first half of 2002 compared to the year-ago level. Asset management and administration fees increased 9% in the first half of 2002 compared to the year-ago level, primarily resulting from an increase in assets in, and service fees earned on, SchwabFunds, as well as higher balance-related account fees. This increase was partially offset by a 10% decrease in net interest revenue, as average margin loans to clients in the first half of 2002 decreased 29% from year-ago levels. Total expenses excluding interest during the first half of 2002 were $1.8 billion, down 15% from $2.1 billion during the first half of 2001. This decrease resulted primarily from the Company's continued expense reduction measures, including the restructuring plan implemented during 2001. In June 2001, U.S. Trust sold its Corporate Trust business to The Bank of New York Company, Inc. (Bank of NY). The Company recorded an extraordinary gain of $221 million, or $121 million after tax, on this sale in the second quarter of 2001. During the first quarter of 2002, the Company recorded an extraordinary gain of $22 million, or $12 million after tax, which represented the remaining proceeds from this sale that were realized upon satisfaction of certain client retention requirements. In evaluating the Company's financial performance, management uses adjusted operating income, which excludes non-operating items as detailed in the following table. The Company's after-tax operating income for the first half of 2002 was $214 million, relatively flat with the first half of 2001, and its after-tax operating profit margin for the first half of 2002 was 10.1%, up from 9.6% for the first half of 2001. A reconciliation of the Company's operating income to net income is shown in the following table (in millions): -18- - -------------------------------------------------------------------------------- Six Months Ended June 30, Percent 2002 2001 Change - -------------------------------------------------------------------------------- Operating income, after tax $ 214 $ 217 (1%) Non-operating items: Extraordinary gain (1) 22 221 (90) Restructuring charges (2) (30) (117) (74) Other charges (3) (28) Merger- and acquisition-related charges (4) (27) (60) (55) - -------------------------------------------------------------------------------- Total non-operating items (35) 16 n/m Tax effect 13 (34) n/m - -------------------------------------------------------------------------------- Total non-operating items, after tax (22) (18) 22 - -------------------------------------------------------------------------------- Net income $ 192 $ 199 (4%) ================================================================================ (1) The Company recorded an extraordinary pre-tax gain, net of closing and exit costs, from the sale of USTC's Corporate Trust business to the Bank of NY in June 2001. In March 2002, the Company recorded an extraordinary pre-tax gain for the remaining proceeds related to client retention requirements for this sale. (2) Primarily includes costs relating to a workforce reduction, a reduction in operating facilities, the removal of certain systems hardware, software, and equipment from service, and the withdrawal from certain international operations. (3) For 2001, includes a regulatory fine assessed to USTC and U.S. Trust NY, professional service fees for operational and risk management remediation at USTC and U.S. Trust NY, and the write-off of certain software development costs at CSE. (4) Includes retention program compensation related to the merger with USTC, and intangible asset amortization and retention program compensation related to the acquisition of CyberTrader. The retention programs related to the acquisition of CyberTrader and the merger with USTC ended in March 2002 and May 2002, respectively. For the six months ended June 30, 2001, amount also includes goodwill amortization, which ceased on January 1, 2002 upon the adoption of SFAS No. 142. n/m Not meaningful The Company's operating income before taxes for the first half of 2002 was $343 million, unchanged from the first half of 2001 as increases of $19 million, or 17%, in the Individual Investor segment and $18 million, or 29%, in the U.S. Trust segment, were offset by decreases of $20 million, or 14%, in the Institutional Investor segment and $17 million, or 57%, in the Capital Markets segment. These fluctuations were primarily due to the factors described in the comparison between the three-month periods. The Company's net income for the first half of 2002 was $192 million, or $.14 per share, compared to $199 million, or $.14 per share, for the first half of 2001. The Company's after-tax profit margin for the first half of 2002 was 9.1%, up from 8.8% for the first half of 2001. The annualized return on stockholders' equity for the first half of 2002 was 9%, unchanged from the first half of 2001. REVENUES Revenues declined $163 million, or 7%, to $2.1 billion in the first half of 2002 compared to the first half of 2001, due to a $152 million, or 20%, decrease in commission revenues, a $50 million, or 10%, decrease in net interest revenue, and a $50 million, or 33%, decrease in principal transaction revenues. These declines were partially offset by a $72 million, or 9%, increase in asset management and administration fees and a $17 million, or 27%, increase in other revenues. As trading volumes decreased substantially during the first half of 2002, the Company's non-trading revenues represented 67% of total revenues as compared to 60% for the first half of 2001 as shown in the following table: - -------------------------------------------------------------------------------- Six Months Ended June 30, Composition of Revenues 2002 2001 - -------------------------------------------------------------------------------- Commissions 28% 33% Principal transactions 5 7 - -------------------------------------------------------------------------------- Total trading revenues 33 40 - -------------------------------------------------------------------------------- Asset management and administration fees 42 36 Net interest revenue 21 22 Other 4 2 - -------------------------------------------------------------------------------- Total non-trading revenues 67 60 - -------------------------------------------------------------------------------- Total 100% 100% ================================================================================ The $163 million decline in revenues from the first half of 2001 was primarily due to decreases in revenues of $104 million, or 8%, in the Individual Investor segment and $76 million, or 37%, in the Capital Markets segment. The decrease in the Capital Markets segment was primarily due to lower average revenue per equity share traded and lower share volume handled by SCM, partially offset by higher revenues from client fixed income securities trading activity. See note "12 - Segment Information" in the Notes to Condensed Consolidated Financial Statements for financial information by segment. Asset Management and Administration Fees Asset management and administration fees were $891 million for the first half of 2002, up $72 million, or 9%, from the first half of 2001, as shown in the following table (in millions): -19 - -------------------------------------------------------------------------------- Six Months Ended Asset Management June 30, Percent and Administration Fees 2002 2001 Change - -------------------------------------------------------------------------------- Mutual fund service fees: Proprietary funds (SchwabFunds(R)and Excelsior(R)) $437 $390 12% Mutual Fund OneSource(R) 143 145 (1) Other 20 17 18 Asset management and related services 291 267 9 - -------------------------------------------------------------------------------- Total $891 $819 9% ================================================================================ The increase in asset management and administration fees was due to the factors described in the comparison between the three-month periods. During the first half of 2002, net new client assets and new accounts decreased from the first half of 2001 as shown in the table below. - -------------------------------------------------------------------------------- Six Months Ended Change in Client Assets and Accounts June 30, Percent (In billions, except as noted) 2002 2001 Change - -------------------------------------------------------------------------------- Net change in assets in client accounts Net new client assets $ 26.9 $ 42.2 Net market losses (75.8) (55.6) - -------------------------------------------------------------------- Net decline $(48.9) $ (13.4) ==================================================================== New client accounts (in thousands) 456.9 546.3 (16%) ================================================================================ Commissions Commission revenues for the Company were $597 million for the first half of 2002, down $152 million, or 20%, from the first half of 2001. The Company's client trading activity is shown in the following table (in thousands): - -------------------------------------------------------------------------------- Six Months Ended June 30, Percent Daily Average Trades 2002 2001 Change - -------------------------------------------------------------------------------- Revenue Trades Online 115.6 149.9 (23%) TeleBroker(R)and Schwab by PhoneTM 6.2 8.3 (25) Regional client telephone service centers, branch offices, and other 16.2 19.8 (18) - -------------------------------------------------------------------------------- Total 138.0 178.0 (22%) ================================================================================ Mutual Fund OneSource(R) Trades Online 46.5 36.8 26% TeleBroker and Schwab by Phone .5 .4 25 Regional client telephone service centers, branch offices, and other 11.0 17.9 (39) - -------------------------------------------------------------------------------- Total 58.0 55.1 5% ================================================================================ Total Daily Average Trades Online 162.1 186.7 (13%) TeleBroker and Schwab by Phone 6.7 8.7 (23) Regional client telephone service centers, branch offices, and other 27.2 37.7 (28) - -------------------------------------------------------------------------------- Total 196.0 233.1 (16%) ================================================================================ As shown in the following table, the total number of revenue trades executed by the Company has decreased 23% as the number of client accounts that traded and client trading activity per account that traded have declined. - -------------------------------------------------------------------------------- Six Months Ended Commissions Earned on June 30, Percent Client Revenue Trades 2002 2001 Change - -------------------------------------------------------------------------------- Client accounts that traded during the period (in thousands) 2,014 2,224 (9%) Average client revenue trades per account that traded 8.5 10.0 (15) Total revenue trades (in thousands) 17,104 22,247 (23) Trading frequency proxy (1) 3.7 4.6 (20) Number of trading days 124 125 (1) Average commission per revenue trade $36.99 $34.13 8 Commissions earned on client revenue trades (in millions) (2) $ 633 $ 759 (17) - -------------------------------------------------------------------------------- (1) Represents annualized revenue trades per $100,000 in client assets. (2) Includes certain non-commission revenues relating to the execution of client trades. Excludes commissions on trades relating to specialist operations and U.S. Trust commissions on trades. -20- Net Interest Revenue Net interest revenue was $439 million for the first half of 2002, down $50 million, or 10%, from the first half of 2001 as shown in the following table (in millions): - -------------------------------------------------------------------------------- Six Months Ended June 30, Percent 2002 2001 Change - -------------------------------------------------------------------------------- Interest Revenue Margin loans to clients $ 261 $ 513 (49%) Investments, client-related 168 320 (48) Private banking loans 119 116 3 Securities available for sale 39 42 (7) Other 38 87 (56) - -------------------------------------------------------------------------------- Total 625 1,078 (42) - -------------------------------------------------------------------------------- Interest Expense Brokerage client cash balances 98 460 (79) Deposits from banking clients 46 74 (38) Long-term debt 27 29 (7) Short-term borrowings 13 10 30 Stock-lending activities 2 14 (86) Other 2 n/m - -------------------------------------------------------------------------------- Total 186 589 (68) - -------------------------------------------------------------------------------- Net interest revenue $ 439 $ 489 (10%) ================================================================================ n/m Not meaningful Client-related and other daily average balances, interest rates, and average net interest spread for the first halves of 2002 and 2001 are summarized in the following table (dollars in millions): - -------------------------------------------------------------------------------- Six Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Interest-Earning Assets (client-related and other): Investments (client-related): Average balance outstanding $ 17,674 $ 13,171 Average interest rate 1.92% 4.90% Margin loans to clients: Average balance outstanding $ 9,097 $ 12,860 Average interest rate 5.78% 8.04% Private banking loans: Average balance outstanding $ 4,079 $ 3,167 Average interest rate 5.87% 7.39% Securities available for sale: Average balance outstanding $ 1,501 $ 1,329 Average interest rate 5.18% 6.34% Average yield on interest-earning assets 3.65% 6.54% Funding Sources (client-related and other): Interest-bearing brokerage client cash balances: Average balance outstanding $ 23,256 $ 22,375 Average interest rate .86% 4.14% Interest-bearing banking deposits: Average balance outstanding $ 3,832 $ 3,315 Average interest rate 2.41% 4.52% Other interest-bearing sources: Average balance outstanding $ 1,041 $ 1,299 Average interest rate 2.25% 4.66% Average noninterest-bearing portion $ 4,222 $ 3,538 Average interest rate on funding sources .98% 3.72% Summary: Average yield on interest-earning assets 3.65% 6.54% Average interest rate on funding sources .98% 3.72% - -------------------------------------------------------------------------------- Average net interest spread 2.67% 2.82% - -------------------------------------------------------------------------------- The decrease in net interest revenue from the first half of 2001 was due to the factors described in the comparison between the three-month periods. Principal Transactions Principal transaction revenues were $100 million for the first half of 2002, down $50 million, or 33%, from the first half of 2001, as shown in the following table (in millions): - -------------------------------------------------------------------------------- Six Months Ended June 30, Percent Principal Transactions 2002 2001 Change - -------------------------------------------------------------------------------- Fixed income securities $ 47 $ 29 62% Nasdaq and other equity securities 47 109 (57) Other 6 12 (50) - -------------------------------------------------------------------------------- Total $100 $150 (33%) ================================================================================ The decrease in principal transaction revenues was due to the change to decimal pricing, which was not fully -21- implemented in the first quarter of 2001, as well as the factors described in the comparison between the three-month periods. Other Revenues Other revenues were $81 million for the first half of 2002, up $17 million, or 27%, from the first half of 2001. This increase was due to the factors described in the comparison between the three-month periods, as well as a gain recorded on the sale of the Company's Canadian operations in the first quarter of 2002. EXPENSES EXCLUDING INTEREST Total expenses excluding interest for the first half of 2002 declined $311 million, or 15%, from the first half of 2001. The Company's initiatives under its restructuring plan and other expense reduction measures have resulted in decreases in most expense categories during the first half of 2002 when compared to the first half of 2001. The Company recorded total pre-tax charges of $30 million in the first half of 2002 for restructuring charges under its restructuring plan. In the first half of 2001, the Company recorded total pre-tax restructuring and other charges of $145 million. Compensation and benefits expense was $941 million for the first half of 2002, down $31 million, or 3%, from the first half of 2001 primarily due to a reduction in full-time equivalent employees, partially offset by the accrual of discretionary bonuses to employees in the first half of 2002. The following table shows a comparison of certain compensation and benefits components and employee data (in thousands): - -------------------------------------------------------------------------------- Six Months Ended June 30, 2002 2001 - -------------------------------------------------------------------------------- Compensation and benefits expense as a % of total revenues 45% 43% Variable compensation as a % of compensation and benefits expense 14% 10% Compensation for temporary employees, contractors and overtime hours as a % of compensation and benefits expense 5% 7% Full-time equivalent employees (at end of period) (1) 19.1 22.4 Revenues per average full-time equivalent employee $108.8 $ 93.2 - -------------------------------------------------------------------------------- (1) Includes full-time, part-time, and temporary employees, and persons employed on a contract basis. Communications expense was $137 million for the first half of 2002, down $48 million, or 26%, from the first half of 2001. This decrease was due to the factors described in the comparison between the three-month periods. Advertising and market development expense was $105 million for the first half of 2002, down $39 million, or 27%, from the first half of 2001. This decrease was primarily a result of reductions in television and print media spending as part of the Company's expense reduction measures. Goodwill amortization expense for the first half of 2001 was $32 million. Upon adoption of SFAS No. 142 on January 1, 2002, amortization of the existing goodwill ceased and therefore there was no such expense in the first half of 2002. The Company did not record any goodwill impairment charges in the first half of 2002 upon completion of the initial transitional impairment test under SFAS No. 142. The Company's effective income tax rate was 37.7% for the first half of 2002, down from 44.6% for the first half of 2001. The decrease was due to the factors described in the comparison between the three-month periods. Liquidity and Capital Resources CSC is a financial holding company, which is a type of bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended. CSC conducts virtually all business through its wholly owned subsidiaries. The capital structure among CSC and its subsidiaries is designed to provide each entity with capital and liquidity consistent with its operations. See note "10 - Regulatory Requirements" in the Notes to Condensed Consolidated Financial Statements. Liquidity CSC CSC's liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. As discussed below, Schwab, CSC's depository institution subsidiaries, and SCM are subject to regulatory requirements that may restrict them from certain transactions with CSC. Management believes that funds generated by the operations of CSC's subsidiaries will continue to be the primary funding source in meeting CSC's liquidity needs, meeting CSC's depository institution subsidiaries' capital guidelines, and maintaining Schwab's and SCM's net capital. Based on their respective regulatory capital ratios at June 30, 2002, the Company and its depository institution subsidiaries are considered well capitalized. CSC has liquidity needs that arise from its issued and outstanding $597 million Senior Medium-Term Notes, -22- Series A (Medium-Term Notes), as well as from the funding of cash dividends, acquisitions, and other investments. The Medium-Term Notes have maturities ranging from 2002 to 2010 and fixed interest rates ranging from 6.04% to 8.05% with interest payable semiannually (see Item 3 - Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Swaps). The Medium-Term Notes are rated A2 by Moody's Investors Service, A- by Standard & Poor's Ratings Group (S&P), and A by Fitch IBCA, Inc. (Fitch). The rating by S&P was lowered to A- from A on August 1, 2002. The rating by Fitch was lowered to A from A+ on May 17, 2002. CSC has a prospectus supplement on file with the Securities and Exchange Commission enabling CSC to issue up to $750 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At June 30, 2002, all of these notes remained unissued. CSC has authorization from its Board of Directors to issue up to $1.0 billion in commercial paper. At June 30, 2002, no commercial paper has been issued. CSC's ratings for these short-term borrowings are P-1 by Moody's Investors Service, A-2 by S&P, and F1 by Fitch. The rating by S&P was lowered to A-2 from A-1 on August 1, 2002. In June 2002, CSC established a $1.0 billion committed, unsecured credit facility with a group of twenty-two banks which is scheduled to expire in June 2003. This facility replaced a similar $1.2 billion facility that expired in June 2002. CSC reduced the size of the new facility due to its current and expected liquidity requirements. These facilities were unused during the first six months of 2002. Any issuances under CSC's commercial paper program will reduce the amount available under this facility. The funds under this facility are available for general corporate purposes and CSC pays a commitment fee on the unused balance of this facility. The financial covenants in this facility require CSC to maintain a minimum level of tangible net worth, and Schwab and SCM to maintain specified levels of net capital, as defined. Management believes that these restrictions will not have a material effect on its ability to meet foreseeable dividend or funding requirements. CSC also has direct access to $670 million of the $770 million uncommitted, unsecured bank credit lines, provided by eight banks that are primarily utilized by Schwab to manage short-term liquidity. The amount available to CSC under these lines is lower than the amount available to Schwab because the credit line provided by one of these banks is only available to Schwab. These lines were not used by CSC during the first six months of 2002. Schwab Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $23.3 billion and $25.0 billion at June 30, 2002 and December 31, 2001, respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab in the future. Schwab is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying cash dividends, or making unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $1 million. At June 30, 2002, Schwab's net capital was $1.1 billion (13% of aggregate debit balances), which was $952 million in excess of its minimum required net capital and $698 million in excess of 5% of aggregate debit balances. Schwab has historically targeted net capital to be at least 10% of its aggregate debit balances, which primarily consist of client margin loans. To manage Schwab's regulatory capital position, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility maturing in September 2003, of which $220 million was outstanding at June 30, 2002. At quarter end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC maturing in 2004. Borrowings under these subordinated lending arrangements qualify as regulatory capital for Schwab. To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of eight banks totaling $770 million at June 30, 2002 (as noted previously, $670 million of these lines are also available for CSC to use). The need for short-term borrowings arises primarily from timing differences between cash flow requirements and the scheduled liquidation of interest-bearing investments. Schwab used such borrowings for 8 days during the first six months of 2002, with the daily amounts borrowed averaging $44 million. There were no borrowings outstanding under these lines at June 30, 2002. To satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC), Schwab had unsecured letter of credit agreements with ten banks in favor of the OCC aggregating $765 million at June 30, 2002. Schwab pays a fee to maintain these letters of credit. No funds were drawn under these letters of credit at June 30, 2002. U.S. Trust U.S. Trust's liquidity needs are generally met through earnings generated by its operations. U.S. Trust is subject to the Federal Reserve Board's risk-based and leverage capital guidelines. These regulations require banks and bank holding companies to maintain minimum levels of capital. In addition, CSC's -23- depository institution subsidiaries are subject to limitations on the amount of dividends they can pay to USTC. In addition to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements, CSC's depository institution subsidiaries have established their own external funding sources. At June 30, 2002, U.S. Trust had $50 million in Trust Preferred Capital Securities outstanding with a fixed interest rate of 8.41%. Certain of CSC's depository institution subsidiaries have established credit facilities with the Federal Home Loan Bank System (FHLB) totaling $697 million. At June 30, 2002, $300 million in short-term borrowings and $101 million in long-term debt were outstanding under these facilities. Additionally, at June 30, 2002, U.S. Trust had $595 million of federal funds purchased and $366 million of repurchase agreements outstanding. CSC provides U.S. Trust with a $300 million short-term credit facility maturing in 2003. Borrowings under this facility do not qualify as regulatory capital for U.S. Trust. The amount outstanding under this facility was $30 million at June 30, 2002. SCM SCM's liquidity needs are generally met through earnings generated by its operations. Most of SCM's assets are liquid, consisting primarily of cash and cash equivalents, marketable securities, and receivables from brokers, dealers and clearing organizations. SCM's liquidity is affected by the same net capital regulatory requirements as Schwab (see discussion above). At June 30, 2002, SCM's net capital was $133 million, which was $132 million in excess of its minimum required net capital. SCM may borrow up to $150 million under a subordinated lending arrangement with CSC maturing in 2003. Borrowings under this arrangement qualify as regulatory capital for SCM. The amount outstanding under this facility was $125 million at June 30, 2002 and had been reduced to $60 million at July 31, 2002. The advances under this facility reflect increased intra-day capital needs at SCM to support the expansion of its institutional equities business. In addition, CSC provides SCM with a $50 million short-term credit facility. Borrowings under this arrangement do not qualify as regulatory capital for SCM. No funds were drawn under this facility at June 30, 2002. Liquidity Risk Factors Specific risk factors which may affect the Company's liquidity position are discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources - Liquidity Risk Factors" in the Company's 2001 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2001. There have been no material changes to these liquidity risk factors in the first half of 2002. Cash Flows and Capital Resources Net income plus depreciation and amortization including goodwill amortization was $356 million for the first half of 2002, down 11% from $398 million for the first half of 2001. Depreciation and amortization expense related to equipment, office facilities and property was $159 million for the first half of 2002, as compared to $162 million for the first half of 2001, or 8% and 7% of revenues for each period, respectively. Amortization expense related to intangible assets was $5 million for each of the first halves of 2002 and 2001. Goodwill amortization expense was $32 million for the first half of 2001. The Company's cash position (reported as cash and cash equivalents on the condensed consolidated balance sheet) and cash flows are affected by changes in brokerage client cash balances and the associated amounts required to be segregated under federal or other regulatory guidelines. Timing differences between cash and investments actually segregated on a given date and the amount required to be segregated for that date may arise in the ordinary course of business and are addressed by the Company in accordance with applicable regulations. Other factors which affect the Company's cash position and cash flows include investment activity in securities owned, levels of capital expenditures, banking client deposit and loan activity, financing activity in short-term borrowings and long-term debt, and repurchases of CSC's common stock. In the first half of 2002, cash and cash equivalents decreased $1.9 billion, or 43%, to $2.5 billion primarily due to movements of brokerage client-related funds to meet segregation requirements, decreases in brokerage client cash balances and banking client deposits, and increases in investments in securities available for sale. Management does not believe that this decline in cash and cash equivalents is an indication of a trend. The Company's capital expenditures were $72 million in the first half of 2002 and $208 million in the first half of 2001, or 3% and 9% of revenues for each period, respectively. Capital expenditures in the first half of 2002 were for software and equipment relating to the Company's information technology systems and certain facilities. Capital expenditures as described above include the capitalized costs for developing internal-use software of $36 million in the first half of 2002 and $47 million in the first half of 2001. As discussed in the Company's 2001 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2001, management anticipated that 2002 capital expenditures would be approximately 10% to 20% lower than 2001 spending. Due to a continued -24- economic slowdown and management's continued focus on cost containment, the Company further reduced its capital expenditures in the first half of 2002. Management currently anticipates that full-year 2002 capital expenditures will be approximately 30% to 40% lower than 2001 levels. During the first half of 2002, 3 million of the Company's stock options, with a weighted-average exercise price of $6.67, were exercised with cash proceeds received by the Company of $19 million and a related tax benefit of $4 million. The cash proceeds are recorded as an increase in cash and a corresponding increase in stockholders' equity. The tax benefit is recorded as a reduction in income taxes payable and a corresponding increase in stockholders' equity. The Company borrowed $100 million and repaid $82 million of long-term debt during the first half of 2002. During the first half of 2002, CSC repurchased 3 million shares of its common stock for $31 million. During the first half of 2001, CSC repurchased 8 million shares of its common stock for $144 million. At June 30, 2002, the authorization granted by the Board of Directors allows for future repurchases of CSC's common stock totaling up to $368 million of the original $500 million authorization. During each of the first halves of 2002 and 2001, the Company paid common stock cash dividends of $30 million. The Company monitors both the relative composition and absolute level of its capital structure. The Company's total financial capital (long-term debt plus stockholders' equity) at June 30, 2002 was $5.1 billion, up $203 million, or 4%, from December 31, 2001. At June 30, 2002, the Company had long-term debt of $751 million, or 15% of total financial capital, that bears interest at a weighted-average rate of 6.89%. At June 30, 2002, the Company's stockholders' equity was $4.3 billion, or 85% of total financial capital. Commitments A summary of the Company's principal contractual obligations and other commitments as of June 30, 2002 is shown in the following table (in millions). Management believes that funds generated by its operations, as well as cash provided by external financing, will continue to be the primary funding sources in meeting these obligations and commitments. - -------------------------------------------------------------------------------- Less than 1 - 3 4 - 5 After 5 1 Year Years Years Years Total - -------------------------------------------------------------------------------- Operating leases (1) $ 153 $ 862 $ 254 $ 764 $2,033 Long-term debt (2) 32 337 106 273 748 Short-term borrowings 1,274 1,274 Credit-related financial instruments (3) 565 115 680 Other commitments (4) 6 6 - -------------------------------------------------------------------------------- Total $2,030 $1,314 $ 360 $1,037 $4,741 ================================================================================ (1) Includes minimum rental commitments and maximum guaranteed residual values under noncancelable leases for office space and equipment. (2) Excludes the effect of interest rate swaps, see Item 3 - Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Swaps. (3) Includes U.S. Trust firm commitments to extend credit primarily for mortgage loans to private banking clients and standby letters of credit. (4) Includes committed capital contributions to venture capital funds. In addition to the commitments summarized above, in the ordinary course of its business the Company has entered into various agreements with third-party vendors, including agreements for advertising, sponsorships of sporting events, data processing equipment purchases, licensing, and software installation. These agreements typically can be canceled by the Company if notice is given within the terms specified in the agreements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Financial Instruments Held For Trading Purposes The Company held municipal, other fixed income and government securities, and certificates of deposit with a fair value of approximately $59 million and $36 million at June 30, 2002 and December 31, 2001, respectively. These securities, and the associated interest rate risk, are not material to the Company's financial position, results of operations, or cash flows. The Company maintains inventories in exchange-listed, Nasdaq, and other equity securities on both a long and short basis. The fair value of these securities at June 30, 2002 was $153 million in long positions and $50 million in short positions. The fair value of these securities at December 31, 2001 was $167 million in long positions and $27 million in short positions. Using a hypothetical 10% increase or decrease in prices, the potential loss or gain in fair value is estimated to be approximately $10 million and $14 million at June 30, 2002 and December 31, 2001, respectively, due to the offset of change in fair value in long and short positions. In addition, the Company generally enters into exchange-traded futures and options to hedge against potential losses in equity inventory positions, thus offsetting this potential loss exposure. A hypothetical 10% change in fair value of the futures and options at June 30, 2002 and December 31, 2001 would substantially offset the potential -25- loss or gain on the equity securities discussed above. The notional amount and fair value of futures and options were not material to the Company's condensed consolidated balance sheets at June 30, 2002 and December 31, 2001. Financial Instruments Held For Purposes Other Than Trading Deferred Compensation The Company maintains investments in mutual funds related to its deferred compensation plan, which is available to certain employees. These investments were approximately $55 million and $61 million at June 30, 2002 and December 31, 2001, respectively. These securities, and the associated market risk, are not material to the Company's financial position, results of operations, or cash flows. Debt Issuances At June 30, 2002, CSC had $597 million aggregate principal amount of Medium-Term Notes, with fixed interest rates ranging from 6.04% to 8.05%. At December 31, 2001, CSC had $679 million aggregate principal amount of Medium-Term Notes, with fixed interest rates ranging from 6.04% to 8.05%. See "Interest Rate Swaps" below. At June 30, 2002 and December 31, 2001, U.S. Trust had $50 million Trust Preferred Capital Securities outstanding, with a fixed interest rate of 8.41%. In addition at June 30, 2002 and December 31, 2001, U.S. Trust had $101 million and $1 million FHLB long-term debt outstanding, respectively. The FHLB long-term debt had fixed interest rates ranging from 3.90% to 6.69% at June 30, 2002 and a fixed interest rate of 6.69% at December 31, 2001. The Company has fixed cash flow requirements regarding these long-term debt obligations due to the fixed rate of interest. The fair value of these obligations at June 30, 2002 and December 31, 2001, based on estimates of market rates for debt with similar terms and remaining maturities, approximated their carrying amount. Interest Rate Swaps As part of its consolidated asset and liability management process, the Company utilizes interest rate swaps (Swaps) to manage interest rate risk. U.S. Trust uses Swaps to hedge the interest rate risk associated with its variable rate deposits from banking clients. These Swaps call for U.S. Trust to receive a variable rate of interest and pay a fixed rate of interest. At June 30, 2002, these Swaps had a weighted-average variable interest rate of 1.91%, a weighted-average fixed interest rate of 6.36%, a weighted-average maturity of 2.1 years, and an aggregate notional principal amount of $880 million. At December 31, 2001, the notional principal amount of such Swaps totaled $905 million, and they carried a weighted-average variable interest rate of 2.15%, a weighted-average fixed interest rate of 6.37%, and a weighted-average maturity of 2.6 years. These Swaps have been designated as cash flow hedges under SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities, and are recorded on the condensed consolidated balance sheet, with changes in their fair values primarily recorded in other comprehensive income (loss), a component of stockholders' equity. At June 30, 2002 and December 31, 2001, U.S. Trust recorded a derivative liability of $55 million and $54 million, respectively, for these Swaps. During the second quarter of 2002, CSC entered into Swaps with an aggregate notional principal amount of $293 million that effectively alter the interest rate characteristics of a like amount of its Medium-Term Notes. These Swaps call for CSC to receive a fixed rate of interest and pay a variable rate of interest based on three-month LIBOR. At June 30, 2002, the net effect of the Swaps converted the Medium-Term Notes from a weighted-average fixed interest rate of 7.57% to a weighted-average variable interest rate of 4.34%. The variable interest rates reset every three months. These Swaps have been designated as fair value hedges under SFAS No. 133, and are recorded on the condensed consolidated balance sheet. Changes in fair value of the Swaps are completely offset by changes in fair value of the hedged Medium-Term Notes, resulting in no effect on earnings. At June 30, 2002, CSC recorded a derivative asset of $3 million for these Swaps. Concurrently, the carrying value of the Medium-Term Notes was increased by $3 million. Net Interest Revenue Simulation The Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation model (the model) includes all interest-sensitive assets and liabilities, as well as Swaps utilized by the Company to hedge its interest rate risk. Key variables in the model include assumed margin loan and brokerage client cash balance growth or decline, changes to the level and term structure of interest rates, the repricing of financial instruments, prepayment and reinvestment assumptions, loan, banking deposit, and brokerage client cash balance pricing and volume assumptions. The simulations involve assumptions that are inherently uncertain and as a result, the simulations cannot precisely estimate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and -26- management strategies, including changes in asset and liability mix. As demonstrated by the simulations presented below, the Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when rates fall (i.e., interest-earning assets are repricing more quickly than interest-bearing liabilities). The Swaps entered into during the second quarter of 2002 have the effect of increasing the repricing frequency of interest-bearing liabilities, thereby reducing the Company's consolidated interest-rate sensitivity. The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the effect of a gradual 100 basis point increase or decrease in interest rates relative to the Company's current base rate forecast on simulated net interest revenue over the next twelve months at June 30, 2002 and December 31, 2001. - -------------------------------------------------------------------------------- Impact on Net Interest Revenue June 30, December 31, Percentage Increase (Decrease) 2002 2001 - -------------------------------------------------------------------------------- Increase of 100 basis points 1.5% 3.8% Decrease of 100 basis points (4.0%) (7.0%) - -------------------------------------------------------------------------------- The impact of the Company's hedging activities upon net interest revenue for the quarters ended June 30, 2002 and December 31, 2001 was immaterial to the Company's results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings United States Trust Company of New York (U.S. Trust NY) was Escrow Agent and Indenture Trustee in connection with an offering of approximately $130 million in senior secured redeemable notes issued in July 1998 by Epic Resorts, LLC (Epic Notes). In January 2002, certain noteholders filed a complaint in the Supreme Court of New York, New York County against U.S. Trust NY alleging that U.S. Trust NY failed to comply with its obligations as Escrow Agent and Indenture Trustee for the Epic Notes, and are seeking damages. Although USTC sold its Corporate Trust business in 2001, under the sale agreement, USTC retains liability arising from certain litigation, including this case. The plaintiff noteholders claim that as a result of the alleged breaches, they suffered financial losses, including losing their investment in the Epic Notes. U.S. Trust NY has answered the complaint, denying plaintiffs' allegations and asserting affirmative defenses, and intends to vigorously defend the lawsuit. The nature of the Company's business, including its new products and services, subjects it to claims, lawsuits, regulatory examinations, and other proceedings in the ordinary course of business. The results of these matters cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the Company's results of operations in any future period, depending partly on the results for that period, and a substantial judgment could have a material adverse impact on the Company's financial condition and results of operations. However, it is the opinion of management, after consultation with legal counsel, that the ultimate outcome of current matters will not have a material adverse impact on the financial condition or operating results of the Company. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders CSC's Annual Meeting of Stockholders was held on May 13, 2002, and a total of 1,096,840,478 shares were present in person or by proxy at the Annual Meeting. CSC's stockholders voted upon the following proposals: -27- Proposal No. 1 - Election of Four Directors: Shares For Shares Withheld ----------- ----------------- Frank C. Herringer 1,062,658,100 34,182,378 Stephen T. McLin 1,076,630,429 20,210,049 Charles R. Schwab 992,880,934 103,959,544 Roger O. Walther 1,068,032,148 28,808,330 Proposal No. 2 - Approval of an Amendment to the Corporate Executive Bonus Plan: Shares For Shares Against Abstentions ------------- --------------- ------------- 1,003,629,221 82,962,197 10,249,060 Proposal No. 3 - Approval of an Amendment to the Annual Executive Individual Performance Plan: Shares For Shares Against Abstentions ------------- --------------- ------------- 1,009,168,288 77,742,968 9,929,222 With respect to each of the above proposals, there were no broker non-votes. Item 5. Other Information Effective April 17, 2002, CSC's Board of Directors appointed Paula A. Sneed to the Board, filling a seat left vacant by Condoleezza Rice when she resigned in January 2001 to become the National Security Advisor in the Bush administration. Ms. Sneed is Group Vice President and President of E-Commerce and Marketing Services for Kraft Foods North America, part of Kraft Foods Inc. On July 16, 2002, CSC's Board of Directors appointed the following individuals to their respective positions: William L. Atwell Executive Vice Effective President, June 19, 2002 President of Schwab Institutional John Philip Coghlan Vice Chairman and Effective President of Retail July 8, 2002 Jody L. Bilney Executive Vice Effective President and Chief July 22, 2002 Marketing Officer With these appointments, Mr. Atwell and Ms. Bilney became members of the Company's Executive Committee, expanding it from eight to ten members. Mr. Coghlan was already a member of the Executive Committee. Mr. Atwell succeeded Mr. Coghlan as President of Schwab Institutional upon Mr. Coghlan's appointment as President of Retail. The Retail enterprise had been headed by David S. Pottruck, President and Co-Chief Executive Officer of the Company, on an interim basis since February 19, 2002. 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 - -------------------------------------------------------------------------------- 10.239 The Charles Schwab Corporation Annual Executive Individual Performance Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2002 (supersedes Exhibit 10.211). 10.240 The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2002 (supersedes Exhibit 10.212). 10.241 Credit Agreement (364-Day Commitment) dated as of June 21, 2002 between the Registrant and the financial institutions listed therein (supersedes Exhibit 10.238). 12.1 Computation of Ratio of Earnings to Fixed Charges. 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 99.3 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. - -------------------------------------------------------------------------------- (b) Reports on Form 8-K None. -28- THE CHARLES SCHWAB CORPORATION 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: August 13, 2002 /s/ Christopher V. Dodds ----------------- --------------------------------- Christopher V. Dodds Executive Vice President and Chief Financial Officer -29- EX-10 3 exh10_116.txt EXHIBIT 10_116 Exhibit 10.116 SECOND AMENDMENT TO TRUST AGREEMENT FOR THE CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan ("Plan"), which was amended and restated in its entirety effective November 1, 1990, and further amended effective January 1, 1992, is hereby further amended effective July 1, 1992, to reflect the appointment of The Charles Schwab Trust Company to act as successor trustee under the Plan and Trust Agreement, and as follows: 1. Each reference to "Security Pacific National Bank" is replaced by "The Charles Schwab Trust Company." 2. The last two sentences of Section 5.05(a) are revised to read as follows: Investment in such employer Securities shall be made from time to time by a direct issue of such Employer Securities from the Employer (in the event of Employer Securities used to fund the employee stock ownership plan only) or by purchase through a Purchasing Agent designated by the Trustee to effect all purchases of Employer Securities. The Purchasing Agent shall not in any event be The Charles Schwab Corporation or any of its affiliates or subsidiaries. The Purchasing Agent shall invest such funds as are paid over to the Purchasing Agent from time to time in Employer Securities at the time, in the amount, in the manner and at the price determined by the Purchasing Agent in its sole discretion, provided such price shall be the fair market value of such securities on the open market. The Purchasing Agent shall hold such assets as an agent of the Trustee and shall be a fiduciary to the Plan, but only with respect to those assets under its management and control and only with respect to its determinations as to the timing, price and amount of purchases of Employer Securities and the selection of the broker, but the Purchasing Agent shall have no discretion as to whether or not purchases of Employer Securities shall be made. The Purchasing Agent shall sell shares of Employer Securities at a the direction of the Trustee, but at the time, in the manner and at the price determined by the Purchasing Agent, provided such price shall be the fair market value of such securities on the open market. The Trustee shall instruct the Purchasing Agent to sell shares of Employer Securities only if the Plan Administrator has directed the Trustee to arrange for such sale and only if such sale is previously approved by the Board of Directors to the extent required under Section 10.01 of the plan. 3. Section 5.05(b) is amended to read as follows: (b) The Trustee shall pay over all contributions to the employee stock ownership plan, and such contributions and assets of the profit sharing plan that are to be invested in Employer Securities, to the Purchasing Agent for investment in Employer Securities. 4. Section 5.05(c) is amended to read as follows: Cash dividends received on any Employer Securities held as part of the profit sharing plan shall be paid over the Purchasing Agent and invested as soon as practicable in additional shares of Employer Securities. Cash dividends received on any Employer Securities allocated to a Participant's Account and held as part of the employee stock ownership plan shall be paid over the Purchasing Agent and invested as soon as practicable in additional shares of Employer Securities. Cash dividends received on Employer Securities held in the suspense account (e.g., unallocated shares of Employer Securities held as part of the employee stock ownership plan) shall be used as provided in Section 10.08 of the Plan. 5. Section 5.05(d) is amended to read as follows: The Purchasing Agent shall invest funds awaiting investment in Employer Securities in short-term obligations, including obligations of the United States of America or any agency or instrumentality thereof, trust and participation certificates, beneficial interests in any trust and such other short-term obligations as the Purchasing Agent deems to be appropriate for such interim investment purposes, provided however that the portion of the assets under its control that in its discretion shall be reasonable under the circumstances, pending investments, or payment of expenses, or the distribution of benefits. The Purchasing Agent is authorized to invest in any common, collective or pooled fund maintained by the Purchasing Agent as provided in Section 7.03. 6. Section 5.05(f) is amended to read as follows: Voting or proxy or other rights with respect to Employer Securities shall be disposed of as provided in this Section. With respect to Employer Securities that are allocated to Participants Accounts, each Participant shall be entitled to direct the Purchasing Agent as to the manner in which such employer Securities then allocated to his Account shall be voted. Such directions may be achieved through the use of proxy or similar statements delivered by the Purchasing Agent to the Participants with respect to the Employer Securities allocated to their Accounts. The Plan Administrator shall provide any information requested by the Purchasing Agent that is necessary or convenient in connection with obtaining and preserving the confidentiality of the Participants' directions. Any allocated Employer Securities with respect to which Participants are entitled to issue directions pursuant to the foregoing and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. All unallocated employer Securities shall be voted by the Purchasing Agent, provided however that the Purchasing Agent shall vote such unallocated Employer Securities in the same proportion as the shares of Employer Securities for which Participant voting instructions have been received as provided in the agreement between the Employer and the New York Stock Exchange. 7. Article XI is amended by the addition of the following sections at the end: Section 11.09 Disclosure. The Trustee is authorized to disclose such information as is necessary to the operation and administration of the trust fund to any of its affiliates and to such other persons and organizations that the Trustee determines have a legitimate business reason for obtaining such information. Section 11.10 Recording. The Trustee is authorized to record conversations between itself and the Plan Administrator, an Investment Manger, the Employer and other persons acting on behalf of the Plan. Section 11.11 Affiliates. The Trustee is authorized to contract or make other arrangements with The Charles Schwab Corporation and any of its affiliates, subsidiaries, successors and assigns, and any other organizations affiliated with or subsidiaries of, the Trustee or related entities, for the provision of services to the Plan and trust fund. Section 11.12 Trades. The Trustee is authorized to place securities orders, settle securities trades, hold securities in custody and perform related activities on behalf of the trust fund through or by Charles Schwab & Co., Inc. to the extent that the Trustee may select the broker-dealer. Trades and related activities effected through Charles Schwab & Co., Inc. shall not be subject to fees and commissions established by Charles Schwab & Co., Inc. Transactions effected by Schwab shall be subject to Schwab's trading rules and polices as modified or amended from time to time, together with the applicable rules, regulations, customs and usages of any exchange, marked, clearing house or self-regulatory organization and the applicable federal and state laws, rules and regulations. Section 11.13 Mutual Funds. The Trustee is authorized to invest in shares of regulated investment companies (or other investment vehicles) advised by affiliates of The Charles Schwab Corporation and any of its affiliates, subsidiaries, successors and assigns, and any other organization affiliated with, or subsidiaries of, the Trustee or related entitles, or by Trustee itself. Section 11.14 Lien. The Trustee shall have a lien on the trust fund for compensation and for any reasonable expenses incurred by the Trustee, including counsel, appraisal or accounting fees as provided in Section 4.04, and such amounts may be withdrawn from the trust fund if not paid by the Employer within a reasonable time after the Trustee mails a written billing. Executed this 30th day of June 1992. CHARLES SCHWAB & CO., INC. By /S/ ------------------------ Charles R. Schwab CHARLES SCHWAB TRUST COMPANY By /S/ ----------------------- Harvey A. Rowen EX-10 4 exh10_169.txt EXHIBIT 10_169 Exhibit 10.169 THIRD AMENDMENT TO THE TRUST AGREEMENT FOR THE CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN The Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan ("Plan"), which was amended and restated in its entirety effective November 1, 1990, and further amended effective January 1, 1992 and July 1, 1992, is hereby amended as follows, effective as of January 1, 1996: The fifth sentence of Section 5.05(f) is amended to read as follows: Any allocated Employer Securities with respect to which Participants are entitled to issue directions pursuant to the foregoing and for which such directions are not received by the Purchasing Agent shall be voted by the Purchasing Agent in the same proportion as the shares of Employer Securities for which Participant voting instructions have been received. CHARLES SCHWAB & CO., INC. By: Luis E. Valencia /S/ ------------------------------ Its: CAO ------------------------------ Date: May 8, 1996 ------------------------------ THE CHARLES SCHWAB TRUST COMPANY By: Richard R. Tinervin /S/ ------------------------------ Its: President and CEO ------------------------------ Date: May 3, 1996 ------------------------------ EX-10 5 exh10_239.txt EXHIBIT 10_239 Exhibit 10.239 The Charles Schwab Corporation Annual Executive Individual Performance Plan (Restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2002) I. Purposes The purposes of this Annual Executive Individual Performance Plan (the "Plan") are: (a) to provide greater incentive for key executives to continually exert their best efforts on behalf of The Charles Schwab Corporation (the "Company") by rewarding them for services rendered with incentive compensation that is in addition to their regular salaries; (b) to attract and to retain in the employ of the Company persons of outstanding competence; and (c) to further align the interests of such employees with those of the Company's stockholders through a strong performance-based reward system. II. Form of Awards Incentive compensation awards under this Plan shall be generally granted in cash, less any applicable withholding taxes; provided that the Committee may determine, from time to time, that all or a portion of any award may be paid in the form of an equity based incentive, including without limitation stock options, restricted shares, or outright grants of Company stock. The number of shares and stock options granted in any year, when added to the number of shares and stock options granted for such year pursuant to the Company's Corporate Executive Bonus Plan, shall in no event exceed .5% of the outstanding shares of the Company. III. Determination of Awards 1. Incentive awards for participants shall be determined annually. The participants in the Plan shall be the executive officers who are selected by the Compensation Committee of the Board of Directors (the "Committee") to participate in the Charles Schwab Corporate Executive Bonus Plan (the "CEB Plan"), except that the President and Co-Chief Executive Officer shall not be eligible to participate in the Plan. Payouts under the CEB Plan are defined by reference to a target percentage of base salary determined, from time to time, by the Committee and pursuant to a payout matrix, adopted from time to time by the Committee, that uses corporate performance criteria, to be selected by the Committee from among the following: revenue growth, operating revenue growth, consolidated pretax profit margin, consolidated pretax operating margin, customer net new asset growth, stockholder return, return on net assets, earnings per share, return on equity, and return on investment. Each participant shall have a bonus target under the Plan equal to such Participant's bonus target under the CEB Plan, multiplied by 160%. Payouts described in this subsection shall be calculated and paid on an annual basis. 2. With respect to payments made pursuant to Section III.1, the amount of base salary included in the computation of incentive awards pursuant to the CEB Plan shall not exceed 250% of the base salary in effect for the officer holding the same or substantially similar position on March 31, 2000. In addition, (i) the maximum target incentive percentage pursuant to the CEB Plan shall be 100% of base salary and (ii) the maximum award pursuant to the CEB Plan shall be 400% of the participant's target award. 3. Notwithstanding anything to the contrary contained in this Plan, the Committee shall have the power, in its sole discretion, to reduce the amount payable to any Participant (or to determine that no amount shall be payable to such Participant) with respect to any award prior to the time the amount otherwise would have become payable hereunder. In the event of such a reduction, the amount of such reduction shall not increase the amounts payable to other participants under the Plan. IV. Administration 1. Except as otherwise specifically provided, the Plan shall be administered by the Committee. The Committee members shall be appointed pursuant to the Bylaws of the Company, and the members thereof shall be ineligible for awards under this Plan for services performed while serving on said Committee. 2. The decision of the Committee with respect to any questions arising as to interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be, in its sole and absolute discretion, final, conclusive and binding. V. Eligibility for Awards 1. Awards under the Plan shall be granted by the Committee to those employees who are eligible to participate in the CEB Plan. This is intended to include the Vice Chairmen, Executive Vice Presidents, and other officers having comparable positions. No award may be granted to a member of the Company's Board of Directors except for services performed as an employee of the Company. 2. Except in the event of retirement, death, or disability, to be eligible for an award an employee must be employed by the Company as of the date awards are calculated and approved by the Committee under this Plan. 3. For purposes of this Plan, the term "employee" shall include an employee of a corporation or other business entity in which this Company shall directly or indirectly own 50% or more of the outstanding voting stock or other ownership interest. VI. Awards 1. The Committee shall determine each year the payments, if any, to be made under the Plan. Awards for any calendar year shall be granted not later than the end of the first quarter of the calendar year, and payments pursuant to the Plan shall be made as soon as practicable after the close of the calendar year. 2. Upon the granting of awards under this Plan, each participant shall be informed of his or her award by his or her direct manager and that such award is subject to the applicable provisions of this Plan. VII. Deferral of Awards 1. A participant in this Plan who is also eligible to participate in The Charles Schwab Corporation Deferred Compensation Plan may elect to defer payments pursuant to the terms of that plan. VIII.Recommendations and Granting of Awards 1. Recommendations for awards shall be made to the Committee by the Co-Chief Executive Officers. 2. Any award shall be made in the sole discretion of the Committee, which shall take final action on any such award. No person shall have a right to an award under this Plan until final action has been taken granting such award. IX. Amendments and Expiration Date While it is the present intention of the Company to grant awards annually, the Committee reserves the right to modify this Plan from time to time or to repeal the Plan entirely, or to direct the discontinuance of granting awards either temporarily or permanently; provided, however, that no modification of this plan shall operate to annul, without the consent of the beneficiary, an award already granted hereunder; provided, also, that no modification without approval of the stockholders shall increase the maximum amount which may be awarded as hereinabove provided. X. Miscellaneous All expenses and costs in connection with the operation of this Plan shall be borne by the Company and no part thereof shall be charged against the awards anticipated by the Plan. Nothing contained herein shall be construed as a guarantee of continued employment of any participant hereunder. This Plan shall be construed and governed in accordance with the laws of the State of California. EX-10 6 exh10_240.txt EXHIBIT 10_240 Exhibit 10.240 The Charles Schwab Corporation Corporate Executive Bonus Plan (Restated to include amendments approved at the Annual Meeting of Stockholders on May 13, 2002) I. Purposes The purposes of this Corporate Executive Bonus Plan (the "Plan") are: (a) to provide greater incentive for key executives continually to exert their best efforts on behalf of The Charles Schwab Corporation (the "Company") by rewarding them for services rendered with compensation that is in addition to their regular salaries; (b) to attract and to retain in the employ of the Company persons of outstanding competence; and (c) to further the identity of interests of such employees with those of the Company's stockholders through a strong performance-based reward system. II. Form of Awards 1. Incentive compensation awards under this Plan shall be generally granted in cash, less any applicable withholding taxes; provided that the Committee may determine, from time to time, that all or a portion of any award may be paid in the form of an equity based incentive, including without limitation stock options, restricted shares, or outright grants of Company stock. The number of shares and stock options granted in any year, when added to the number of shares and stock options granted for such year pursuant to the Company's Annual Executive Individual Performance Plan, shall in no event exceed .5% of the outstanding shares of the Company. III. Determination of Awards 1. Incentive awards for participants other than the President/Co-Chief Executive Officer shall be determined quarterly according to a Corporate Performance Payout Matrix that shall be adopted at the beginning of each year by the Compensation Committee of the Board of Directors (the "Committee"). The Executive Committee Corporate Performance Payout Matrix shall be based on corporate performance criteria to be selected by the Committee from among the following: revenue growth, operating revenue growth, consolidated pretax profit margin, consolidated pretax operating margin, customer net new asset growth, stockholder return, return on net assets, earnings per share, return on equity, and return on investment. Awards shall be defined by reference to a target percentage of base salary determined, from time to time, by the Committee. Payouts described in this subsection shall be calculated and paid on a quarterly basis, based on year-to-date performance compared with the comparable period in the preceding year. 2. With respect to payments made pursuant to Section III.1, the amount of base salary included in the computation of incentive awards shall not exceed 250% of the base salary in effect for the officer holding the same or substantially similar position on March 31, 2000. In addition, for all participants other than the President/Co-Chief Executive Officer, (i) the maximum target incentive percentage shall be 100% of base salary and (ii) the maximum award shall be 400% of the participant's target award. 3. Incentive awards for the President/Co-Chief Executive Officer shall be determined in accordance with a Corporate Performance Payout Matrix that shall be adopted at the beginning of each year by the Committee. The Committee shall determine the President/Co-Chief Executive Officer's award each year, up to the maximum amount defined by the matrix for a given level of performance. This matrix may, if the Committee deems appropriate, differ from that described in Subsection III.1. However, the performance criteria shall be the same as referred to above. Payouts for the President/Co-Chief Executive Officer shall be made on an annual basis, based on the Company's results for the full year. 4. The maximum award payable for the President/Co-Chief Executive Officer under this plan shall be no more than 500% of his target incentive award. The target incentive amount shall be determined each year by the Committee, but may not exceed 500% of base salary. The amount of base salary taken into account for purposes of computing the target incentive award may not exceed 250% of the President/Co-Chief Executive Officer's base salary as of March 31, 2000. 5. Notwithstanding anything to the contrary contained in this Plan, the Committee shall have the power, in its sole discretion, to reduce the amount payable to any Participant (or to determine that no amount shall be payable to such Participant) with respect to any award prior to the time the amount otherwise would have become payable hereunder. In the event of such a reduction, the amount of such reduction shall not increase the amounts payable to other participants under the Plan. IV. Administration 1. Except as otherwise specifically provided, the Plan shall be administered by the Committee. The Committee members shall be appointed pursuant to the Bylaws of the Company, and the members thereof shall be ineligible for awards under this Plan for services performed while serving on said Committee. 2. The decision of the Committee with respect to any questions arising as to interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be, in its sole and absolute discretion, final, conclusive and binding. V. Eligibility for Awards 1. Awards under the Plan may be granted by the Committee to those employees who have contributed the most in a general way to the Company's success by their ability, efficiency, and loyalty, consideration being given to ability to succeed in more important managerial responsibility in the Company. This is intended to include the President/Co-Chief Executive Officer, Vice Chairmen, Executive Vice Presidents, and from time to time, certain other officers having comparable positions. No award may be granted to a member of the Company's Board of Directors except for services performed as an employee of the Company. 2. Except in the event of retirement, death, or disability, to be eligible for an award an employee shall be employed by the Company as of the date awards are calculated and approved by the Committee under this Plan. 3. For purposes of this Plan, the term "employee" shall include an employee of a corporation or other business entity in which this Company shall directly or indirectly own 50% or more of the outstanding voting stock or other ownership interest. VI. Awards 1. The Committee shall determine each year the payments, if any, to be made under the Plan. Awards for any calendar year shall be granted not later than the end of the first quarter of the calendar year, and payments pursuant to the Plan shall be made as soon as practicable after the close of each calendar quarter (or, in the case of the President/Co-Chief Executive Officer, as soon as practicable after the close of each calendar year). 2. Upon the granting of awards under this Plan, each participant shall be informed of his or her award by his or her direct manager and that such award is subject to the applicable provisions of this Plan. VII. Deferral of Awards 1. A participant in this Plan who is also eligible to participate in The Charles Schwab Corporation Deferred Compensation Plan may elect to defer payments pursuant to the terms of that plan. VIII. Recommendations and Granting of Awards 1. Recommendations for awards shall be made to the Committee by the Co-Chief Executive Officers, except that, with respect to the President/Co-Chief Executive Officer, recommendations for awards shall be made solely by the Chairman/Co-Chief Executive Officer. 2. Any award shall be made in the sole discretion of the Committee, which shall take final action on any such award. No person shall have a right to an award under this Plan until final action has been taken granting such award. IX. Amendments and Expiration Date While it is the present intention of the Company to grant awards annually, the Committee reserves the right to modify this Plan from time to time or to repeal the Plan entirely, or to direct the discontinuance of granting awards either temporarily or permanently; provided, however, that no modification of this plan shall operate to annul, without the consent of the beneficiary, an award already granted hereunder; provided, also, that no modification without approval of the stockholders shall increase the maximum amount which may be awarded as hereinabove provided. X. Miscellaneous All expenses and costs in connection with the operation of this Plan shall be borne by the Company and no part thereof shall be charged against the awards anticipated by the Plan. Nothing contained herein shall be construed as a guarantee of continued employment of any participant hereunder. This Plan shall be construed and governed in accordance with the laws of the State of California. EX-10 7 exh10_241.txt EXHIBIT 10_241 Exhibit 10.241 $1,000,000,000 CREDIT AGREEMENT (364-DAY COMMITMENT) dated as of June 21, 2002 Among THE CHARLES SCHWAB CORPORATION and CITICORP USA, INC., as Administrative Agent and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO and BANK OF AMERICA, N.A. COMMERZBANK AG PNC BANK, NATIONAL ASSOCIATION and WESTDEUTSCHE LANDESBANK GIROZENTRALE, as Co-Documentation Agents and CITICORP NORTH AMERICA INC., as Sole Lead Arranger and Sole Book Manager Table of Contents Page 1. DEFINITIONS. The following terms have the following meanings:............1 2. THE CREDIT FACILITY......................................................11 2.1 The Revolving Credit Facility...................................11 2.2 Term Loan Facility..............................................12 2.3 Evidence of Borrowing/Promissory Notes..........................12 2.4 Making of Revolving Loans and Term Loans, Borrowings; Interest Periods; Notice........................................13 2.5 Conversion and Continuation Elections...........................15 2.6 Interest Periods................................................16 2.7 Interest Rates..................................................16 2.8 Substitute Rates................................................17 2.9 Fees............................................................17 2.10 Reduction of Credit.............................................18 2.11 Termination Date; Extensions....................................19 2.12 Payments by the Lenders to the Agent............................19 2.13 Sharing of Payments, Etc........................................20 2.14 Computation of Fees and Interest................................20 3. PAYMENT..................................................................21 3.1 Repayment.......................................................21 3.2 Method of Payment...............................................21 3.3 Optional Prepayment.............................................21 3.4 Taxes/Net Payments..............................................21 3.5 Illegality......................................................22 3.6 Increased Costs and Reduction of Return.........................23 3.7 Funding Losses..................................................23 3.8 Certificates of Lenders.........................................24 3.9 Substitution of Lenders.........................................24 3.10 Survival........................................................24 4. CONDITIONS...............................................................24 4.1 Conditions Precedent to the Effectiveness of this Agreement.....25 4.2 Conditions Precedent to Revolving Loans and Term Loans..........26 5. REPRESENTATIONS AND WARRANTIES...........................................26 5.1 Organization and Good Standing..................................27 5.2 Corporate Power and Authority...................................27 5.3 Enforceability..................................................27 5.4 No Violation of Laws or Agreements..............................27 5.5 No Consents.....................................................27 5.6 Financial Statements............................................27 5.7 Broker Subsidiary Licenses, Etc.................................27 5.8 Broker Subsidiary/Broker Registration...........................28 5.9 Broker Subsidiary/SIPC..........................................28 5.10 Taxes...........................................................28 5.11 ERISA...........................................................28 5.12 No Extension of Credit for Default Remedy/Hostile Acquisition...28 5.13 Use of Proceeds/Margin Regulations..............................28 5.14 Authorized Persons..............................................29 5.15 Material Contracts..............................................29 5.16 Litigation......................................................29 5.17 Investment Company..............................................29 6. AFFIRMATIVE COVENANTS....................................................29 6.1 Notice of Events of Default.....................................29 6.2 Financial Statements............................................29 6.3 Insurance.......................................................29 6.4 Books and Records...............................................30 6.5 Change in Business..............................................30 7. NEGATIVE COVENANTS.......................................................30 7.1 Net Capital.....................................................30 7.2 Minimum Tangible Net Worth......................................30 7.3 Merger/Disposition of Assets....................................30 7.4 Broker Subsidiary Indebtedness..................................30 7.5 Indebtedness Secured by Subsidiary Stock........................31 7.6 Liens and Encumbrances..........................................31 8. EVENTS OF DEFAULT........................................................32 8.1 Defaults........................................................32 8.2 Remedies........................................................33 9. THE AGENT................................................................34 9.1 Appointment and Authorization...................................34 9.2 Delegation of Duties............................................34 9.3 Liability of Agent..............................................34 9.4 Reliance by Agent...............................................34 9.5 Notice of Default...............................................35 9.6 Credit Decision.................................................35 9.7 Indemnification of Agent........................................36 9.8 Agent in Individual Capacity....................................36 9.9 Successor Agent.................................................36 9.10 Withholding Tax.................................................37 9.11 Co-Agents.......................................................38 10. MISCELLANEOUS............................................................38 10.1 Amendments and Waivers..........................................38 10.2 Notices.........................................................39 10.3 No Waiver-Cumulative Remedies...................................40 10.4 Costs and Expenses..............................................40 10.5 Borrower Indemnification........................................41 10.6 Payments Set Aside..............................................42 10.7 Successors and Assigns..........................................42 10.8 Assignments, Participations Etc.................................42 10.9 Confidentiality.................................................44 10.10 Notification of Addresses, Lending Offices, Etc.................45 10.11 Counterparts....................................................45 10.12 Severability....................................................45 10.13 No Third Parties Benefited......................................45 10.14 Governing Law and Jurisdiction..................................45 10.15 Waiver of Jury Trial............................................46 10.16 Entire Agreement................................................46 10.17 Headings........................................................46 Net Capital Ratio for Broker Subsidiary.......................................11 Net Capital Ratio for SCM.....................................................11 SCHEDULES: Schedule 1 - Lenders' Commitments Schedule 2 - List of Borrowing Agreements Schedule 6.2 - Compliance Certificate Schedule 10.2 - Notices EXHIBITS: Exhibit A-1 - Revolving Note Exhibit A-2 - Term Note Exhibit B - Borrowing Advice Exhibit C - Notice of Conversion/Continuation Exhibit D - Commitment and Termination Date Extension Request Exhibit E - Borrower's Opinion of Counsel Exhibit F - Form of Notice of Assignment and Acceptance CREDIT AGREEMENT (364-DAY COMMITMENT) THIS CREDIT AGREEMENT (364-DAY COMMITMENT) ("this Agreement") is entered into as of June 21, 2002, among The Charles Schwab Corporation, a Delaware corporation (the "Borrower"), the several financial institutions from time to time party to this Agreement (collectively the "Lenders"; individually each a "Lender"), and Citicorp USA, Inc., as administrative agent for the Lenders (the "Agent"). WHEREAS, the Lenders are willing to make from time to time Revolving Loans to the Borrower through June 20, 2003, and to make Term Loans to the Borrower on or before June 20, 2003, and maturing no later than June 19, 2004, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements and covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS. The following terms have the following meanings: Affiliate: As to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. Agent: Citicorp USA in its capacity as administrative agent for the Lenders hereunder and any successor agent appointed under Section 9.9. Agent-Related Persons: Citicorp USA and any successor agent appointed under Section 9.9, together with Citicorp USA's Affiliate, the Arranger, and the officers, directors, employees, agents and attorney-in-fact of such Persons and Affiliate. Agreement: This Credit Agreement. Agent's Payment Office: The address for payments set forth on the signature page hereto in relation to the Agent, or such other address as the Agent may from time to time specify. Applicable Margin: (i) with respect to Federal Funds Rate Loans, 0.40%; and (ii) with respect to Eurodollar Rate Loans, 0.40%. Arranger: Citicorp North America, Inc. Assignee: The meaning specified in Section 10.8. Attorney Costs: Without duplication, (1) all fees and disbursements of any law firm or other external counsel, and (2) the allocated cost of internal legal services and all disbursements of internal counsel. Bankruptcy Code: The Federal Bankruptcy Reform Act of 1978 (11 U.S.C.ss.101, et seq.). Base Rate: For any day, the higher of: (a) 0.50% per annum above the Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by Citibank, N.A. as its "Base Rate". The "Base Rate" is a rate set by Citibank, N.A. based upon various factors including Citibank, N.A.'s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Citibank, N.A. shall take effect at the opening of business on the day specified in the public announcement of such change. Base Rate Loan: A Revolving Loan or Term Loan that bears interest based on the Base Rate. Borrowing: A borrowing hereunder consisting of Revolving Loans or Term Loans of the same Type made to the Borrower on the same day by the Lenders under Section 2 and, other than in the case of a Base Rate Loan or Federal Funds Rate Loan, having the same Interest Period. Borrowing Advice: A written request made by the Borrower with respect to any Loan substantially in the form of Exhibit B specifying the information required in Section 2.4 hereof and executed by the Borrower from time to time. Borrowing Agreements: The credit agreement(s) between the Borrower and the lenders listed in Schedule 2. Borrowing Date: Any date on which a Borrowing occurs under Section 2.4. Broker Subsidiary: Charles Schwab & Co., Inc., a California corporation, and its successors and assigns. Business Day: A day other than a Saturday, Sunday or any other day on which commercial banks are authorized or required to close in California or New York and, if the applicable Business Day relates to a Eurodollar Rate Loan, such a day on which dealings are carried on in the applicable offshore dollar interbank market. Capital Adequacy Regulation: Any guideline, directive or requirement of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. Change in Control: The consummation of a reorganization, merger or consolidation by the Borrower or the sale or other disposition of all or substantially all of the assets of the Borrower (a "Business Combination"), unless, following such Business Combination, (i) no person or entity (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Borrower or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation (except to the extent that such ownership existed prior to the Business Combination); and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the board of directors of the Borrower as of the time of the action of the board of directors of the Borrower providing for such Business Combination. Citicorp USA: Citicorp USA, Inc., a Delaware corporation. Closing Date: The date (not before June 21, 2002) on which all conditions precedent set forth in Section 4 are satisfied or waived by all Lenders or, in the case of subsection 4.1(g), waived by the person entitled to receive such payment. Code:The Internal Revenue Code of 1986, as amended, and Regulations promulgated thereunder. Commitment: The meaning specified in Section 2.1. Commitment Fee: The meaning specified in subsection 2.9(b). Consolidated Tangible Net Worth: With respect to any Person, as of any date of determination, all amounts that would, in accordance with GAAP, be included under shareholders' equity on a consolidated balance sheet of such Person as at such date, plus any preferred stock, less all assets of such Person and its Subsidiaries (determined on a consolidated basis) at such date that would be classified as intangible assets in accordance with GAAP, including, without limitation, trade or service marks, franchises, trade names and goodwill. Controlled Subsidiary: Any corporation 80% of whose voting stock (except for any qualifying shares) is owned directly or indirectly by the Borrower. Conversion/ Continuation Date: Any date on which under Section 2.5, the Borrower (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. Credit: The aggregate amount of the Commitments of all Lenders to make Revolving Loans under the Revolving Credit Facility and Term Loans under the Term Loan Facility in an amount not to exceed One Billion and no/100 Dollars ($1,000,000,000.00). Default: Any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. Dollars, dollars, and $: Each mean lawful money of the United States. Effective Amount: With respect to any Revolving Loans and Term Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments of Revolving Loans and Term Loans occurring on such date. Eligible Assignee: (i) A commercial bank organized under the laws of the United States, or any state thereof, and having total equity capital of at least $1,000,000,000 and a senior debt rating of a least "A" by Standard & Poor's Ratings Service, a Division of The McGraw-Hill Companies, Inc. or at least "A-2" by Moody's Investors Service, Inc. or, if not rated by either of the foregoing organizations, an equivalent rating from a nationally recognized statistical rating organization; or (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the OECD), or a political subdivision of any such country, and having total equity capital of at least $1,000,000,000 and a senior debt rating of at least "A" by Standard & Poor's Ratings Service, a Division of The McGraw-Hill Companies, Inc. or at least "A-2" by Moody's Investors Service, Inc., or, if not rated by either of the foregoing organizations, an equivalent rating from a nationally recognized statistical rating organization; provided that such bank is acting through a branch or agency located in the United States. Eurodollar Base Rate: For any Interest Period: (a) the rate per annum equal to the rate determined by the Agent to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by the Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum equal to the average (rounded upward to the next 1/100th of 1%) of the rates of interest per annum notified to the Agent by each Reference Lender as the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by such Reference Lender in its capacity as a Lender and with a term equivalent to such Interest Period would be offered by its Offshore Lending Office to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. Eurodollar Rate: The rate obtained by dividing (i) Eurodollar Base Rate by (ii) a percentage (expressed as a decimal) equal to 1.00 minus the Eurodollar Rate Reserve Percentage. Eurodollar Rate Loan: A Revolving Loan or Term Loan that bears interest based on the Eurodollar Rate. Eurodollar Rate Reserve Percentage: For any Interest Period for any Loan for which the Eurodollar Rate has been selected or is applicable, the percentage (expressed as a decimal) as calculated by the Agent that is in effect on the first day of such Interest Period, as prescribed by the Board of Governors of the U.S. Federal Reserve System (or any successor), for determining reserve requirements to be maintained by the Agent under Regulation D (or any successor regulation thereof) as amended to the date hereof (including such reserve requirements as become applicable to the Agent pursuant to phase-in or other similar requirements of Regulation D at any time subsequent to the date hereof) in respect of "Eurocurrency liabilities" (as defined in Regulation D). The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Rate Reserve Percentage. Event of Default: Any of the events or circumstances specified in Section 8.1. Exchange Act: The Securities and Exchange Act of 1934, as amended, and regulations promulgated thereunder. Federal Funds Rate: For any day, the interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York. Federal Funds Effective Rate: For any day, an interest rate per annum equal to the arithmetic mean as determined by the Agent of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, received by the Agent by each of three Federal funds brokers of recognized standing in New York City prior to 11:00 a.m. (San Francisco time) selected by Agent in its sole discretion. Federal Funds Rate Loan: A Revolving Loan or Term Loan that bears interest based on the Federal Funds Effective Rate. Fee Letter: The meaning specified in subsection 2.9(a). FRB: The Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. GAAP:Generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. Governmental Authority: Any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. Hedge Agreements: Interest rate swap, interest rate cap or interest rate collar agreements. Indebtedness: As to any corporation, any obligation of, or guaranteed or assumed by, such corporation for (i) borrowed money evidenced by bonds, debentures, notes or other similar instruments, (ii) the deferred purchase price of property or services (excluding trade and other accounts payable), (iii) the leasing of tangible personal property under leases which, under any applicable Financial Accounting Standards Board Statement, have been or should be recorded as capitalized leases or (iv) direct or contingent obligations under letters of credit issued for the account of such corporation. Indemnified Liabilities: The meaning specified in Section 10.5. Indemnified Person: The meaning specified in Section 10.5. Insolvency Proceeding: As to a debtor, (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other similar arrangement in respect of its creditors generally or any substantial portion of its creditors, undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. Interest Payment Date: As to any Loan other than a Base Rate Loan or Federal Funds Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan or Federal Funds Rate Loan, the last Business Day of each calendar quarter, provided, however, that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. Interest Period: Any period specified in accordance with Section 2.6 hereof. Intermediate Parent: Schwab Holdings, Inc., a Delaware corporation and its successors and assigns. Lender: The meaning specified in the introductory clause hereto. Lending Office: As to any Lender, the office or offices of such Lender specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.2, or such other office or offices as such Lender may from time to time notify the Borrower and the Agent. Loan:An extension of credit by a Lender to the Borrower under Section 2 in the form of a Revolving Loan or Term Loan. Loan Document: This Agreement, any Notes, the Fee Letter, and all other documents delivered to the Agent or any Lender in connection herewith. Minimum Tangible Net Worth: As of the Closing Date, and the last day of each fiscal quarter thereafter, the greater of: (a) $2,000,000,000, or (b) the sum of - (i) $2,000,000,000, plus (ii) 50% of the sum of cumulative Net Earnings for each fiscal quarter commencing with the fiscal quarter ended June 30, 2002. Net Capital Ratio: As of the date of determination, that percentage of net capital to aggregate debit items of any entity subject to the Net Capital Rule 15c3-1 promulgated by the Securities Exchange Commission pursuant to the Securities Exchange Act of 1934 and any successor or replacement rule or regulation therefor. Net Earnings: With respect to any fiscal period, the consolidated net income of the Borrower and its Subsidiaries, after taking into account all extraordinary items, taxes and other proper charges and reserves for the applicable period, determined in accordance with U.S. generally accepted accounting principles, consistently applied. Note:A promissory note executed by the Borrower in favor of a Lender pursuant to Section 2.3 in substantially the form of Exhibits A-1 and A-2. Notice of Conversion/ Continuation: A notice in substantially the form of Exhibit C. Obligations: All borrowings, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Borrower to any Lender, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. Person: An individual, partnership, corporation, limited liability company, business trust, unincorporated association, trust, joint venture or Governmental Authority. Pro Rata Share: As to any Lender at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Lender's Commitment divided by the combined Commitments of all Lenders. Reference Lenders: Citicorp USA, Bank of America, N.A. and Bank One, NA. Replacement Lender: The meaning specified in Section 3.9. Required Lenders: At any time at least two Lenders then holding in excess of 50% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, at least two Lenders then having in excess of 50% of the Commitments. Requirement of Law: As to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. Responsible Officer: Any senior vice president or more senior officer of the Borrower, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer, executive vice president-finance, controller or the treasurer of the Borrower, or any other officer having substantially the same authority and responsibility. Revolving Credit Facility: The revolving credit facility available to the Borrower pursuant to Section 2.1 hereof. Revolving Loan: The meaning specified in Section 2.1, and may be a Base Rate Loan, Federal Funds Rate Loan or a Eurodollar Rate Loan (each a "Type" of Revolving Loan). Revolving Note: The meaning specified in Section 2.3. Revolving Termination Date: The earlier to occur of: (a) June 20, 2003; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. SCM: Schwab Capital Markets L.P., a New Jersey limited partnership, and its successors and assigns. SEC: The Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. Senior Medium- Term Notes, Series A: Senior debt securities or senior subordinated debt securities issued by The Charles Schwab Corporation with a maturity between 9 months and 30 years in accordance with the Senior Indenture, as amended, and the Senior Subordinated Indenture, as amended, both dated as of July 15, 1993 by and between The Charles Schwab Corporation and The Chase Manhattan Bank, as trustee. Subsidiary: Any corporation or other entity of which a sufficient number of voting securities or other interests having power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. Term Commitment: One Billion and no/100 Dollars ($1,000,000,000.00). Term Loan: The meaning specified in Section 2.2 and may be a Base Rate Loan, Federal Funds Rate Loan or Eurodollar Rate Loan (each a "Type" of Term Loan). Term Loan Facility: The term loan facility available to the Borrower pursuant to Section 2.2 hereof. Term Loan Maturity Date: The meaning specified in Section 2.2. Term Note: The meaning specified in Section 2.3. Type: The meaning specified in the definition of "Revolving Loan". 2. THE CREDIT FACILITY. 2.1 The Revolving Credit Facility Each Lender severally agrees, on the terms and conditions set forth herein, to make loans to the Borrower (each such loan, a "Revolving Loan") from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding, together with the principal amount of Term Loans outstanding in favor of such Lender at such time, the amount set forth on Schedule 1 (such amount together with the Lender's Pro Rata Share of the Term Commitment, as the same may be reduced under Section 2.10 or as a result of one or more assignments under Section 10.8, the Lender's "Commitment"); provided, however, that, after giving effect to any Borrowing of Revolving Loans, the Effective Amount of all outstanding Revolving Loans shall not at any time exceed the combined Commitments; and provided further that the Effective Amount of the Revolving Loans, together with all Term Loans outstanding at such time, of any Lender shall not at any time exceed such Lender's Commitment. Within the limits of each Lender's Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.1, prepay under Section 3.3 and reborrow under this Section 2.1. 2.2 Term Loan Facility. Each Lender severally agrees, on the terms and conditions set forth herein, to make Loans to the Borrower during the period from the Closing Date to June 20, 2003, in an aggregate amount not to exceed such Lender's Pro Rata Share of the Term Commitment. The Borrower from time to time may borrow under the Term Loan Facility (and may reborrow any amount theretofore prepaid) until close of business on June 20, 2003, for a term not to exceed 364 days from the date of the Borrowing. Each such loan under the Term Loan Facility (a "Term Loan") shall be in the minimum amount of $10,000,000 and shall become due and payable on the last day of the term selected by the Borrower for such Term Loan (the "Term Loan Maturity Date"), which shall in no event be later than 364 days from the date of such Term Loan. The maximum availability under the Term Loan Facility shall be the amount of the Credit minus the aggregate outstanding principal amount of Revolving Loans and Term Loans made by the Lenders; provided, however, that to the extent the proceeds of a Term Loan are used to repay an outstanding Revolving Loan (or a portion thereof), such Revolving Loan (or portion thereof) shall not be considered part of the aggregate principal amount of outstanding Revolving Loans made by the Lenders for purposes of this sentence (such maximum availability hereafter being referred to as the "Term Loan Availability"). Under no circumstances shall the aggregate outstanding principal amount of Term Loans and Revolving Loans made by the Lenders exceed the Credit, and under no circumstances shall any Lender be obligated (i) to make any Term Loan (nor may the Borrower reborrow any amount heretofore prepaid) after June 20, 2003, or (ii) to make any Term Loan in excess of the Term Loan Availability. Each Term Loan made hereunder shall fully and finally mature and be due and payable in full on the Term Loan Maturity Date specified in the Borrowing Advice for such Term Loan; provided, however, that to the extent the Borrowing Advice for any Term Loan selects an Interest Period that expires before the Term Loan Maturity Date specified in such Borrowing Advice, the Borrower may from time to time select additional interest rate options and Interest Periods (none of which shall extend beyond the Term Loan Maturity Date for such Term Loan) by delivering a Borrowing Advice or Notice of Conversion/Continuation, as applicable. 2.3 Evidence of Borrowing/Promissory Notes. The obligation of the Borrower to repay the aggregate unpaid principal amount of the Revolving Loans and Term Loans shall be evidenced by promissory notes of the Borrower (respectively the "Revolving Note and the Term Note") in substantially the form attached hereto as Exhibits A-1 and A-2, with the blanks appropriately completed, payable to the order of each Lender in the principal amount of its Commitment, bearing interest as hereinafter specified. Each Revolving Note and Term Note shall be dated, and shall be delivered to each Lender, on the date of the execution and delivery of this Agreement by the Borrower. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule contained on the Revolving Note and Term Note, or on a continuation of such schedule attached thereto and made a part thereof, appropriate notations regarding the Revolving Loans and Term Loans evidenced by such Note as specifically provided therein and such Lender's record shall be conclusive absent manifest error; provided, however, that the failure to make, or error in making, any such notation shall not limit or otherwise affect the obligations of the Borrower hereunder or under the Revolving Note and Term Note. The Agent, by notice to the Borrower (to be given not later than two Business Days prior to the initial Borrowing or Term Loan hereunder) may request that Revolving Loans or Term Loans made hereunder for which the interest calculation is to be based on the Eurodollar Rate be evidenced by separate Revolving Notes (in the case of Revolving Loans) and Term Notes (in the case of Term Loans), substantially in the form of Exhibit A-1 hereto (in the case of Revolving Loans) and Exhibit A-2 hereto (in the case of Term Loans), payable to the order of each Lender for the account of its office, branch or affiliate it may designate as its Lending Office. 2.4 Making of Revolving Loans and Term Loans, Borrowings; Interest Periods; Notice. (a) Each Borrowing of Revolving Loans or Term Loans shall be made upon Borrower's irrevocable written notice delivered to the Agent in the form of a Borrowing Advice (which notice must be received by the Agent prior to 10:00 a.m. San Francisco time for a Eurodollar Rate Loan, and prior to 11:00 a.m. San Francisco time for a Base Rate Loan or a Federal Funds Rate Loan) (i) the same Business Day as the requested Borrowing Date in the case of Base Rate Loans and Federal Funds Rate Loans to be made on such Business Day, or (ii) three Business Days prior to the requested Borrowing Date in the case of Eurodollar Rate Loans, with each Borrowing Advice setting forth the following information: (A) the requested Borrowing Date, which shall be a Business Day, on which such Revolving Loan or Term Loan is to be made; (B) for a Eurodollar Rate Loan, the duration of the Interest Period selected in accordance with Section 2.6 hereof (if the Borrowing Advice fails to specify the duration of the Interest Period for any Borrowing comprised of a Eurodollar Rate Loan, such Interest Period shall be three months); (C) the Type of Loans comprising the Borrowing and the interest rate option selected in accordance with Section 2.7 hereof; and (D) the aggregate principal amount of the Revolving Loan or Term Loan (which shall be in an aggregate minimum amount of $10,000,000) to which such Interest Period and interest rate shall apply. (b) The Agent will promptly notify each Lender of its receipt of any Borrowing Advice and of the amount of such Lender's Pro Rata Share of that Borrowing. (c) Each Lender will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Borrower at the Agent's Payment Office by 1:00 p.m. San Francisco time on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Each Loan to the Borrower under this Agreement shall be made by 1:30 p.m. (San Francisco time) on the date of the Requested Borrowing Date, and shall be in immediately available funds (in the aggregate amount made available to the Agent by the Lenders) wired to the Borrower's account at Citibank, N.A. (Account 4055-4016) or such other account as may be designated by the Borrower in writing. (d) After giving effect to any Borrowing, there may not be more than ten (10) different Interest Periods in effect. (e) Unless the Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (c) of this Section and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (f) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. With respect to any Borrowing having an Interest Period ending on or before June 20, 2003, if prior to the last day of the Interest Period for such Borrowing the Borrower fails timely to provide a Notice of Conversion/Continuation in accordance with Section 2.5, such Borrowing shall, on the last day of the then-existing Interest Period for such Borrowing, automatically convert into a Base Rate Loan. In the event of any such automatic conversion, the Borrower on the date of such conversion shall be deemed to make a representation and warranty to the Lenders that, to the best of the Borrower's knowledge, (i) neither the Broker Subsidiary nor SCM is in violation of minimum net capital requirements as described in Section 7.1, (ii) the Borrower's Consolidated Tangible Net Worth is not below the Minimum Tangible Net Worth as described in Section 7.2, and (iii) no amount owing with respect to any Commitment Fee, any outstanding Borrowing, or any interest thereon, or any other amount hereunder, is due and unpaid. If prior to the last day of the Interest Period applicable to any Term Loan the Borrower fails timely to provide a Notice of Conversion/Continuation in accordance with Section 2.5, such Term Loan shall, on the last day of the then-existing Interest Period for such Term Loan, automatically, have applicable to it a new Interest Period of thirty (30) days (or, in the event there are fewer than thirty (30) days remaining to the Term Loan Maturity Date for such Term Loan, an Interest Period of the number of days remaining to such Term Loan Maturity Date) and shall bear interest at the Base Rate. 2.5 Conversion and Continuation Elections. (a) The Borrower may, upon irrevocable written notice to the Agent in accordance with this Section 2.5: (i) elect, as of any Business Day, in the case of Base Rate Loans or Federal Funds Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loan, to convert any such Loan (or any part thereof in an amount not less than $10,000,000), into Loans of any other Type; or (ii) elect as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $10,000,000); provided, that if at any time the aggregate amount of Eurodollar Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $10,000,000, such Eurodollar Rate Loans shall automatically convert into Base Rate Loans. (b) The Borrower shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 10:00 a.m. San Francisco time for a Eurodollar Rate Loan, and not later than 11:00 a.m. San Francisco time for a Base Rate Loan or a Federal Funds Rate Loan, at least (i) three Business Days in advance of the Conversion/Continuation Date, as to any Loan that is to be converted into or continued as a Eurodollar Rate Loan; and (ii) the same Business Day as the Conversion/Continuation Date, as to any Loan that is to be converted into a Base Rate Loan or Federal Funds Rate Loan, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of the Loan or Loans to be converted or renewed; (C) the Type of Loan or Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans or Federal Funds Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Eurodollar Rate Loans, the Borrower has failed to select timely a new Interest Period to be applicable to such Eurodollar Rate Loans, or if any Default or Event of Default then exists, the Borrower shall be deemed to have elected to convert such Eurodollar Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Lender of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Borrower, the Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given as held by each Lender. (e) Unless the Required Lenders otherwise agree, during the existence of a Default or Event of Default, the Borrower may not elect to have a Loan converted into or continued as a Eurodollar Rate Loan. (f) After giving effect to any conversion or continuation of Loans, there may not be more than ten (10) different Interest Periods in effect. 2.6 Interest Periods. The Borrower may select for any Eurodollar Rate Loan the Interest Period (as defined in the next sentence) for each Borrowing, it being understood that the Borrower may request multiple Borrowings on the same day and may select a different Interest Period for each such Borrowing. An Interest Period shall be each period, as selected by the Borrower in accordance with the terms of this Agreement, in the case of each Borrowing, beginning on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as a Eurodollar Rate Loan, and ending on the date specified by the Borrower, subject to the numerically corresponding day in the first, second, third or sixth month thereafter, in the case of any Interest Period that is to be based on the Eurodollar Rate, provided that if the last day of an Interest Period would be a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such next succeeding Business Day is in a different calendar month, in which case such interest period shall end on the next preceding Business Day; provided, however, that (i) no Interest Period applicable to any Revolving Loan shall extend beyond the Revolving Termination Date; and (ii) no Interest Period applicable to any Term Loan shall extend beyond the Term Loan Maturity Date specified in the Borrowing Advice for such Term Loan, which in no event shall be later than June 19, 2004. 2.7 Interest Rates. (a) (i) Each Revolving Loan, while outstanding, shall bear interest from the applicable Borrowing Date at a rate per annum equal to the Eurodollar Rate, the Federal Funds Effective Rate, or the Base Rate, as the case may be, (and subject to the Borrower's right to convert to other Types of Loans under Section 2.5) plus the Applicable Margin. (ii) Each Term Loan, while outstanding, shall bear interest from the applicable Borrowing Date at a rate per annum equal to the Eurodollar Rate, the Federal Funds Effective Rate, or the Base Rate, as the case may be, (and subject to the Borrower's right to convert to other Types of Loans under Section 2.5) plus the sum of the Applicable Margin and 0.20% per annum. (b) Interest on each Revolving Loan and Term Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 3.3 for the portion of the Loan so prepaid and upon payment (including prepayment) in full thereof, and, during the existence of any Event of Default interest shall be paid on demand of the Agent at the request or with the consent of the Required Lenders. (c) After the principal amount of any Revolving Loan or Term Loan, accrued interest upon such Loan, the commitment fee, or any other amount hereunder shall have become due and payable by acceleration, or otherwise, it shall thereafter (until paid) bear interest, payable on demand, (i) until the end of the Interest Period with respect to such Loan at a rate per annum equal to 2% per annum in excess of the rate or rates in effect with respect to such Loan, and (ii) thereafter, at a rate per annum equal to 2% per annum in excess of the Base Rate. 2.8 Substitute Rates. If upon receipt by the Agent of a Borrowing Advice relating to any Borrowing or of a Notice of Conversion/Continuation: (a) the Agent shall determine that by reason of changes affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the applicable Eurodollar Rate with respect to any Interest Period; or (b) the Agent shall determine that by reason of any change since the date hereof in any applicable law or governmental regulation (other than any such change in the regulations described in the definition of Eurodollar Rate Reserve Percentage in Section 1 hereof), guideline or order (or any interpretation thereof), the adoption or enactment of any new law or governmental regulation or order or any other circumstance affecting the Lenders or the London interbank market, the Eurodollar Rate shall no longer represent the effective cost to the Lenders of U.S. dollar deposits in the relevant amount and for the relevant period; or (c) Agent shall determine that, as a result of any change since the date hereof in any applicable law or governmental regulation or as a result of the adoption of any new applicable law or governmental regulation, the applicable Eurodollar Rate would be unlawful; then, the Agent will promptly so notify the Borrower and each Lender, whereupon, the obligation of the Lenders to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Lenders revokes such notice in writing. Upon receipt of such notice, the Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it and, at its election, submit a Borrowing Advice or Notice of Conversion/Continuation selecting another Type of Loan. If the Borrower does not revoke such Notice or give a Notice as provided herein, the Lenders shall make, convert or continue the Loans, as proposed by the Borrower in the amount specified in the applicable notice submitted by the Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans. 2.9 Fees. (a) Arrangement, Agency Fees. The Borrower shall pay an arrangement fee to the Arranger for the Arranger's account, and shall pay an agency fee to the Agent for the Agent's account, as required by the letter agreement ("Fee Letter") between the Borrower, the Agent and the Arranger dated __________ __, 2002. (b) Commitment Fee. The Borrower shall pay to the Agent for the account of each Lender a commitment fee (the "Commitment Fee") on the actual daily unused portion of such Lender's Commitment computed on a quarterly basis in arrears on the last Business Day of each quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to nine-one hundredths of one percent (0.09%) per annum. For purposes of calculating utilization under this subsection, the Commitments shall be deemed used to the extent of the Effective Amount of Revolving Loans and Term Loans then outstanding. Such Commitment Fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each quarter commencing on the quarter ending September 30, 2002 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.10, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. (c) Utilization Fee. The Borrower shall pay to the Agent for the account of each Lender quarterly in arrears commencing on September 30, 2002 a utilization fee equal to one tenth of one percent (0.10%) per annum on the aggregate amount of outstanding Revolving Loans and Term Loans, provided that the outstanding amount of such Loans exceeds fifty percent (50%) of the aggregate amount of all the Commitments of the Lenders to the Borrower. 2.10 Reduction of Credit. The Borrower, from time to time, upon at least three (3) Business Days' written notice to the Agent, may terminate the commitments, or permanently reduce the Commitments by an aggregate minimum amount of $10,000,000, without penalty or premium; unless after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the Effective Amount of all Revolving Loans and Term Loans together would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Lender's Commitment according to its Pro Rata Share. All accrued Commitment Fees to, but not including, the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. During the continuation of the Credit, the computation of the Commitment Fee and the Lenders' obligations to make Revolving Loans or Term Loans shall be based upon such reduced Commitments. In the event the Credit shall be reduced to zero pursuant to this Section, the Credit shall be deemed terminated, and any Commitment Fee or any other amount payable hereunder then accrued shall become immediately payable. Such termination of the Credit shall terminate the Borrower's obligations with respect to the Commitment Fee to the extent not theretofore accrued and shall terminate the Lenders' obligations to make any further Revolving Loans or Term Loans under this Agreement. 2.11 Termination Date; Extensions. The termination date of each Lender's Commitment with respect to the Credit (the "Termination Date"), including both the Revolving Credit Facility under Section 2.1 hereof and the Term Loan Facility under Section 2.2 hereof, is initially June 20, 2003. At any time no earlier than forty-five (45) days and no later than thirty (30) days prior to the Termination Date then in effect (whether the initial Termination Date of June 20, 2003 or any later Termination Date as extended under this Section 2.11), the Borrower may, by written notice to the Agent in the form attached as Exhibit D hereto, request that the Termination Date be extended for a period of 364 calendar days. Such request shall be irrevocable and binding upon the Borrower. In no event will any Lender agree to approve any extension more than thirty (30) days before the Termination Date then in effect. If each Lender agrees to so extend its Commitment and the Termination Date (which agreement may be given or withheld in such Lender's sole and absolute discretion), the Agent shall evidence such agreement by executing and returning to the Borrower a copy of the Borrower's written request no later than fifteen (15) days after the Agent's receipt of the Borrower's written request. If the Agent fails to so respond to and accept the Borrower's request for extension of the Termination Date then in effect, the Lenders' Commitments shall be terminated on the Termination Date then in effect. If, on the other hand, the Agent so responds to and accepts the Borrower's request for extension of the Termination Date, then upon receipt by the Borrower of a copy of the Borrower's written request countersigned by the Agent, (i) the Lenders' Commitments then in effect and the Termination Date then in effect shall automatically be extended for the 364-day period specified in such written request, and (ii) each reference in this Agreement to "June 20, 2003", and "June 19, 2004" (and any prior extension thereof pursuant to this Section 2.11) also shall automatically be correspondingly extended for 364 days. 2.12 Payments by the Lenders to the Agent. (a) Unless the Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day in the case of a Eurodollar Rate Loan, or, in the case of a Base Rate Loan or Federal Funds Rate Loan, prior to noon (12:00) San Francisco time on the date of such Borrowing, that such Lender will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Lender's Pro Rata Share of the Borrowing, the Agent may assume that each Lender has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made its full amount available to the Borrower such Lender shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Lender with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Lender's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Borrower of such failure to fund and, upon demand by the Agent, the Borrower shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of any obligation hereunder to make a Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date. 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share, such Lender shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Lenders such participation in the Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's ratable share (according to the proportion of (i) the amount of such paying Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.5) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participation purchased under this Section and will in each case notify the Lenders following any such purchase or repayment. 2.14 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by Citibank N.A.'s "Base Rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest, and all computation of fees under subsection 2.9(b) and (c) shall be made on the basis of a 360-day year and actual days elapsed. Interest and such fees shall accrue during each period during which interest or such fees are computed from and including the first day thereof to and excluding the last day thereof. (b) If any Reference Lender's Commitment shall terminate (otherwise than on termination of all the Commitments), or for any reason whatsoever such Reference Lender shall cease to be a Lender hereunder, such Reference Lender shall thereupon cease to be a Reference Lender, and the determination of the Eurodollar Base Rate under subsection (c) of the definition of such term shall be determined on the basis of the rates as notified by the remaining Reference Lenders. 3. PAYMENT. 3.1 Repayment. (a) The Term Credit. The Borrower shall repay to the Agent for the account of the Lenders the aggregate principal amount of the Term Loans outstanding on each Term Loan Maturity Date, as applicable. (b) The Revolving Credit. The Borrower shall repay to the Agent, for the account of the Lenders, on the Revolving Termination Date the aggregate principal amount of Revolving Loans outstanding on such date. 3.2 Method of Payment. All payments hereunder and under the Revolving Note and the Term Note shall be payable in lawful money of the United States of America and in immediately available funds not later than 12:00 noon (San Francisco time) on the date when due at the principal office of the Agent or at such other place as the Agent may, from time to time, designate in writing to the Borrower. 3.3 Optional Prepayment. Subject to Section 3.7, the Borrower shall be entitled at any time or from time to time, upon not less than one (1) Business Day irrevocable notice to the Agent, to ratably prepay Loans in whole or in part in minimum amounts of $10,000,000 without premium or penalty. Each notice of payment shall specify the date and aggregate principal amount of any such prepayment and the Type(s) of Loans to be repaid. The Agent will promptly notify each Lender of its receipt of any such Notice and of such Lender's Pro Rata Share of such prepayment. If such Notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount, specified in such Notice shall be due and payable on the date specified therein, together with all accrued interest to each such date on the amount prepaid, and any amounts required in accordance with Section 3.7 hereof as a result of such prepayment. 3.4 Taxes/Net Payments. All payments by Borrower hereunder and under the Revolving Note and the Term Note to the Agent or any Lender shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments, after deduction or withholding for or on account of any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any Governmental Authority or taxing authority thereof (collectively, "Taxes"), shall not be less than the amounts otherwise specified to be paid under this Agreement. The Borrower shall pay all Taxes when due and shall promptly send to the Lender original tax receipts or copies thereof certified by the relevant taxing authority together with such other documentary evidence with respect to such payments as may be required from time to time by the Agent. If the Borrower fails to pay any Taxes to the appropriate taxing authorities when due or fails to remit to the Agent or Lender any such original tax receipts or certified copies thereof as aforesaid or other required documentary evidence, the Borrower shall indemnify the Agent or Lender within thirty (30) days of demand by the Lender or Agent for any taxes, interest or penalties that may become payable by the Agent or Lender as a result of such failure. Notwithstanding the foregoing, (i) the Borrower shall not be liable for the payment of any tax on or measured by the net income of any Lender pursuant to the laws of the jurisdiction where an office of such Lender making any loan hereunder is located or does business, and (ii) the foregoing obligation to gross up the payments to any Lender so as not to deduct or offset any withholding taxes or Taxes paid or payable by the Borrower with respect to any payments to such Lender shall not apply (x) to any payment to any Lender which is a "foreign corporation, partnership or trust" within the meaning of the Code if such Lender is not, on the date hereof (or on the date it becomes a Lender under this Agreement pursuant to the assignment terms of this Agreement), or on any date hereafter that it is a Lender under this Agreement, entitled to submit either a Form W-8BEN or any successor form thereto (relating to such Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Loans) or Form W-8ECI or any successor form thereto (relating to all interest to be received by such Lender hereunder in respect of the Loans) of the U.S. Department of Treasury, or (y) to any item referred to in the preceding sentence that would not have been imposed but for the failure by such Lender to comply with any applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections of such Lender with the United States if such compliance is required by statute or regulation of the United States as a precondition to relief or exemption from such item. 3.5 Illegality. (a) If any Lender determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make Eurodollar Rate Loans, then, on notice thereof by the Lender to the Borrower through the Agent, any obligation of that Lender to make Eurodollar Rate Loans shall be suspended until the Lender notifies the Agent and the Borrower that the circumstances giving rise to such determination no longer exist. (b) If a Lender determines that it is unlawful to maintain any Eurodollar Rate Loan, the Borrower shall, upon its receipt of notice of such fact and demand from such Lender (with a copy to the Agent), prepay in full such Eurodollar Rate Loans of that Lender then outstanding, together with interest accrued thereon and amounts required under Section 3.7, either on the last day of the Interest Period thereof, if the Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if the Lender may not lawfully continue to maintain such Eurodollar Rate Loan. If the Borrower is required to so prepay any Eurodollar Rate Loan, then concurrently with such prepayment, the Borrower shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Loan or Federal Funds Rate Loan. (c) If the obligation of any Lender to make or maintain Eurodollar Rate Loans has been so terminated or suspended, the Borrower may elect, by giving notice to the Lender through the Agent that all Loans which would otherwise be made by the Lender as Eurodollar Rate Loans shall be instead Base Rate Loans, or Federal Funds Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Lender shall designate a different Lending Office with respect to its Eurodollar Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Lender, be illegal or otherwise disadvantageous to the Lender. 3.6 Increased Costs and Reduction of Return. (a) If any Lender determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Eurodollar Rate) in or in the interpretation of any law or regulation, or (ii) the compliance by that Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any Eurodollar Rate Loan, then the Borrower shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs. (b) If any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and determines that the amount of such capital is increased as a consequence of its Commitment, Loans, credits or obligations under this Agreement then, upon demand of such Lender to the Borrower through the Agent, the Borrower shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for the cost of such increase. 3.7 Funding Losses. The Borrower shall reimburse each Lender and hold each Lender harmless from any loss or expense which the Lender may sustain or incur as a consequence of: (a) the failure of the Borrower to make on a timely basis any payment of principal of any Eurodollar Rate Loan; (b) the failure of the Borrower to borrow, continue or convert a Loan after the Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of the Borrower to make any prepayment in accordance with any notice delivered under Section 3.3; (d) the prepayment or other payment (including after acceleration thereof) of any Eurodollar Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.5 of any Eurodollar Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period, including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Borrower to the Lenders under this Section and under subsection 3.6(a), each Eurodollar Rate Loan made by a Lender and each related reserve, special deposit or similar requirement shall be conclusively deemed to have been funded at the LIBO-based rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded,. 3.8 Certificates of Lenders. Any Lender claiming reimbursement or compensation under this Section 3 shall deliver to the Borrower (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. 3.9 Substitution of Lenders. Upon the receipt by the Borrower from any Lender (an "Affected Lender") of a claim for compensation under Section 3.6, the Borrower may: (i) request the Affected Lender to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Borrower to acquire and assume all or a ratable part of all of such Affected Lender's Loans and Commitment (a "Replacement Lender"); (ii) request one or more of the other Lenders to acquire and assume all or part of such Affected Lender's Loans and Commitment (but no other Lender shall be required to do so); or (iii) designate a Replacement Lender. Any such designation of a Replacement Lender under clause (ii) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld). 3.10 Survival. The agreements and obligations of the Borrower in this Section 3 shall survive the payment of all other Obligations. 4. CONDITIONS. 4.1 Conditions Precedent to the Effectiveness of this Agreement. The obligation of each Lender to make its initial extension of credit hereunder is subject to the condition that the Agent has received on or before the Closing Date all of the following in form and substance satisfactory to the Agent and each Lender, in sufficient copies for each Lender; (a) This Agreement and the Notes executed by each party thereto. (b) A copy of a resolution or resolutions adopted by the Board of Directors or Executive Committee of the Borrower, certified by the Secretary or an Assistant Secretary of the Borrower as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, and a copy of the Certificate of Incorporation and the By-Laws of the Borrower, similarly certified. (c) A certificate, signed by the Secretary or an Assistant Secretary of the Borrower and dated the date hereof, as to the incumbency of the person or persons authorized to execute and deliver this Agreement. (d) A certificate signed by the Chief Financial Officer or Vice Chairman and Executive Vice President of the Borrower that, as of the date hereof, there has been no material adverse change in its consolidated financial condition since December 31, 2001 not reflected on its Quarterly Report on Form 10-Q filed with the SEC for the period ending March 31, 2002. (e) A certificate, signed by the Secretary or an Assistant Secretary of the Borrower and dated the date hereof, as to the persons authorized to execute and deliver a Borrowing Advice, a Notice of Conversion/Continuation, and the Revolving Notes and the Term Notes. The Agent and each Lender may rely on such certificate with respect to the Revolving Loans and Term Loans hereunder unless and until it shall have received an updated certificate and, after receipt of such updated certificate, similarly may rely thereon. (f) A written opinion, dated the date hereof, of counsel for the Borrower, in the form of Exhibit E. (g) Evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of Citicorp USA to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute Citicorp USA's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Borrower and Citicorp USA); including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 10.4. (h) Written evidence that all of the Borrowing Agreements have been or concurrently herewith are being terminated. (i) A certificate, signed by the Treasurer or an Assistant Treasurer of the Borrower and dated as of the date hereof, which confirms that after giving effect to this Agreement, the aggregate principal amount of credit available under all of the Borrower's committed unsecured revolving credit facilities combined will not exceed the amount authorized under the resolutions of the Borrower referenced in subsection 4.1(b). 4.2 Conditions Precedent to Revolving Loans and Term Loans. The obligation of each Lender to make any Revolving Loan or Term Loan to be made by it (including its initial Revolving Loan), or to continue or convert any Loan under Section 2.5 is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date: The Agent shall have received a Borrowing Advice or a Notice of Conversion/Continuation, as applicable. Each Borrowing Advice or Notice of Conversion/Continuation given by the Borrower shall be deemed to be a representation and warranty by the Borrower to each Lender, effective on and as of the date of such Notice and as of such Borrowing Date for a Revolving Loan or Term Loan covered thereby, that (i) the representations and warranties set forth in Section 5 hereof are true and correct as of such date, and (ii) no Event of Default, and no event which with the lapse of time or notice or both would become an Event of Default, has occurred and is continuing. No Lender shall be required to make any Loan hereunder if: (a) the Credit, the Revolving Credit Facility (in the case of a Revolving Loan) or the Term Loan Facility (in the case of a Term Loan) has been terminated; or (b) any of the representations or warranties of the Borrower set forth in Section 5 hereof shall prove to have been untrue in any material respect when made, or when any Event of Default or any event that, upon lapse of time or notice or both, would become an Event of Default as defined in Section 8, has occurred; or (c) the Broker Subsidiary or SCM is in violation of minimum net capital requirements as described in Section 7.1; or (d) the Borrower's Consolidated Tangible Net Worth is below the Minimum Tangible Net Worth as described in Section 7.2; or (e) any amount owing with respect to any Commitment Fee or any outstanding Revolving Loan or Term Loan or any interest thereon or any other amount payable hereunder is due and unpaid. 5. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Agent and each Lender, as of the date of delivery of this Agreement and as of the date of any Revolving Loan or Term Loan, as follows: 5.1 Organization and Good Standing. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has full power, authority and legal right and has all governmental licenses, authorizations, qualifications and approvals required to own its property and assets and to transact the business in which it is engaged; and all of the outstanding shares of capital stock of Borrower have been duly authorized and validly issued, are fully paid and non-assessable. 5.2 Corporate Power and Authority. The Borrower has full power, authority and legal right to execute and deliver, and to perform its obligations under, this Agreement, and to borrow hereunder, and has taken all necessary corporate and legal action to authorize the borrowings hereunder on the terms and conditions of this Agreement and to authorize the execution and delivery of this Agreement, and the performance of the terms thereof. 5.3 Enforceability. This Agreement has been duly authorized and executed by the Borrower, and when delivered to the Lenders will be a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, except, in each case, as enforcement thereof may be limited by bankruptcy, insolvency or other laws relating to or affecting enforcement of creditors' rights or by general equity principles. 5.4 No Violation of Laws or Agreements. The execution and delivery of this Agreement by the Borrower and the performance of the terms hereof will not violate any provision of any law or regulation or any judgment, order or determination of any court or governmental authority or of the charter or by-laws of, or any securities issued by, the Borrower or any provision of any mortgage, indenture, loan or security agreement, or other instrument, to which the Borrower is a party or which purports to be binding upon it or any of its assets in any respect that reasonably could be expected to have a material adverse effect on the Borrower and its Subsidiaries taken as a whole on a consolidated basis; nor will the execution and the delivery of this Agreement by the Borrower and the performance of the terms hereof result in the creation of any lien or security interest on any assets of the Borrower pursuant to the provisions of any of the foregoing. 5.5 No Consents. Except as disclosed in writing by Borrower, no consents of others (including, without limitation, stockholders and creditors of the Borrower) nor any consents or authorizations of, exemptions by, or registrations, filings or declarations with, any Governmental Authority are required to be obtained by the Borrower in connection with the execution and delivery of this Agreement and the performance of the terms thereof. 5.6 Financial Statements. The consolidated financial statements of the Borrower contained in the documents previously delivered to each Lender have been prepared in accordance with U.S. generally accepted accounting principles and present fairly the consolidated financial position of the Borrower. 5.7 Broker Subsidiary Licenses, Etc. The Broker Subsidiary possesses all material licenses, permits and approvals necessary for the conduct of its business as now conducted and as presently proposed to be conducted as are required by law or the applicable rules of the SEC and the National Association of Securities Dealers, Inc. 5.8 Broker Subsidiary/Broker Registration. The Broker Subsidiary is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended. 5.9 Broker Subsidiary/SIPC. The Broker Subsidiary is not in arrears with respect to any assessment made upon it by the Securities Investor Protection Corporation, except for any assessment being contested by the Broker Subsidiary in good faith by appropriate proceedings and with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles. 5.10 Taxes. The Borrower has paid and discharged or caused to be paid and discharged all taxes, assessments, and governmental charges prior to the date on which the same would have become delinquent, except to the extent that such taxes, assessments or charges are being contested in good faith and by appropriate proceedings by or on behalf of the Borrower and with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles. 5.11 ERISA. The Borrower is in compliance with the provisions of and regulations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended, applicable to any pension or other employee benefit plan established or maintained by the Borrower or to which contributions are made by the Borrower (the "Plans"). The Borrower has met all of the funding standards applicable to each of its Plans, and there exists no event or condition that would permit the institution of proceedings to terminate any of the Plans under Section 4042 of ERISA. The estimated current value of the benefits vested under each of the Plans does not, and upon termination of any of the Plans will not, exceed the estimated current value of any such Plan's assets. The Borrower has not, with respect to any of the Plans, engaged in a prohibited transaction set forth in Section 406 of ERISA or Section 4975(c) of the Internal Revenue Code of 1986. 5.12 No Extension of Credit for Default Remedy/Hostile Acquisition. The Borrower will not use any amounts borrowed by it under this Agreement to remedy a default under any mortgage, indenture, agreement or instrument under which there may be issued any Indebtedness of the Borrower to any bank or bank holding company, or their respective assignees, for borrowed money. Further, the Borrower will not use any amounts advanced to it under this Agreement for the immediate purpose of acquiring a company where the Board of Directors or other governing body of the entity being acquired has made (and not rescinded) a public statement opposing such acquisition. 5.13 Use of Proceeds/Margin Regulations. The Borrower will use the proceeds for general corporate purposes, including, without limitation, for the back-up of the issuance of commercial paper notes. The Borrower will not use the proceeds of any loan provided hereby in such a manner as to result in a violation of Regulations T, U or X of the Board of Governors of the Federal Reserve System. 5.14 Authorized Persons. The persons named for such purpose in the certificates delivered pursuant to subsection 4.1(e) hereof are authorized to execute Borrowing Advices. 5.15 Material Contracts. Borrower is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note or lease to which the Borrower is a party or by which it may be bound. 5.16 Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting, the Borrower or any of its Subsidiaries before any court, arbitrator, governmental body, agency or official in which there is a significant probability of an adverse decision which could have a material adverse affect on the business or the financial condition of the Borrower. 5.17 Investment Company. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that so long as any Lender shall have a Commitment hereunder or any Loan or other obligation hereunder shall remain outstanding, unpaid or unsatisfied and until full payment of all amounts due to the Lenders hereunder, it will, unless and to the extent the Required Lenders waive compliance in writing: 6.1 Notice of Events of Default. Give prompt notice to the Agent and each Lender, no later than three Business Days after becoming aware thereof, of any Event of Default or any event that, upon lapse of time or notice or both, would become an Event of Default. 6.2 Financial Statements. Deliver to the Agent, in form and detail satisfactory to the Agent and the Required Lenders with sufficient copies for each Lender, within ten Business Days of the filing thereof with the SEC, a copy of each registration statement filed under the Securities Act of 1933, a copy of each filing (including exhibits) made by the Borrower with the SEC under the Securities Exchange Act of 1934, as amended, accompanied by a compliance certificate with an attached schedule of calculations (in the form attached hereto as Schedule 6.2) demonstrating compliance with the Section 7.1 and 7.2 financial covenants; and, in the event the Borrower requests an extension of any such filing from the SEC, promptly (but not later than the second Business Day following the filing of such request) deliver a copy of such request to the Agent. 6.3 Insurance. Maintain and keep in force in adequate amounts such insurance as is usual in the business carried on by the Borrower and cause the Broker Subsidiary to maintain and keep in force in adequate amounts such insurance as is usual in the business carried on by the Broker Subsidiary. 6.4 Books and Records. Maintain adequate books, accounts and records and prepare all financial statements required hereunder in accordance with U.S. generally accepted accounting principles and practices and in compliance with the regulations of any governmental regulatory body having jurisdiction thereof. 6.5 Change in Business. Advise the Agent and such Lender, in a timely manner, of material changes to the nature of business of the Borrower or the Broker Subsidiary as at present conducted. The Broker Subsidiary is at present engaged in the business of providing financial services, primarily to individual investors and/or their advisors. 7. NEGATIVE COVENANTS. The Borrower covenants and agrees that so long as any Lender shall have any Commitment hereunder, or any Loan or other obligation, shall remain outstanding, unpaid or unsatisfied and until full payment of all amounts due to the Lenders hereunder, unless and to the extent the Required Lenders waive compliance in writing: 7.1 Net Capital. The Borrower will not permit the Broker Subsidiary to allow (a) the average of two consecutive month-end Net Capital Ratios to be less than 7%, or (b) any month-end Net Capital Ratio to be less than 5%. The Borrower similarly will not permit SCM to allow (i) the average of two consecutive month-end Net Capital Ratios to be less than 7%, or (ii) any month-end Net Capital Ratio to be less than 5%. 7.2 Minimum Tangible Net Worth. The Borrower will not allow its Consolidated Tangible Net Worth to fall below the Minimum Tangible Net Worth. 7.3 Merger/Disposition of Assets. The Borrower will not (i) permit either Broker Subsidiary or Intermediate Parent to (a) merge or consolidate, unless the surviving company is a Controlled Subsidiary, or (b) convey or transfer its properties and assets substantially as an entirety except to one or more Controlled Subsidiaries; or (ii) except as permitted by subsection 7.3(i) sell, transfer or otherwise dispose of any voting stock of Broker Subsidiary or Intermediate Parent, or permit either Broker Subsidiary or Intermediate Parent to issue, sell or otherwise dispose of any of its voting stock, unless, after giving effect to any such transaction, Broker Subsidiary or Intermediate Parent, as the case may be, remains a Controlled Subsidiary. 7.4 Broker Subsidiary Indebtedness. The Borrower will not permit the Broker Subsidiary to create, incur or assume any Indebtedness other than: (a) (i) Indebtedness to customers, other brokers or dealers, securities exchanges or securities markets, self-regulatory organizations, clearing houses and like institutions (including, without limitation, letters of credit or similar credit support devices issued for the account of Broker Subsidiary and for the benefit of any of the foregoing in order to comply with any margin, collateral or similar requirements imposed by or for the benefit of any of the foregoing), (ii) "broker call" credit, (iii) indebtedness consisting of borrowings secured solely by margin loans made by Broker Subsidiary, together with any underlying collateral of Broker Subsidiary, (iv) stock loans, (v) obligations to banks for disbursement accounts, (vi) Indebtedness incurred for the purchase of tangible personal property on a non-recourse basis or for the leasing of tangible personal property under a capitalized lease, (vii) Indebtedness incurred for the purchase, installation or servicing of computer equipment and software, and (viii) Indebtedness incurred in the ordinary course of the Broker Subsidiary's business, to the extent not already included in the foregoing clauses (i) through (vii); (b) intercompany Indebtedness; and (c) other Indebtedness in the aggregate not exceeding $100,000,000. 7.5 Indebtedness Secured by Subsidiary Stock. The Borrower will not, and will not permit any Subsidiary at any time directly or indirectly to create, assume, incur or permit to exist any Indebtedness secured by a pledge, lien or other encumbrance (hereinafter referred to as a "lien") on the voting stock of any Subsidiary without making effective provision whereby the Revolving Notes and the Term Notes shall be secured equally and ratably with such secured Indebtedness so long as other Indebtedness shall be so secured; provided, however, that the foregoing covenant shall not be applicable to Permitted Liens (as defined in Section 7.6 below). 7.6 Liens and Encumbrances. The Borrower will not create, incur, assume or suffer to exist any lien or encumbrance upon or with respect to any of its properties, whether now owned or hereafter acquired, except the following (the "Permitted Liens"): (a) liens securing taxes, assessments or governmental charges or levies, or in connection with workers' compensation, unemployment insurance or social security obligations, or the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons not yet delinquent or which are being contested in good faith by appropriate proceedings with respect to which adequate reserves or other provisions are being maintained to the extent required by U.S. generally accepted accounting principles; (b) liens not for borrowed money incidental to the conduct of its business or the ownership of property that do not materially detract from the value of any item of property; (c) attachment, judgment or other similar liens arising in the connection with court proceedings that do not, in the aggregate, materially detract from the value of its property, materially impair the use thereof in the operation of its businesses and (i) that are discharged or stayed within sixty (60) days of attachment or levy, or (ii) payment of which is covered in full (subject to customary and reasonable deductibles) by insurance or surety bonds; and (d) liens existing at Closing Date provided that the obligations secured thereby are not increased. 8. EVENTS OF DEFAULT. 8.1 Defaults. The occurrence of any of the following events shall constitute an "Event of Default": (a) The Borrower shall fail to pay any interest with respect to the Revolving Notes or the Term Notes or any Commitment Fee in accordance with the terms hereof within 10 days after such payment is due. (b) The Borrower shall fail to pay any principal with respect to the Revolving Notes or the Term Notes in accordance with the terms thereof on the date when due. (c) Any representation or warranty made by the Borrower herein or hereunder or in any certificate or other document furnished by the Borrower hereunder shall prove to have been incorrect when made (or deemed made) in any respect that is materially adverse to the interests of the Lenders or their rights and remedies hereunder. (d) Except as specified in (a) and (b) above, the Borrower shall default in the performance of, or breach, any covenant of the Borrower with respect to this Agreement, and such default or breach shall continue for a period of thirty days after there has been given, by registered or certified mail, to the Borrower by the Agent a written notice specifying such default or breach and requiring it to be remedied. (e) An event of default as defined in any mortgage, indenture, agreement or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Borrower in a principal amount not less than $75,000,000, shall have occurred and shall result in such Indebtedness becoming or being declared due and payable prior to the date on which it otherwise would become due and payable, or an event of default or a termination event as defined in any Hedge Agreement shall have occurred and shall result in a net payment obligation of the Borrower thereunder of not less than $75,000,000; provided, however, that if such event of default shall be remedied or cured by the Borrower, or waived by the holders of such Indebtedness, within twenty days after the Borrower has received written notice of such event of default and acceleration, then the Event of Default hereunder by reason thereof shall be deemed likewise to have thereupon been remedied, cured or waived without further action upon the part of either the Borrower or the Agent and Lenders. (f) Any involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief against the Borrower or the Broker Subsidiary, or against all or a substantial part of the property of either of them, under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, reorganization or similar law, (ii) the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for the Borrower or the Broker Subsidiary or for all or a substantial part of the property of either of them, or (iii) the winding-up or liquidation of the Borrower or the Broker Subsidiary; and, in any such case, such involuntary proceeding or involuntary petition shall continue undismissed for 60 days, or, before such 60-day period has elapsed, there shall be entered an order or decree ordering the relief requested in such involuntary proceeding or involuntary petition. (g) The Borrower or the Broker Subsidiary shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Borrower or Broker Subsidiary or for any substantial part of its respective properties, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its respective debts as they become due or shall take any corporate action in furtherance of any of the foregoing. (h) A final judgment or judgments for the payment of money in excess of $75,000,000 in the aggregate shall be entered against the Borrower by a court or courts of competent jurisdiction, and the same shall not be discharged (or provisions shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Borrower shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (i) At any time after a Change in Control, the Borrower fails to maintain at least one of the following credit ratings for its Senior Medium-Term Notes, Series A: (a) BBB- (or better) by Standard & Poor's Ratings Service, a Division of The McGraw-Hill Companies, Inc., or (b) Baa3 (or better) by Moody's Investors Service, Inc. 8.2 Remedies. If an Event of Default occurs and is continuing, then and in every such case the Agent shall, at the request of, or may, with the consent of, the Required Lenders (i) declare the Commitment of each Lender to make Loans to be terminated whereupon such Commitments and obligation shall be terminated, and declare the unpaid principal of all outstanding Loans, any and all accrued and unpaid interest, any accrued and unpaid Commitment Fees, or any other amounts owing or payable under the Notes, to be immediately due and payable, by a notice in writing to the Borrower, and upon such declaration such principal, interest, Commitment Fees, or other amounts payable hereunder and accrued thereon shall become immediately due and payable, together with any funding losses that may result as a consequence of such declaration, without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower; provided, however, that in the case of any of the Events of Default specified in subsection (f) or (g) of Section 8.1, automatically without any notice to the Borrower or any other act by the Agent, the Credit and the obligations of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans, any accrued and unpaid interest, any accrued and unpaid Commitment Fees or any other amounts payable hereunder shall become immediately due and payable, together with any funding losses that may result as a consequence thereof, without further act of the Agent or any Lender and without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower. 9. THE AGENT. 9.1 Appointment and Authorization. Each Lender hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities except those expressly set forth, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Borrower or any Subsidiary or Affiliate of the Borrower, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower or any of the Borrower's Subsidiaries or Affiliates. 9.4 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. (b) For purposes of determining compliance with the conditions specified in Section 4.1, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender. 9.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 8; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders. 9.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Borrower and without limiting the obligation of the Borrower to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from any such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share, of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. Citicorp USA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Borrower and its Subsidiaries and Affiliates as though Citicorp USA were not the Agent hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, Citicorp USA or its Affiliates may receive information regarding the Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Borrower or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, Citicorp USA shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent. 9.9 Successor Agent. The Agent may, and at the request of the Required Lenders shall, resign as Agent upon 30 days' notice to the Lenders and Borrower. If the Agent resigns under this Agreement, the Required Lenders, with the consent of the Borrower, which consent shall not be unreasonably withheld, shall appoint from among the Lenders a successor agent for the Lenders which successor agent shall be approved by the Borrower. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent with the consent of the Borrower, which consent shall not be unreasonably withheld, may appoint, after consulting with the Lenders and the Borrower, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 9 and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. The retiring Agent shall refund to Borrower that portion of any agency fee paid to such Agent as is not earned due to such Agent's resignation, prorated to the date of such Agent's resignation. 9.10 Withholding Tax. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the Code and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Section 1441 or 1442 of the Code, such Lender agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN before the payment of any interest in the first calendar year and before the payment of any interest in any subsequent calendar year during which the Form W-8BEN (or any successor thereto) then in effect expires; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed copies of IRS Form W-8ECI or any successor form thereto before the payment of any interest is due in the first taxable year of such Lender and before the payment of any interest in any subsequent calendar year during which the Form W-8ECI (or any successor thereto) then in effect expires; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Lender. To the extent of such percentage amount, the Agent will treat such Lender's IRS Form W-8BEN or any successor form thereto as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form W-8ECI or any successor form thereto with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Lender is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent or if any Lender which is a "foreign corporation, partnership or trust" within the meaning of the Code is not entitled to claim exemption from or a reduction of U.S. withholding tax under Section 1441 or 1442 of the Code, then the Agent shall withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason other than the Agent's gross negligence or willful misconduct) such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 9.11 Co-Agents. None of the Lenders identified on the facing page or signature pages of this Agreement as a "co-agent", "managing agent", "syndication agent" or "documentation agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified as a "co-agent", "syndication agent" or "documentation agent" shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. 10. MISCELLANEOUS. 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Borrower or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by the Agent at the written request of the Required Lenders) and the Borrower and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and the Borrower and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Lenders or any of them to take any action hereunder; or (e) amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Lenders; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.2 Notices. (a) All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Borrower by facsimile shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2). (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Section 2 or 9 shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Borrower. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person who is named in the then-current certificate delivered pursuant to subsection 4.1(e) hereof as authorized to execute Borrowing Advices (each an "Authorized Person") and the Lenders shall not have any liability to the Borrower or other Person on account of any action taken or not taken by the Agent or the Lenders in reliance upon such telephonic or facsimile notice, provided the Agent and the Lenders reasonably believe such Person to be an Authorized Person. The obligation of the Borrower to repay the Loans shall not be affected in any way to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. 10.3 No Waiver-Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Borrower shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse Citicorp USA including in its capacity as Agent and Lender within five Business Days after demand, subject to subsection 4.1(g) for all reasonable costs and expenses incurred by Citicorp USA including in its capacity as Agent and Lender in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by Citicorp USA (including in its capacity as Agent and Lender with respect thereto); and (b) pay or reimburse the Agent, the Arranger and each Lender within five Business Days after demand (subject to subsection 4.1(g)) for all reasonable costs and expenses (including reasonable Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). In connection with any claim, demand, action or cause of action relating to the enforcement, preservation or exercise of any rights or remedies covered by this Section 10.4 against the Borrower, all Lenders shall be represented by the same legal counsel selected by such Lenders; provided, that if such legal counsel determines in good faith that representing all such Lenders would or could result in a conflict of interest under laws or ethical principles applicable to such legal counsel or that a claim is available to a Lender that is not available to all such Lenders, then to the extent reasonably necessary to avoid such a conflict of interest or to permit an unqualified assertion of such a claim, each Lender shall be entitled to separate representation by legal counsel selected by that Lender, with all such legal counsel using reasonable efforts to avoid unnecessary duplication of effort by counsel for all Lenders. 10.5 Borrower Indemnification. Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold the Agent-Related Persons, and each Lender and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting from the gross negligence or willful misconduct of such Indemnified Person. If any claim, demand, action or cause of action is asserted against any Indemnified Person, such Indemnified Person shall promptly notify Borrower, but the failure to so promptly notify Borrower shall not affect Borrower's obligations under this Section unless such failure materially prejudices Borrower's right to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. If requested by Borrower in writing, such Indemnified Person shall in good faith contest the validity, applicability and amount of such claim, demand, action or cause of action and shall permit Borrower to participate in such contest. Any Indemnified Person that proposes to settle or compromise any claim or proceeding for which Borrower may be liable for payment of indemnity hereunder shall give Borrower written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall obtain Borrower's prior consent. In connection with any claim, demand, action or cause of action covered by this Section 10.5 against more than one Indemnified Person, all such Indemnified Person shall be represented by the same legal counsel selected by the Indemnified Persons and reasonably acceptable to Borrower; provided, that if such legal counsel determines in good faith that representing all such Indemnified Persons would or could result in a conflict of interest under laws or ethical principles applicable to such legal counsel or that a defense or counterclaim is available to an Indemnified Person that is not available to all such Indemnified Persons, then to the extent reasonably necessary to avoid such a conflict of interest or to permit unqualified assertion of such a defense or counterclaim, each Indemnified Person shall be entitled to separate representation by legal counsel selected by that Indemnified Person and reasonably acceptable to Borrower, with all such legal counsel using reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnified Persons. The agreements in this Section shall survive payment of all other Obligations. 10.6 Payments Set Aside. To the extent that the Borrower makes a payment to the Agent or the Lenders, or the Agent or the Lenders exercise any right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Lender. 10.8 Assignments, Participations Etc. (a) Any Lender may, with the written consent of the Agent and the Borrower, which consent shall not be unreasonably withheld (except Borrower's consent shall not be required if (i) a Default or an Event of Default exists and is continuing, and (ii) the Eligible Assignee is not engaged in the securities brokerage business or the investment advisory business), at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Agent shall be required in connection with any assignment and delegation by a Lender to an Eligible Assignee that is an Affiliate of such Lender) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments, and the other rights and obligations of such Lender hereunder, in a minimum amount of $10,000,000; provided, however, that the Borrower and, the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (A) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Borrower and the Agent by such Lender and the Assignee; (B) such Lender and its Assignee shall have delivered to the Borrower and the Agent an Assignment and Acceptance in the form of Exhibit D ("Assignment and Acceptance") together with any Note or Notes subject to such assignment; and (C) the assignor Lender or Assignee has paid to the Agent a processing fee in the amount of $3,500. (b) From and after the date that the Agent notifies the assignor Lender and the Borrower that it has received (and the Borrower and the Agent have provided their consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee (and provided that it consents to such assignment in accordance with subsection 10.8(a)), the Borrower shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Lender has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Commitment retained by the assignor Lender (such Notes to be in exchange for, but not in payment of, the Notes held by such Lender). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assignor Lender pro tanto. (d) Any Lender may at any time sell to one or more commercial banks or other Persons not Affiliates of the Borrower (a "Participant") participating interests in any Loans, the Commitment of that Lender and the other interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Borrower, and the Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document. Any Lender that sells a participation to any Person that is a "foreign corporation, partnership or trust" within the meaning of the Code shall include in its participation agreement with such Person a covenant by such Person that such Person will comply with the provisions of Section 9.10 as if such Person were a Lender and provide that the Agent and the Borrower shall be third party beneficiaries of such covenant. (e) Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (f) Any Lender (a "Granting Lender") may, with notice to the Agent, grant to a special purpose funding vehicle (an "SPC") the option to fund all or any part of any Loan that such Granting Lender would otherwise be obligated to fund pursuant to this Agreement. The funding of a Loan by an SPC hereunder shall utilize the Revolving Credit Commitment of the Granting Lender to the same extent, and as if, such Loan were funded by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or payment under this Agreement for which a Lender would otherwise be liable for so long as, and to the extent, the Granting Lender provides such indemnity or makes such payment. Notwithstanding anything to the contrary contained in the foregoing or anywhere else in this Agreement, (i) nothing herein shall constitute a commitment by any SPC to fund any Loan, (ii) if an SPC elects not to exercise such option or otherwise fails to fund all or any part of such Loan, the Granting Lender shall be obligated to fund such Loan pursuant to the terms hereof, and (iii) the Borrower and Agent shall continue to deal exclusively with the Granting Lender and any funding by an SPC hereunder shall not constitute an assignment, assumption or participation of any rights or obligations of the Granting Lender. Any SPC may disclose on a confidential basis any non-public information relating to its funding of Loans to any rating agency, commercial paper dealer or provider of any surety or guarantee to such SPC, provided, as a condition precedent to such disclosure, (A) such agency, dealer or provider has delivered to such Granting Lender for the benefit of Borrower a written confidentiality agreement substantially similar to Section 10.9, and (B) simultaneous with or prior to such disclosure, such Granting Lender has given written notice to Borrower of the agency, dealer or provider to which such disclosure is being made and the contents of such disclosure. This Section may not be amended without the prior written consent of each Granting Lender, all or any part of whose Loan is being funded by an SPC at the time of such amendment. 10.9 Confidentiality. Each Lender agrees to hold any confidential information that it may receive from Borrower or from the Agent on such Borrower's behalf, pursuant to this Agreement in confidence, except for disclosure: (a) to legal counsel and accountants for Borrower or any Lender; (b) to other professional advisors to Borrower or any Lender, provided that the recipient has delivered to such Lender a written confidentiality agreement substantially similar to this Section 10.9; (c) to regulatory officials having jurisdiction over any Lender; (d) as required by applicable law or legal process or in connection with any legal proceeding in which any Lender and Borrower are adverse parties; and (e) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of any Lender's interests hereunder or a participation interest in the Revolving Note and/or the Term Note, each in accordance with Section 10.8 hereof, provided that the recipient has delivered to such Lender a written confidentiality agreement substantially similar to this Section 10.9. Each Lender further agrees that it will not use such confidential information in any activity or for any purpose other than the administration of credit facilities extended to Borrower and its Subsidiaries and, without limitation, will take such steps as are reasonably appropriate to preclude access to any such confidential information to be obtained by any Person employed by any Lender, or by an affiliate of any Lender, who is not involved in the administration of credit facilities extended to Borrower and its Subsidiaries. For purposes of the foregoing, "confidential information" shall mean any information respecting Borrower or its Subsidiaries reasonably specified by Borrower as confidential, other than (i) information filed with any governmental agency and available to the public, and (ii) information disclosed by Borrower to any Person not associated with Borrower without a written confidentiality agreement substantially similar to this Section 10.9. Certain of the confidential information pursuant to this Agreement is or may be valuable proprietary information that constitutes a trade secret of Borrower or its Subsidiaries; neither the provision of such confidential information to any Lender or the limited disclosures thereof permitted by this Section 10.9 shall affect the status of any such confidential information as a trade secret of Borrower and its Subsidiaries. Each Lender, and each other Person who agrees to be bound by this Section 10.9, acknowledges that any breach of the agreements contained in this Section 10.9 would result in losses that could not be reasonably or adequately compensated by money damages. Accordingly, if any Lender or any other person breaches its obligations hereunder, such Lender or such other person recognizes and consents to the right of Borrower, Intermediate Parent, and/or Broker Subsidiary to seek injunctive relief to compel such Lender or other Person to abide by the terms of this Section 10.9. 10.10 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Agent in writing of any changes in the address to which notices to the Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.11 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.12 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.13 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Borrower, the Lenders, the Agent and the Arranger, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.14 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWER, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE BORROWER, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. 10.15 Waiver of Jury Trial. THE BORROWER, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTION CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.16 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Borrower, the Lenders and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. 10.17 Headings. Articles and Section headings in this Agreement are included herein for the convenience of reference only. (SIGNATURE PAGE FOLLOWS) IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers as of the date first above written. Borrower: THE CHARLES SCHWAB CORPORATION By: /s/ Emily R. Glidden --------------------------------- Name: Emily R. Glidden Title: Senior Vice President and Treasurer Lenders: CITICORP USA, INC., as Agent and individually as Lender By: /s/ William S. Timmons, III --------------------------------------- Name: William S. Timmons, III ------------------------------------- Title: Vice President ------------------------------------ BANK OF AMERICA, N.A. By: /s/ Robert S. Brown --------------------------------------- Name: Robert S. Brown ------------------------------------- Title: Managing Director ------------------------------------ COMMERZBANK AKTIENGESELLSCHAFT NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Arndt E. Bruns --------------------------------------- Name: Arndt E. Bruns ------------------------------------- Title: Assistant Vice President ------------------------------------ By: /s/ Michael P. McCarthy --------------------------------------- Name: Michael P. McCarthy ------------------------------------- Title: Vice President ------------------------------------ PNC BANK, NATIONAL ASSOCIATION By: /s/ Carolyn Schwarz --------------------------------------- Name: Carolyn Schwarz ------------------------------------- Title: Vice President ------------------------------------ WESTDEUTSCHE LANDESBANK GIROZENTRALE By: /s/ Terence R. Law --------------------------------------- Name: Terence R. Law ------------------------------------- Title: Executive Director ------------------------------------ By: /s/ Robert D. Wieser --------------------------------------- Name: Robert D. Wieser ------------------------------------- Title: Director ------------------------------------ LLOYDS TSB BANK PLC By: /s/ Michael J. Gilligan --------------------------------------- Name: Michael J. Gilligan ------------------------------------- Title: Director, Financial Institutions, USA, G311 ------------------------------------ LLOYDS TSB BANK PLC By: /s/ Matthew S. R. Tuck --------------------------------------- Name: Matthew S. R. Tuck ------------------------------------- Title: Vice President, Financial Institutions, USA TD20 ------------------------------------ CREDIT LYONNAIS By: /s/ Sebastian Rocco --------------------------------------- Name: Sebastian Rocco ------------------------------------- Title: Senior Vice President ------------------------------------ WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Beth C. McGinnis --------------------------------------- Name: Beth C. McGinnis ------------------------------------- Title: Vice President ------------------------------------ WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Ben Silber --------------------------------------- Name: Ben Silber ------------------------------------- Title: Vice President ------------------------------------ BANK ONE, NA By: /s/ Andrea S. Kantor --------------------------------------- Name: Andrea S. Kantor ------------------------------------- Title: Director ------------------------------------ NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLAND BRANCH By: /s/ Hinrich Holm --------------------------------------- Name: Hinrich Holm ------------------------------------- Title: Vice President ------------------------------------ NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLAND BRANCH By: /s/ Georg L. Peters --------------------------------------- Name: Georg L. Peters ------------------------------------- Title: Vice President ------------------------------------ BNP PARIBAS By: /s/ Frank Sodano --------------------------------------- Name: Frank Sodano ------------------------------------- Title: Director ------------------------------------ BNP PARIBAS By: /s/ Richard Ungaro --------------------------------------- Name: Richard Ungaro ------------------------------------- Title: Vice President ------------------------------------ MELLON BANK, N.A. By: /s/ Thomas Caruso --------------------------------------- Name: Thomas Caruso ------------------------------------- Title: Vice President ------------------------------------ BANK OF HAWAII By: /s/ Dana Takushi --------------------------------------- Name: Dana Takushi ------------------------------------- Title: Vice President ------------------------------------ HARRIS TRUST AND SAVINGS BANK By: /s/ Charles Howes --------------------------------------- Name: Charles Howes ------------------------------------- Title: Vice President ------------------------------------ THE BANK OF NEW YORK By: /s/ Orla Nallen --------------------------------------- Name: Orla Nallen ------------------------------------- Title: Assistant Vice President ------------------------------------ FIRST TENNESSEE BANK, National Association By: /s/ James H. Moore, Jr. --------------------------------------- Name: James H. Moore, Jr. ------------------------------------- Title: Senior Vice President ------------------------------------ HSBC BANK USA By: /s/ Paul M. Lopez --------------------------------------- Name: Paul M. Lopez ------------------------------------- Title: FVP ------------------------------------ HSBC BANK USA By: /s/ Jospeh W. Hayster --------------------------------------- Name: Jospeh W. Hayster ------------------------------------- Title: EVP ------------------------------------ JP MORGAN CHASE BANK By: /s/ Therese Bechet --------------------------------------- Name: Therese Bechet ------------------------------------- Title: Managing Director ------------------------------------ UBS AG, STAMFORD BRANCH By: /s/ Thomas R. Salzano --------------------------------------- Name: Thomas R. Salzano ------------------------------------- Title: Director, Banking Products Services, US ------------------------------------ UBS AG, STAMFORD BRANCH By: /s/ Patricia O' Kicki --------------------------------------- Name: Patricia O' Kicki ------------------------------------- Title: Director, Banking Products Services ------------------------------------ U.S. BANK, N.A. By: /s/ Woody Johnson --------------------------------------- Name: Woody Johnson ------------------------------------- Title: Vice President ------------------------------------ BANCA DI ROMA SPA By: /s/ Richard G. Dietz --------------------------------------- Name: Richard G. Dietz (#97271) ------------------------------------- Title: Vice President ------------------------------------ BANCA DI ROMA SPA By: /s/ Luca Balestra --------------------------------------- Name: Luca Balestra (#25050) ------------------------------------- Title: SVP and Manager ------------------------------------ FIRST HAWAIIAN BANK By: /s/ Charles L. Jenkins --------------------------------------- Name: Charles L. Jenkins ------------------------------------- Title: Vice President, Manager ------------------------------------ Schedule 1 LENDERS' COMMITMENTS The Charles Schwab Corporation $1,000,000,000 Credit Agreement (364-Day Commitment) dated as of June 21, 2002. Lender Commitment Amount 1. Citicorp North America, Inc. 1. $100,000,000 2. Bank of America, N.A. 2. 85,000,000 3. Commerzbank Aktiengesellschaft New York and Grand Cayman Branches 3. 85,000,000 4. PNC Bank, National Association 4. 85,000,000 5. Westdeutsche Landesbank Girozentrale 5. 85,000,000 6. Lloyds TSB Bank plc 6. 60,000,000 7. Credit Lyonnais 7. 55,000,000 8. Wells Fargo Bank, National Association 8. 55,000,000 9. Bank One, NA 9. 50,000,000 10. Norddeutsche Landesbank Girozentrale, New York Branch and/or Cayman Island Branch 10. 45,000,000 11. BNP Paribas 11. 30,000,000 12. Mellon Bank, N.A. 12. 30,000,000 13. Bank of Hawaii 13. 25,000,000 14. Harris Trust and Savings Bank 14. 25,000,000 15. The Bank of New York 15. 25,000,000 16. First Tennessee Bank, N.A. 16. 25,000,000 17. HSBC Bank USA 17. 25,000,000 18. JP Morgan Chase Bank 18. 25,000,000 19. UBS AG, Stamford Branch 19. 25,000,000 20. U.S. Bank, N.A. 20. 25,000,000 21. Banca di Roma SpA 21. 20,000,000 22. First Hawaiian Bank 22. 15,000,000 Total $1,000,000,000 Schedule 2 LIST OF BORROWING AGREEMENTS 1. $1,200,000,000 Credit Agreement (364-Day Commitment) dated as of June 22, 2001 among the Borrower, the lenders party thereto, and Bank of America, N.A., as administrative agent for such lenders. Schedule 6.2 COMPLIANCE CERTIFICATE I, ____________________, certify that I am the _______________________ of The Charles Schwab Corporation (the "Borrower"), and that as such I am authorized to execute this Compliance Certificate on behalf of the Borrower, and do hereby further certify on behalf of the Borrower that: 1. I have reviewed the terms of that certain Credit Agreement (364-Day Commitment) dated as of June 21, 2002 among the Borrower, the financial institutions named therein (the "lenders") and Citicorp USA, Inc., as Agent for the lenders (the "Credit Agreement"), and I have made, or have caused to be made by employees or agents under my supervision, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by the attached financial statements dated ______________, 200__. 2. The examination described in paragraph 1 did not disclose, and I have no knowledge of the existence of any condition or event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Compliance Certificate, except as set forth below. 3. Schedule I attached hereto sets forth financial data and computations evidencing compliance with the covenants set forth in Sections 7.1 and 7.2 of the Credit Agreement, all of which data and computations are true, complete and correct. Capitalized terms not otherwise defined herein are defined in the Credit Agreement. 4. Described below are the exceptions, if any, to paragraph 2 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event. The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Compliance Certificate in support hereof, are made and delivered this ___ day of _____________ 200__. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ The Charles Schwab Corporation Credit Agreement (364-Day Commitment) Dated as of June 21, 2002 Schedule I to Compliance Certificate (Dollars in Thousands) 1. Net Capital Ratio of the Broker Subsidiary and SCM. Requirement: Broker Subsidiary and SCM - month-end ratio not less than 5%, 2-month average not less than 7%. Net Capital Ratio for Broker Subsidiary Month Month-end Ratio 2-Month Average Net Capital Ratio for SCM Month Month-end Ratio 2-Month Average 2. Minimum Tangible Net Worth of Borrower. Requirement: As of _____________, 200___, required Minimum Tangible Net Worth is $2,000,000,000 plus 50% of cumulative Net Earnings from June 30, 2002. 4 Schedule 10.2 NOTICES If to the Borrower: If by U.S. mail: The Charles Schwab Corporation Treasury Department Attn: Michael Canady or Successor 211 Main St. (Mail Stop SF120KNY-09-305) San Francisco, CA 94105 If by hand delivery (including courier and overnight messenger service): The Charles Schwab Corporation Treasury Department Attn: Michael Canady or Successor 120 Kearny St. 9th Floor San Francisco, CA 94104 Telephone: (415) 636-3855 Facsimile: (415) 636-9820 If to the Agent: See information under Citicorp USA, Inc. in table below pertaining to Lenders. If to the Lenders:
Credit Contact Operations Contact Lending Office Payment Instructions - -------------- ------------------ -------------- -------------------- Bank of America, N.A. Bank of America, N.A. Bank of America, N.A. Bank of America, N.A. 335 Madison Avenue 101 N. Tryon Street 101 N. Tryon Street ABA #: 053000196 New York, NY 10017 Mailcode: NC1-001-15-04 Charlotte, NC 28255 Charlotte, NC Attention: Robert S. Brown Charlotte, NC 28255-0001 Acct #: 1366212250600 Managing Director Attention: Kristen Gilliam Attention: Credit (212) 503-8334 Agency Administrative Officer Services Fax: (212) 503-7027 (704) 388-1553 Ref: The Charles Schwab Fax: (704) 409-0296 Corporation Citicorp USA, Inc. Citicorp USA, Inc. Citicorp USA, Inc. Citibank NA 399 Park Avenue 2 Penn's Way, Suite 200 399 Park Avenue ABA #: 021-000-089 New York, NY 10043 New Castle, DE 19720 New York, NY 10043 New York, NY Attention: Michael Mauerstein Attention: Lee Ocasio Acct #: 40610794 Vice President Assistant Acct Name: (212) 816-3431 Manager Wall Street Fees Fax: (212) 816-4140 (302) 894-6065 Attention: Lee Ocasio Fax: (302) 894-6120 Ref: The Charles Schwab Corporation Bank One, NA Bank One, NA Bank One, NA Bank One, NA 153 W. 51st Street (Main Office Chicago) One Bank One Plaza (Main Office Chicago) New York, NY 10019 One Bank One Plaza Chicago, IL 60670 ABA #: 071000013 Attention: Andrea S. Kantor Chicago, IL 60670 Chicago, IL First Vice Attention: Vickie Kobierski Acct #: 481152860000 President Asst. Vice Acct Name: (212) 373-1023 President LS2 Incoming Clearing Fax: (212) 373-1180 (312) 732-5627 Attention: Fax: (312) 732-3537 Vickie Kobierski Commerzbank Aktiengesellschaft Commerzbank Commerzbank Commerzbank New York and Grand Cayman Aktiengesellschaft New York Aktiengesellschaft New Aktiengesellschaft New Branches and Grand Cayman Branches York and Grand Cayman York Branch Two World Financial Center Two World Financial Center Branches ABA #: 026008044 New York, NY 10281 New York, NY 10281 Two World Financial Center for The Charles Schwab Attention: Michael McCarthy Attention: Arndt Bruns New York, NY 10281 Corporation Vice President Asst. Vice Attention: Cheriese Attn: Commercial (212) 266-7325 President Brathwaite Lending Service Fax: (212) 266-7629 (212) 266-7736 (212) 266-7775 Fax: (212) 266-7629 Fax: (212) 266-7491 Westdeutsche Landesbank Westdeutsche Landesbank Westdeutsche Landesbank Westdeutsche Landesbank Girozentrale, New York Branch Girozentrale, New York Branch Girozentrale, New York Girozentrale, New York 1211 Avenue of the Americas 1211 Avenue of the Americas Branch Branch New York, NY 10036 New York, NY 10036 1211 Avenue of the ABA #: 021-000-021 Attention: Terence R. Law Attention: Philip Green Americas New York, NY Executive (212) 852-6113 New York, NY 10036 Acct #: 920-1-060663 Director Fax: (212) 302-7946 Acct Name: (212) 852-6242 Westdeutsche Landesbank Fax: (212)852-6516 Girozentrale, New York Branch Attention: Loan Administration Ref: The Charles Schwab Corporation Credit Lyonnais, Credit Lyonnais, Credit Lyonnais, Credit Lyonnais, New York Branch New York Branch New York Branch New York Branch 1301 6th Avenue 1301 6th Avenue 1301 6th Avenue ABA #: 026-008-073 New York, NY 10019 New York, NY 10019 New York, NY 10019 New York, NY Attention: Dick Reilly Attention: Seth Ruffer Acct #: Vice President Asst. Vice 01-88179-3701-00 (212) 261-3861 President Acct Name: Fax: (212) 261-3438 (212) 261-7410 Loan Servicing Fax: (212) 261-3401 Attention: S. Ruffer Ref: The Charles Schwab Corporation PNC Bank, PNC Bank, PNC Bank, PNC Bank, National Association National Association National Association National Association 1600 Market Street 1600 Market Street 1600 Market Street ABA #: 043000096 Philadelphia, PA 19103 Philadelphia, PA 19103 Philadelphia, PA Pittsburgh, PA Attention: Daniel K. Fitzpatrick Attention: Christine Allio Acct #: 196030010890 Managing Director (412) 768-7652 Acct Name: Corporate (215) 585-5622 Fax:_______________ Banking Fax: (215) 585-6987 Attention: Wire Room The Bank of New York The Bank of New York The Bank of New York The Bank of New York One Wall Street, 42nd Floor One Wall Street, 42nd Floor One Wall Street ABA #: 021000018 New York, NY 10286 New York, NY 10286 New York, NY 10286 New York, NY Attention: Orla Nallen Attention: Cheryl Smith Acct #: GLA 111231 Asst. Vice President (212) 635-6735 Acct Name: (212) 635-6703 Fax: (212) 635-6615 Broker Services Fax: (212) 809-9566 Attention: Douglas Ottley Ref: The Charles Schwab Corporation Lloyds TSB Bank plc Lloyds TSB Bank plc Lloyds TSB Bank Bank of America 575 Fifth Avenue, 17th Floor 575 Fifth Avenue, 17th Floor plc, Miami International, New York New York, NY 10017 New York, NY 10017 One Biscayne Tower, ABA #: 026-009-593 Attention: Michael Gilligan Attention: Patricia Kilian Suite 3200 New York, NY (212) 930-8911 (212) 930-8914 2 Biscayne Boulevard Acct #: 655-010-1938 Fax: (212) 930-5098 Fax: (212) 930-5098 Miami, FL 33131 Acct Name: Lloyds TSB Bank plc, Miami Ref: The Charles Schwab Corporation Banca Di Roma - San Francisco Banca Di Roma -San Francisco Banca Di Roma - Citibank N.A. - One Market, Steuart Tower 34 East 51st Street San Franciso Branch New York. Suite 1000 New York, NY 10022 c/o Banca Di Roma - ABA #: 021-000-089 San Francisco, CA 94105 Attention: Salvatore Rappa New York Branch For Acct of: Attention: Thomas C. Woodruff Asst. Vice 34 East 51st Street Banca Di Roma - Vice President President New York, NY 10022 New York Branch (415) 977-7308 (212) 407-1812 Acct #: 36003043 Fax: (415) 357-9869 Fax: (212) 407-1684 For further credit to: Banca Di Roma - San Francisco Sub-Acct #: 80994706 Norddeutsche Landesbank Norddeutsche Landesbank Norddeutsche Landesbank Chase Manhattan Bank, Girozentrale New York Branch Girozentrale New York Branch Girozentrale, Cayman New York and/or Cayman Islands Branch and/or Cayman Islands Branch Islands Branch ABA #: 021000021 1114 Avenue of the Americas, 1114 Avenue of the Americas, 1114 Avenue of the New York, NY 37th Floor 37th Floor Americas, 37th Floor Acct Name: New York, NY 10036 New York, NY 10036 New York, NY 10036 Norddeutsche Landesbank, Attention: Georg Peters Attention: Norman Liebenstein New York (212) 812-6699 (212) 812-6809 Acct #: 001-1-352382 Fax: (212) 812-6860 Fax: (212) 812-6860 Ref: The Charles Schwab Credit Facility Wells Fargo Bank, Wells Fargo Bank, Wells Fargo Bank, Wells Fargo Bank, National Association National Association National Association National Association 6th Street and Marquette Avenue 201 3rd Street, 8th Floor 6th Street and Marquette ABA #: 121000248 N9305-075 A0187-081 Ave San Francisco, CA Minneapolis, MN 55479 San Francisco, CA 94103 N9305-075 Acct #: 2712507201 Attention: Edward J. Meyer, Jr. Attention: Cindy Dunn Minneapolis, MN 55479 Account Name: Vice President Loan Servicing Member Syndication (612) 667-7375 Spec. Ref: The Charles Schwab Fax: (612) 667-7251 (415) 477-5431 Corporation, Obligor Fax: (415) 979-0675 #1582242431 Mellon Bank, N.A. Mellon Bank, N.A. Mellon Bank, N.A. Mellon Bank, N.A. One Penn Plaza, 29th Floor 3 Mellon Bank Center One Mellon Center ABA #: 043000261 New York, NY 10419 Pittsburgh, PA 15259 Pittsburgh, PA 15258 Pittsburgh, PA Attention: Thomas P. Caruso Attention: Teresa Hayward Acct #: 9908 73 800 Vice President (412) 234-4744 Acct Name: Mellon Bank (212) 330-1317 Fax: (412) 209-6134 Attention: Teresa Hayward Fax: (212) 330-1332 BNP Paribas BNP Paribas BNP Paribas BNP New York 787 7th Avenue, 27th Floor 787 7th Avenue, 27th Floor 787 7th Avenue, 27th Floor ABA #: 026007689 New York, NY 10019 New York, NY 10019 New York, NY 10019 New York, NY Attention: Frank Sodano Attention: Frank Chiofalo Acct #: 10313000103 Director (212) 841-2297 Attn: Loan Services (212) 841-2084 Fax: (212) 841-2717 Clearing Account Fax: (212) 841-2717 First Tennessee Bank First Tennessee Bank First Tennessee Bank First Tennessee Bank National Association National Association National Association National Association 165 Madison Avenue, 9th Floor 165 Madison Avenue, 9th Floor 165 Madison Avenue, ABA #: 084000026 Memphis, TN 38103-2723 Memphis, TN 38103-2723 9th Floor Memphis, TN Attention: James H. Moore, Jr. Attention: Linda Nguyen Memphis, TN 38103-2723 Acct #: 114174-6830 Senior Vice Sales Acct Name: President Assistant Bank Secrecy (901) 523-4108 (901) 523-4118 Attn: Linda Nguyen Fax: (901) 523-4267 Fax: (901) 523-4267 First Hawaiian Bank First Hawaiian Bank First Hawaiian Bank First Hawaiian Bank 999 Bishop Street, 11th Floor 999 Bishop Street, 11th Floor 999 Bishop Street, 11th ABA #: 1213-0101-5 Honolulu, HI 96813 Honolulu, HI 96813 Floor Honolulu, HI Attention: Charles L. Jenkins Attention: Brenda Deakins / Honolulu, HI 96813 Acct #: 205150109100 VP / MGR Vicki Tanaka Attn: (808) 525-6289 Operations CRED WH LN SVCG Fax: (808) 525-6372 Officer Ref: The Charles Schwab (808) 525-8100 / 8106 Corporation Fax: (808) 525-5085 HSBC Bank USA HSBC Bank USA HSBC Bank USA HSBC Bank USA HSBC Tower, 452 5th Avenue 1 HSBC Center 1 HSBC Center ABA #: 021001088 5th Floor Buffalo, NY 14203 Buffalo, NY 14203 New York, NY New York, NY 10018 Attention: Darlene Cardino Acct #: 001-94050-3 Attention: L. Sue Lomax (716) 841-1670 Acct Name: Senior Vice President Fax: (716) 841-0269 Syndications & Asset (212) 525-2460 Trading Fax: (212) 525-2573 Ref: The Charles Schwab Corporation JPMorgan Chase Bank JPMorgan Chase Bank JPMorgan Chase Bank JPMorgan Chase Bank One Chase Plaza One Chase Plaza One Chase Plaza Acct #: 066-999979 21st Floor 21st Floor New York, NY 10081 ABA #: 021000021 New York, NY 10081 New York, NY 10081 Acct Name: Attention: Therese Bechet Attention: Jerry Pucciarelli Broker Dealer House (212) 552-7785 (212) 552-7514 Account Fax: (212) 552-1118 Fax: (212) 552-7654 Attention: Jerry Pucciarelli Bank of Hawaii Bank of Hawaii Bank of Hawaii Bank of Hawaii 130 Merchant Street 949 Kamokila Blvd., 2nd Floor 949 Kamokila Blvd. ABA #: 1213-01028 20th Floor Kapolei, HI 96707 2nd Floor Honolulu, HI Honolulu, HI 96813 Attention: Debbie Sullivan Kapolei, HI 96707 Acct #: 9298-540626 Attention: Dana Takushi (808) 693-1694 Acct Name: Vice President Fax: (808) 693-1672 Bank of Hawaii (808) 537-8689 Attn: Fax: (808) 537-8301 Business Loan Center Ref: The Charles Schwab Corporation Harris Trust and Savings Bank UBS AG, Stamford Branch U.S. Bank, N.A.
EXHIBIT A-1 REVOLVING NOTE $____________________ (Amount of Commitment) Date: June 21, 2002 For Value Received, The Charles Schwab Corporation ("Schwab") hereby promises to pay to the order of ________________ (the "Lender") to Citicorp USA, Inc., as Agent, at Agent's office located at 388 Greenwich Street, New York, New York 10013, for the account of the applicable Lending Office of the Lender, the principal amount of ____________________ ($___________) or the aggregate amount of all Revolving Loans made to Schwab by the Lender, whichever is less, on June 20, 2003. The undersigned also promises to pay interest on the unpaid principal amount of each Borrowing from the date of such Borrowing until such principal amount is paid, at the rates per annum, and payable at such times, as are specified in the Credit Agreement. This Note shall be subject to the terms of the Credit Agreement, and all principal and interest payable hereunder shall be due and payable in accordance with the terms of the Credit Agreement. Schwab hereby authorizes the Lender to endorse on the Schedule attached to this Note the amount and Type of Revolving Loans made to Schwab by the Lender and all renewals, conversions, and payments of principal amounts in respect of such Revolving Loans, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all such Revolving Loans, provided, however, that the failure to make such notation with respect to any Revolving Loans or payments shall not limit or otherwise affect the obligation of Schwab under the Credit Agreement or this Note. This Note is the Revolving Note referred to in the Credit Agreement (364-Day Commitment), dated as of June 21, 2002 among Schwab, the Lender, certain other Lenders party thereto, and Citicorp USA, Inc., as Agent for the Lenders (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. The Credit Agreement, among other things, contains provisions for acceleration of the maturity of this Note, upon the happening of certain stated events and also for prepayments on account of the principal of this Note prior to the maturity of this Note upon the terms and conditions specified in the Credit Agreement. Principal and interest payments shall be in money of the United States of America, lawful at such times for the satisfaction of public and private debts, and shall be in immediately available funds. Schwab promises to pay the costs of collection, including reasonable attorney's fees, if default is made in the payment of this Note. The terms and provisions of this Note shall be governed by the applicable laws of the State of California. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its officers thereunto duly authorized and directed by appropriate corporate authority. The Charles Schwab Corporation By: -------------------------------- Name: ------------------------------ Title: -----------------------------
EXHIBIT A-1 SCHEDULE TO REVOLVING NOTE Date Amount of Unpaid Made, Principal Principal Name of Continued, Continued, Balance of Person Converted, Type of Amount Converted, Revolving Making or Paid Loan of Loan or Paid Note Notation - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - 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EXHIBIT A-2 TERM NOTE Date: June 21, 2002 FOR VALUE RECEIVED, the undersigned, The Charles Schwab Corporation ("Schwab") hereby promises to pay to the order of ___________________ (the "Lender"), to Citicorp USA, Inc., as Agent, at the Agent's office located at 388 Greenwich Street, New York New York 10013, for the account of the applicable Lending Office of the Lender, the principal amount of each Term Loan made by the Lender to Schwab pursuant to the terms of the Credit Agreement (364-Day Commitment), dated as of June 21, 2002, as amended, among Schwab, the Lender, certain other Lenders party thereto, and Citicorp USA, Inc., as Agent for the Lenders (the "Credit Agreement"), as shown in the schedule attached hereto and any continuation thereof, in lawful money of the United States and in immediately available funds on the Term Loan Maturity Date for such Term Loan. The undersigned also promises to pay interest on the unpaid principal amount of each Term Loan from the date of such Term Loan until such principal amount is paid, in like money, at said office for the account of the Lender's applicable Lending Office, at the rates per annum, and payable at such times as are specified in the Credit Agreement. This Term Note shall be subject to the terms of the Credit Agreement and all principal and interest payable hereunder should be due and payable in accordance with the terms of the Credit Agreement. Terms defined in the Credit Agreement are used herein with the same meanings. This Term Note is one of the Term Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, contains provisions for acceleration of the maturity of this Term Note upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity of the Term Note upon the terms and conditions specified in the Credit Agreement. Schwab promises to pay costs of collection, including reasonable attorney's fees, if default is made in the payment of this Note. The terms and provisions of this Term Note shall be governed by the applicable laws of the State of California. IN WITNESS WHEREOF, the undersigned has caused this Term Note to be executed by its officer thereunto duly authorized and directed by appropriate corporate authority. The Charles Schwab Corporation By: -------------------------------- Name: ------------------------------ Title: -----------------------------
EXHIBIT A-2 SCHEDULE TO TERM NOTE Date Amount of Unpaid Made, Principal Principal Name of Continued, Type of Amount Term Loan Continued, Balance of Person Converted, Loan of Loan Maturity Date Converted, Term Note Making or Paid or Paid Notation - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - 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EXHIBIT B BORROWING ADVICE 1. This Borrowing Advice is executed and delivered by The Charles Schwab Corporation ("Borrower") to you pursuant to that certain Credit Agreement dated as of June 21, 2002 (the "Credit Agreement"), entered into by Borrower, Citicorp USA, Inc. ("Citicorp USA") and certain other Lenders parties thereto, collectively with Citicorp USA (the "Lenders") and Citicorp USA as Agent for the Lenders (herein "Agent"). Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. 2. Borrower hereby requests that the Lenders make a Revolving [or Term Loan] for the account of Borrower (at _______________, Account No. ________________) pursuant to Section 2.4 of the Credit Agreement as follows: (a) Amount of Revolving [or Term Loan]: _________________. (b) Borrowing Date of Revolving [or Term Loan]: _________________. (c) [If a Revolving Loan] Type of Revolving Loan (check one only): ________ Eurodollar Rate with ________- day Interest Period ________ Federal Funds Rate ________ Base Rate (d) [If a Term Loan] Type of Term Loan (check one only): ________ Eurodollar Rate with initial ________- day Interest Period ________ Federal Funds Rate ________ Base Rate (e) [If a Term Loan] Maturity Date of Term Loan:_____. 3. Following this request for a Revolving Loan [or Term Loan], the aggregate outstanding amount of all Revolving Loans and Term Loans under the Revolving Note will not exceed the aggregate amount of the Commitments. 4. This Borrowing Advice is executed on ______________ by the Borrower. BORROWER: THE CHARLES SCHWAB CORPORATION, a Delaware Corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- EXHIBIT C NOTICE OF CONVERSION/CONTINUATION Dated as of: _________________ Citicorp USA, Inc., as Agent =========================== Ladies and Gentlemen: This irrevocable Notice of Conversion/Continuation (this "Notice") is delivered to you under the Credit Agreement (364-Day Commitment) dated as of June 21, 2002 (as amended, restated or otherwise modified, the "Credit Agreement") by and among The Charles Schwab Corporation, a Delaware corporation (the "Company") (herein "Borrower"); and Citicorp USA, Inc., a Delaware corporation (herein "Citicorp USA") and the other Lenders signatory thereto (together with Citicorp USA, collectively "Lenders"), and Citicorp USA as agent for the Lenders (herein "Agent"). 1. This Notice is submitted for the purpose of: (check one and complete applicable information in accordance with the Credit Agreement) [__] Converting or [__] continuing all or a portion of the following type of Loan: (a) (check, as applicable) Base Rate Loan ____________________; Federal Funds Rate Loan _____________; Eurodollar Rate Loan ________________. (b) The aggregate outstanding principal balance of the above Loan is $_________________. (c) As applicable, the last day of the current Interest Period for such Loan is ________________. (d) The principal amount of such Loan to be [converted or continued] is $_________________. (e) Such principal amount should be converted/continued into the following type of Loan: Base Rate Loan ____________________; Federal Funds Rate Loan _____________; Eurodollar Rate Loan ________________. (f) The requested effective date of the [conversion/continuation] of such Loan is ________________. (g) As applicable, the requested Interest Period applicable to the new Loan is ________________. 2. No Event of Default under the Credit Agreement, or event which with the passage of time or the giving of notice or both would constitute an Event of Default under the Credit Agreement, has occurred and is continuing or will be caused by the advance requested hereby. 3. The representations and warranties set forth in Section 5 of the Credit Agreement are true and correct as if made on the date hereof (except for such representations and warranties as expressly relate to a prior date). Capitalized terms used herein which are not defined herein shall have the respective meanings set forth in the Credit Agreement. IN WITNESS WHEREOF, the undersigned officer of the Company has executed this Notice of Conversion/Continuation this ___ day of __________, _____. THE CHARLES SCHWAB CORPORATION By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- [must be signed by an Authorized Officer] EXHIBIT D COMMITMENT AND TERMINATION DATE EXTENSION REQUEST [Bank name and address] [Date] Reference is made to that certain Credit Agreement (364-Day Commitment) dated as of June 21, 2002 ("Credit Agreement") entered into by The Charles Schwab Corporation ("Borrower"), Citicorp USA, Inc., as Agent and Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. Pursuant to Section 2.11 of the Credit Agreement, Borrower hereby requests Agent to obtain each Lender's agreement to the extension of such Lender's Commitment presently in effect, in the amount of $[specify amount of existing Commitment], and the Termination Date presently in effect, for an additional 364 days. Agent's execution of a copy of this letter in the space provided below and the transmission of such executed copy to Borrower shall constitute all Lenders' acceptance of Borrower's request and all Lenders' agreement to the 364-day extension sought herein. More specifically, upon the execution of a copy of this letter by Agent on behalf of Lenders and the transmission thereof to Borrower within 15 days after Agent's receipt of this letter, (1) the Termination Date as defined in Section 2.11 of the Credit Agreement shall be extended 364 days and deemed changed to ___________________, and (2) all other dates appearing in the Credit Agreement that are referred to in Section 2.11 of the Credit Agreement shall correspondingly be extended 364 days. This Commitment and Termination Date Extension Request is executed by Borrower on ________________. BORROWER: THE CHARLES SCHWAB CORPORATION, a Delaware Corporation By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- ACCEPTED AND AGREED: Agent, on Behalf of Lenders By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- EXHIBIT E BORROWER'S OPINION OF COUNSEL [Howard, Rice Letterhead] [Date] Citicorp USA, Inc., as Agent =========================== Re: Credit Agreement (364-Day Commitment), dated June 21, 2002, among The Charles Schwab Corporation, Citicorp USA, Inc., as Agent and the Lenders party thereto Ladies and Gentlemen: This opinion is delivered at the request of The Charles Schwab Corporation to you in your capacity as Agent, on behalf of the Lenders, under the Credit Agreement (364-Day Commitment) dated as of June 21, 2002 (the "Credit Agreement") among The Charles Schwab Corporation, a Delaware corporation ("Borrower"), Citicorp USA, Inc., as the Administrative Agent and the Lenders signatories thereto (each a "Lender" and collectively, the "Lenders"). This opinion letter speaks as of close of business on June 21, 2002 (hereafter the "operative date"). We have acted as special counsel to Borrower in connection with the Credit Agreement. In such capacity we have examined originals, or copies represented to us by Borrower to be true copies, of the Credit Agreement; and we have obtained such certificates of such responsible officials of Borrower and of public officials as we have deemed necessary for purposes of this opinion. We have assumed without investigation the genuineness of all signatures on original documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic copies of originals, and the accuracy and completeness of all corporate records certified to us by the Borrower to be accurate and complete. We have further assumed that the Credit Agreement is binding upon and enforceable against the Agent and the Lenders. As to factual matters, we have relied upon the representations and warranties contained in and made pursuant to the Credit Agreement. Capitalized terms not otherwise defined herein have the meanings given for such terms in the Credit Agreement. For the purpose of this opinion, "Loan Documents" as used herein means the Credit Agreement and the Notes. Based upon the foregoing and in reliance thereon, and subject to the exceptions and qualifications set forth herein, we are of the opinion that: 1. Borrower is a corporation duly formed, validly existing, and in good standing under the laws of Delaware. 2. Borrower has all requisite corporate power and authority to execute, deliver and perform all of its obligations under the Loan Documents. 3. Each Loan Document has been duly authorized, executed and delivered by Borrower. Each Loan Document constitutes the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such validity, binding nature or enforceability may be limited by: (a) the effect of applicable federal or state bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium or other similar laws and court decisions relating to or affecting creditors' rights generally; (b) the effect of legal and equitable principles upon the availability of creditors' remedies, regardless of whether considered in a proceeding in equity or at law; (c) the effect of California judicial decisions involving statutes or principles of equity which have held that certain covenants or other provisions of agreements, including without limitation those providing for the acceleration of indebtedness due under debt instruments upon the occurrence of events therein described, are unenforceable under circumstances where it cannot be demonstrated that the enforcement of such provisions is reasonably necessary for the protection of the lender, has been undertaken in good faith under the circumstances then existing, and is commercially reasonable; (d) the effect of Section 1670.5 of the California Civil Code, which provides that a court may refuse to enforce a contract or may limit the application thereof or any clause thereof which the court finds as a matter of law to have been unconscionable at the time it was made; (e) the unenforceability, under certain circumstances, of provisions purporting to require the award of attorneys' fees, expenses, or costs, where such provisions do not satisfy the requirements of California Civil Code Section 1717 et seq., or in any action where the lender is not the prevailing party; (f) the unenforceability, under certain circumstances, of provisions waiving stated rights or unknown future rights and waiving defenses to obligations, where such waivers are contrary to applicable law or against public policy; (g) the unenforceability, under certain circumstances, of provisions which provide for penalties, late charges, additional interest in the event of a default by the borrower or fees or costs related to such charges; (h) the unenforceability, under certain circumstances, of provisions to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to or with any other right or remedy, or that the election of some particular remedy or remedies does not preclude recourse to one or another remedy; (i) the unenforceability of provisions prohibiting waivers of provisions of either of the Loan Documents otherwise than in writing to the extent that Section 1698 of the California Civil Code permits oral modifications that have been executed; (j) limitations on the enforceability of release, contribution, exculpatory, or nonliability provisions, under federal or state securities laws, Sections 1542 and 1543 of the California Civil Code, and any other applicable statute or court decisions; and (k) limitations on the enforceability of any indemnity obligations imposed upon or undertaken by the borrower to the extent that such obligations do not satisfy the requirements of Sections 2772 et seq. of the California Civil Code and any judicial decisions thereunder; provided that the limitations and qualifications set forth in the immediately preceding sub-paragraphs (b) through (k) do not, in our opinion, render the remedies available to the Lenders under the Loan Documents inadequate for the practical realization of the primary rights and benefits reasonably expected by an institutional lender in a comparable unsecured credit facility transaction governed by California law. The foregoing opinions are subject to the following exceptions and qualifications: a. We have not been requested to verify and have not verified the validity, accuracy, or reasonableness of any of the factual representations contained in either or both of the Loan Documents, and we express no opinion with respect to any of such matters. b. We are members of the bar of the State of California. We are opining herein only concerning matters governed by the Federal laws of the United States of America, the substantive laws of the State of California, and the General Corporation Law of the State of Delaware, and only with respect to Borrower. We express no opinion concerning the applicability to either or both of the Loan Documents, or the effect thereon, of the laws of any other jurisdiction. Furthermore, we express no opinion with respect to choice of law or conflicts of law, and none of the opinions stated herein shall be deemed to include or refer to choice of law or conflict of law. c. We express no opinion on any Federal or state securities laws as they may relate to either or both of the Loan Documents. d. We express no opinion as to compliance with the usury laws of any jurisdiction. The opinions set forth herein are given as of the operative date. We disclaim any obligation to notify you or any other person or entity after the operative date if any change in fact and/or law should change our opinion with respect to any matters set forth herein. This opinion letter is rendered to you in your capacity as the Agent on behalf of the Lenders under the Credit Agreement and may not be relied upon, circulated or quoted, in whole or in part, by any other person or entity (other than the Lenders and a person or entity who becomes an assignee or successor in interest of any Lender or acquires a participation from any Lender consistent with the terms of the Loan Documents) and shall not be referred to in any report or document furnished to any other person or entity without our prior written consent; provided, however, that the foregoing shall not preclude any Lender from describing or otherwise disclosing the existence or contents of this letter to (i) any bank regulatory authority having jurisdiction over such Lender, as required by such authority, (ii) a person or entity who, in good-faith discussions between such Lender and such person or entity, is proposed to become an assignee or successor in interest of such Lender or to acquire a participation from the Bank consistent with the terms of the Loan Documents, and (iii) counsel to the Agent and the Lenders. Very truly yours, HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN A Professional Corporation By: ----------------------------------------- EXHIBIT F FORM OF NOTICE OF ASSIGNMENT AND ACCEPTANCE To: CITICORP USA, INC., as Administrative Agent Ladies and Gentlemen: Reference is made to that certain Credit Agreement (364-Day Commitment) dated as of June 21, 2002 between THE CHARLES SCHWAB CORPORATION, a Delaware corporation ("Borrower"), Lenders from time to time party thereto, and CITICORP USA, INC., as Administrative Agent (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the "Agreement", the terms defined therein being used herein as therein defined). 1. We hereby give you notice of, and request your consent to, the assignment by _______________________ (the "Assignor") to __________________ (the "Assignee") of _________% of the right, title and interest of the Assignor in and to the Loan Documents, including, without limitation, the right, title and interest of the Assignor in and to the Commitment of the Assignor, and all outstanding Loans made by the Assignor. Before giving effect to such assignment: (a) the aggregate amount of the Assignor's Commitment is $_______________. (b) the aggregate principal amount of its outstanding Loans is $_____________. 2. The Assignee hereby represents and warrants that it has complied with the requirements of Section 10.8 of the Agreement in connection with this assignment and acknowledges and agrees that: (a) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share being assigned hereby free and clear of any adverse claim, the Assignor has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of the Agreement of any other Loan Document; (b) the Assignor had made no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance by Borrower of the Obligations; (c) it has received a copy of the Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.2 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (d) it will independently and without reliance upon Administrative Agent or any Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (e) it appoints and authorizes Administrative Agent to take such action and to exercise such powers under the Agreement and the other Loan Documents as are delegated to Administrative Agent by the Agreement and such other Loan Documents; and (f) it will perform in accordance with their terms all of the obligations which by the terms of the Agreement are required to be performed by it as a Lender. 3. The Assignee agrees that, upon receiving your consent to such assignment and form and after _______________, the Assignee will be bound by the terms of the Loan Documents, with respect to the interest in the Loan Documents assigned to it as specified above, as fully and to the same extent as if the Assignee were a Lender originally holding such interest in the Loan Documents. 4. The following administrative details apply to the Assignee: (a) Credit Contact: Assignee name:_______________________________________ Address:_____________________________________________ _____________________________________________ Attention:___________________________________________ Telephone:___________________________________________ Telecopier:__________________________________________ (b) Operations Contract: Assignee name:_______________________________________ Address:_____________________________________________ _____________________________________________ Attention:___________________________________________ Telephone:___________________________________________ Telecopier:__________________________________________ (c) Lending Office: Assignee name:_______________________________________ Address:_____________________________________________ _____________________________________________ (d) Payment Instructions: Assignee name:_______________________________________ ABA No.:_____________________________________________ Account No.:_________________________________________ Attention:___________________________________________ Reference:___________________________________________ IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [ASSIGNOR] By:_________________________________________ Name:_______________________________________ Title:______________________________________ [ASSIGNEE] By:_________________________________________ Name:_______________________________________ Title:______________________________________ We hereby consent to the foregoing assignment. THE CHARLES SCHWAB CORPORATION, as Borrower By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- CITICORP USA, INC., as Administrative Agent By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- EX-12 8 exh12_1.txt EXHIBIT 12.1
Exhibit 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in millions) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- Earnings (loss) before taxes on earnings (loss) and extraordinary gain $ 156 $ (26) $ 286 $ 138 Fixed charges Interest expense: Brokerage client cash balances 46 195 98 460 Deposits from banking clients 24 34 46 74 Long-term debt 14 14 27 29 Short-term borrowings 7 5 13 10 Stock-lending activities 1 5 2 14 Other 4 2 - ------------------------------------------------------------------------------------------------------------------------------------ Total 92 257 186 589 Interest portion of rental expense 22 23 44 46 - ------------------------------------------------------------------------------------------------------------------------------------ Total fixed charges (A) 114 280 230 635 ----------------------------------------------------------------------------------------------------------------------------------- Earnings before taxes on earnings and extraordinary gain and fixed charges (B) $ 270 $ 254 $ 516 $ 773 ==================================================================================================================================== Ratio of earnings to fixed charges (B) / (A) (1) 2.4 .9 (2) 2.2 1.2 ==================================================================================================================================== Ratio of earnings to fixed charges excluding brokerage client interest expense (3) 3.3 .7 3.2 1.8 ==================================================================================================================================== (1) The ratio of earnings to fixed charges is calculated in accordance with SEC requirements. For such purposes, "earnings" consist of earnings (loss) before taxes on earnings (loss) and extraordinary gain and fixed charges. "Fixed charges" consist of interest expense as listed above, including one-third of rental expense, which is estimated to be representative of the interest factor. (2) The amount of the deficiency in the ratio of earnings to fixed charges was $26 million for the three months ended June 30, 2001. (3) Because interest expense incurred in connection with payables to brokerage clients 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 brokerage client interest expense reflects the elimination of such interest expense as a fixed charge.
EX-99 9 exh99_1.txt EXHIBIT 99_1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Charles Schwab Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 (the "Report"), I, Charles R. Schwab, Chairman of the Board and Co-Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. /s/ Charles R. Schwab Date: August 13, 2002 - ------------------------- --------------- Charles R. Schwab Chairman of the Board and Co-Chief Executive Officer EX-99 10 exh99_2.txt EXHIBIT 99_2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Charles Schwab Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 (the "Report"), I, David S. Pottruck, President and Co-Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. /s/ David S. Pottruck Date: August 13, 2002 - ------------------------- --------------- David S. Pottruck President and Co-Chief Executive Officer EX-99 11 exh99_3.txt EXHIBIT 99_3 Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Charles Schwab Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 (the "Report"), I, Christopher V. Dodds, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein. /s/ Christopher V. Dodds Date: August 13, 2002 - ---------------------------- --------------- Christopher V. Dodds Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----