-----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, C0DG4QVuOZoEUVa9i5PpNX3PnlQnqtVhDHaOvSeOk7/X5wOjfTl4LgU1scwdm59h EHQH90MY8X/iJR8DB9BrwQ== 0000316709-04-000037.txt : 20041108 0000316709-04-000037.hdr.sgml : 20041108 20041108131529 ACCESSION NUMBER: 0000316709-04-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 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: 041124985 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 FORM 10-Q BODY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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. 1,346,975,598 shares of $.01 par value Common Stock Outstanding on October 29, 2004 THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended September 30, 2004 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 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 - 30 Item 4. Controls and Procedures 30 Part II - Other Information Item 1. Legal Proceedings 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 32 Item 6. Exhibits 32 - 33 Signature 34
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 Nine Months Ended September 30, September 30, 2004 2003 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues Asset management and administration fees $ 523 $ 468 $1,547 $1,345 Commissions 163 290 738 793 Interest revenue 317 235 855 717 Interest expense (72) (54) (177) (182) ------- ------- ------- ------- Net interest revenue 245 181 678 535 Principal transactions 22 22 69 70 Other 47 36 110 91 - ------------------------------------------------------------------------------------------------------------------------------------ Total 1,000 997 3,142 2,834 - ------------------------------------------------------------------------------------------------------------------------------------ Expenses Excluding Interest Compensation and benefits 455 418 1,430 1,230 Occupancy and equipment 97 106 299 322 Depreciation and amortization 58 69 167 212 Communications 53 59 170 169 Professional services 62 44 181 123 Advertising and market development 43 31 151 100 Commissions, clearance and floor brokerage 9 10 29 29 Restructuring charges 112 35 114 59 Impairment charges - - - 5 Other 39 29 116 101 - ------------------------------------------------------------------------------------------------------------------------------------ Total 928 801 2,657 2,350 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations before taxes on income 72 196 485 484 Taxes on income (26) (72) (173) (154) - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations 46 124 312 330 Gain (loss) from discontinued operations, net of tax (87) 3 (79) (6) - ------------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ (41) $ 127 $ 233 $ 324 ==================================================================================================================================== Weighted-Average Common Shares Outstanding - Diluted 1,364 1,366 1,370 1,361 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share - Basic Income from continuing operations $ .03 $ .09 $ .23 $ .24 Gain (loss) from discontinued operations, net of tax $ (.06) - $ (.06) - Net income (loss) $ (.03) $ .09 $ .17 $ .24 Earnings Per Share - Diluted Income from continuing operations $ .03 $ .09 $ .23 $ .24 Gain (loss) from discontinued operations, net of tax $ (.06) - $ (.06) - Net income (loss) $ (.03) $ .09 $ .17 $ .24 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends Declared Per Common Share $ .020 $ .014 $ .054 $ .036 - ------------------------------------------------------------------------------------------------------------------------------------ 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) September 30, December 31, 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 2,096 $ 2,785 Cash and investments segregated and on deposit for federal or other regulatory purposes(1) (including resale agreements of $12,899 in 2004 and $16,824 in 2003) 19,560 21,341 Securities owned - at market value (including securities pledged of $2 in 2004 and $131 in 2003) 4,304 3,934 Receivables from brokers, dealers and clearing organizations 330 476 Receivables from brokerage clients - net 9,154 8,581 Loans to banking clients - net 6,202 5,736 Loans held for sale 1,059 29 Equipment, office facilities and property - net 932 943 Goodwill - net 810 810 Intangible assets - net 148 141 Other assets 969 829 Assets of discontinued operations 371 261 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 45,935 $ 45,866 ==================================================================================================================================== Liabilities and Stockholders' Equity Deposits from banking clients $ 10,199 $ 8,308 Drafts payable 254 152 Payables to brokers, dealers and clearing organizations 2,151 2,633 Payables to brokerage clients 25,896 27,184 Accrued expenses and other liabilities 1,304 1,216 Short-term borrowings 840 996 Long-term debt 611 772 Liabilities of discontinued operations 125 144 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 41,380 41,405 - ------------------------------------------------------------------------------------------------------------------------------------ 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; 1,392,091,544 shares issued 14 14 Additional paid-in capital 1,763 1,749 Retained earnings 3,256 3,125 Treasury stock - 40,913,709 and 34,452,710 shares in 2004 and 2003, respectively, at cost (366) (319) Unamortized stock-based compensation (104) (95) Accumulated other comprehensive loss (8) (13) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 4,555 4,461 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 45,935 $ 45,866 ==================================================================================================================================== (1) Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated for federal or other regulatory purposes were $19,040 million at September 30, 2004, excluding $200 million of intercompany repurchase agreements, and $21,004 million at December 31, 2003. On October 4, 2004, the Company withdrew $178 million of excess segregated cash. On January 5, 2004, the Company deposited $221 million into its segregated reserve bank accounts. See Notes to Condensed Consolidated Financial Statements. - 2 -
THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statement of Cash Flows (In millions) (Unaudited) Nine Months Ended September 30, 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $ 233 $ 324 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Loss from discontinued operations, net of tax 79 6 Depreciation and amortization 167 212 Impairment charges - 5 Tax benefit from, and amortization of, stock-based awards 44 19 Deferred income taxes 30 3 Other 4 1 Originations of loans held for sale (696) (1,267) Proceeds from sales of loans held for sale 701 1,197 Net change in: Cash and investments segregated and on deposit for federal or other regulatory purposes 1,781 (2,142) Securities owned (excluding securities available for sale) 64 (57) Receivables from brokers, dealers and clearing organizations 146 (65) Receivables from brokerage clients (574) (825) Other assets (176) (64) Drafts payable 101 13 Payables to brokers, dealers and clearing organizations (482) 1,717 Payables to brokerage clients (1,289) 418 Accrued expenses and other liabilities 1 (127) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities 134 (632) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Investing Activities Purchases of securities available for sale (1,968) (1,725) Proceeds from sales of securities available for sale 599 369 Proceeds from maturities, calls and mandatory redemptions of securities available for sale 1,019 537 Net increase in loans to banking clients (1,498) (1,063) Purchase of equipment, office facilities and property - net (151) (97) Cash payments for business combinations and investments, net of cash acquired - (9) Proceeds from sales of subsidiaries - 53 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (1,999) (1,935) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Financing Activities Net increase in deposits from banking clients 1,891 1,277 Net change in short-term borrowings (156) 894 Proceeds from long-term debt 136 - Repayment of long-term debt (294) (100) Dividends paid (74) (49) Purchase of treasury stock (149) (32) Proceeds from stock options exercised and other 30 24 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 1,384 2,014 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used for) provided by discontinued operations (208) 28 - ------------------------------------------------------------------------------------------------------------------------------------ Decrease in Cash and Cash Equivalents (689) (525) Cash and Cash Equivalents at Beginning of Period 2,785 2,979 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 2,096 $ 2,454 ==================================================================================================================================== 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, and with its majority-owned subsidiaries collectively referred to as the Company) is a financial holding company engaged, through its subsidiaries, in securities brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 283 domestic branch offices in 45 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 38 offices in 15 states. Other subsidiaries include Charles Schwab Investment Management, Inc., the investment advisor for Schwab's proprietary mutual funds, CyberTrader, Inc., an electronic trading technology and brokerage firm providing services to highly active, online traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail bank which commenced operations in the second quarter of 2003. The accompanying unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations, and cash flows for the periods presented in conformity with generally accepted accounting principles in the U.S. (GAAP). All adjustments were of a normal recurring nature, except as discussed in note "5 - Discontinued Operations" related to the Company's exit from the capital markets business and the sale of Charles Schwab Europe (CSE). Certain items in prior periods' financial statements have been reclassified to conform to the 2004 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 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003, and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2004 and June 30, 2004. The Company's results for any interim period are not necessarily indicative of results for a full year or any other interim period. 2. New Accounting Standards SEC Staff Accounting Bulletin (SAB) No. 105 "Application of Accounting Principles to Loan Commitments" was released in March 2004. This release summarizes the SEC staff position regarding the application of GAAP to loan commitments accounted for as derivative instruments. The Company accounts for interest rate lock commitments issued on mortgage loans that will be held for sale as derivative instruments. Consistent with SAB No. 105, the Company considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely on changes in market interest rates. As of September 30, 2004, the Company had interest rate lock commitments on mortgage loans to be held for sale with principal balances totaling approximately $130 million, the fair value of which was immaterial. Emerging Issues Task Force Issue (EITF) No. 03-01 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" was ratified by the Financial Accounting Standards Board (FASB) in March 2004. This EITF addresses how to determine the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under Statement of Financial Accounting Standards (SFAS) No. 115 - Accounting for Certain Investments in Debt and Equity Securities (including individual securities and investments in mutual funds), and investments accounted for under the cost method or the equity method. In September 2004, the FASB delayed the effective date of the portion of this EITF that relates to measuring and recognizing other-than-temporary impairment until implementation guidance is finalized. This delay does not suspend the requirement to recognize other-than-temporary impairment required by existing accounting literature. The Company's investments classified as available for sale are primarily comprised of U.S. government sponsored agency and private mortgage-backed securities and collateralized mortgage obligations. At September 30, 2004, the gross unrealized loss on these investments, caused by recent interest rate increases, was $13 million. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not consider these investments to be other-than-temporarily impaired. - 4 - 3. Stock Incentive Plans The Company's stock incentive plans provide for granting options to employees, officers, and directors. Options are granted for the purchase of shares of CSC's common stock at an exercise price not less than the market value on the date of grant, and expire within seven or ten years from the date of grant. Options generally vest over a three- to four-year period from the date of grant. A summary of option activity follows: - -------------------------------------------------------------------------------- 2004 2003 ---------------- ---------------- Weighted- Weighted- Number Average Number Average of Exercise of Exercise Options Price Options Price - -------------------------------------------------------------------------------- Outstanding at beginning of year 136 $ 15.25 156 $ 15.38 Granted: Quarter ended March 31 1 $ 13.73 -(1) $ 9.26 Quarter ended June 30 -(1) $ 10.21 2 $ 8.93 Quarter ended September 30 19 $ 9.11 -(1) $ 11.30 - -------------------------------------------------------------------------------- Total granted 20 $ 9.32 2 $ 9.09 Exercised (6) $ 4.85 (4) $ 6.23 Canceled (9) $ 18.74 (12) $ 18.58 - -------------------------------------------------------------------------------- Outstanding at September 30 141 $ 14.68 142 $ 15.26 ================================================================================ Exercisable at September 30 91 $ 15.80 85 $ 14.27 - -------------------------------------------------------------------------------- Available for future grant at September 30 30 41 - -------------------------------------------------------------------------------- Weighted-average fair value of options granted: Quarter ended March 31 $ 3.95 $ 4.34 Quarter ended June 30 $ 3.52 $ 3.96 Quarter ended September 30 $ 2.71 $ 5.06 - -------------------------------------------------------------------------------- (1) Less than 500,000 options were granted. The Company changed its option pricing model from the Black-Scholes model to a binomial model for all options granted on or after January 1, 2004. The fair values of stock options granted prior to January 1, 2004 were determined using the Black-Scholes model. The Company believes that the binomial model offers greater flexibility in reflecting the characteristics of employee stock options. The binomial model takes into account similar inputs to a Black-Scholes model such as volatility, dividend yield rate, and risk-free interest rate. In addition to these assumptions, the binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. The Company determines these probabilities generally based on analysis of historical trends of such events. The assumptions used in the respective option pricing models were as follows: - -------------------------------------------------------------------------------- Three Months Ended March 31, June 30, September 30, 2004 2003 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Expected dividend yield .48% .30% .48% .30% .48% .30% Expected volatility 36% 52% 36% 49% 36% 49% Risk-free interest rate 4.0% 2.9% 4.6% 2.6% 3.9% 2.9% Expected life (in years) 4 5 4 5 3 5 - -------------------------------------------------------------------------------- The Company applies Accounting Principles Board Opinion No. 25 - Accounting for Stock Issued to Employees, and related interpretations, for its stock-based employee compensation plans. Because the Company grants stock option awards with an exercise price not less than the market value of CSC's common stock on the date of grant, there is no compensation expense recorded, except for restructuring-related expense for modifications of officers' stock options. Had compensation expense for the Company's stock option awards been determined based on the Black-Scholes or binomial fair value, as described above, at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 - Accounting for Stock-Based Compensation, the Company would have recorded additional compensation expense and its net income and earnings per share (EPS) would have been reduced to the pro forma amounts presented in the following table: - -------------------------------------------------------------------------------- Three Nine Months Ended Months Ended September 30, September 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Compensation expense for stock options (after-tax): As reported $ 1 $ 6 $ 1 $ 6 Pro forma (1) $ 25 $ 31 $ 69 $ 89 - -------------------------------------------------------------------------------- Net income (loss): As reported $ (41) $ 127 $ 233 $ 324 Pro forma $ (65) $ 102 $ 165 $ 241 - -------------------------------------------------------------------------------- Basic EPS: As reported $(.03) $ .09 $ .17 $ .24 Pro forma $(.05) $ .08 $ .12 $ .18 Diluted EPS: As reported $(.03) $ .09 $ .17 $ .24 Pro forma $(.05) $ .07 $ .12 $ .18 - -------------------------------------------------------------------------------- (1) Includes pro forma compensation expense related to stock options granted in both current and prior periods. Pro forma stock option compensation is generally amortized on a straight-line basis over the vesting period beginning with the month in which the option was granted. - 5 - 4. Restructuring 2004 Cost Reduction Effort - -------------------------- In the second quarter of 2004, the Company commenced a firm-wide cost reduction effort designed to mitigate the financial impact of its recent pricing changes and to strengthen its productivity and efficiency. The goals of this effort include eliminating work that is not essential to meeting client service standards or the Company's ongoing operating needs, reengineering work processes to maximize productivity, minimizing organizational complexity through functional streamlining, and addressing business unit performance across the Company. During the second quarter of 2004, the Company reallocated certain client service functions from its Orlando regional telephone service center to other centers. In the third quarter of 2004, the Company consolidated 38 branch offices into nearby locations, closed 15 additional branch offices, and took steps to streamline its technology organization. Additionally, the Company reduced its operating facilities, primarily by exiting certain administrative office space in California. The Company recorded pre-tax restructuring charges of $112 million and $116 million in the third quarter and first nine months of 2004, respectively, reflecting severance costs for approximately 1,050 employees and facilities reduction charges. A summary of pre-tax restructuring charges related to the Company's 2004 cost reduction effort is as follows: - -------------------------------------------------------------------------------- Three Nine Period ended September 30, 2004 Months Months - -------------------------------------------------------------------------------- Workforce reduction: Severance pay and benefits $ 54 $ 58 Non-cash compensation expense for officers' stock options 2 2 - -------------------------------------------------------------------------------- Total workforce reduction 56 60 - -------------------------------------------------------------------------------- Facilities reduction: Non-cancelable lease costs, net of estimated sublease income 56 56 - -------------------------------------------------------------------------------- Total restructuring charges $112 $116 ================================================================================ A summary of the activity in the restructuring reserve related to the Company's 2004 cost reduction effort for the third quarter and first nine months of 2004 is as follows: - -------------------------------------------------------------------------------- Three months ended Workforce Facilities September 30, 2004 Reduction Reduction Total - -------------------------------------------------------------------------------- Balance at June 30, 2004 $ 4 $ - $ 4 Restructuring charges 56 56 112 Cash payments (21) (2) (23) Non-cash charges(1) (5) - (5) - -------------------------------------------------------------------------------- Balance at September 30, 2004 $ 34(2) $ 54(3) $ 88 ================================================================================ - -------------------------------------------------------------------------------- Nine months ended Workforce Facilities September 30, 2004 Reduction Reduction Total - -------------------------------------------------------------------------------- Balance at December 31, 2003 $ - $ - $ - Restructuring charges 60 56 116 Cash payments (21) (2) (23) Non-cash charges(1) (5) - (5) - -------------------------------------------------------------------------------- Balance at September 30, 2004 $ 34(2) $ 54(3) $ 88 ================================================================================ (1) Primarily includes charges for officers' stock-based compensation. (2) The Company expects to substantially utilize the remaining workforce reduction reserve through cash payments for severance pay and benefits over the respective severance periods through 2006. (3) The Company expects to substantially utilize the remaining facilities reduction reserve through cash payments for the net lease expense over the respective lease terms through 2014. 2003, 2002, and 2001 Initiatives - -------------------------------- The Company's 2003, 2002, and 2001 restructuring initiatives included workforce reductions, reductions in operating facilities, the removal of certain systems hardware, software, and equipment from service, and the withdrawal from certain international operations. These initiatives reduced operating expenses and adjusted the Company's organizational structure to improve productivity, enhance efficiency, and increase profitability. The Company recorded a pre-tax restructuring credit of $2 million in the first nine months of 2004 related to these restructuring initiatives, primarily due to changes in estimates of sublease income associated with previously announced efforts to sublease excess facilities. The Company recorded total pre-tax restructuring charges of $35 million and $59 million in the third quarter and first nine months of 2003, respectively. - 6 - A summary of the activity in the restructuring reserve related to the Company's 2003, 2002, and 2001 restructuring initiatives for the third quarter and first nine months of 2004 is as follows: - -------------------------------------------------------------------------------- Three months ended Workforce Facilities September 30, 2004 Reduction Reduction Total - -------------------------------------------------------------------------------- Balance at June 30, 2004 $ 7 $ 166 $ 173 Restructuring charges (1) 1 - Cash payments (3) (12) (15) Non-cash charges (1) (1) - (1) Other (2) - 2 2 - -------------------------------------------------------------------------------- Balance at September 30, 2004 $ 2(3) $ 157(4) $ 159 ================================================================================ - -------------------------------------------------------------------------------- Nine months ended Workforce Facilities September 30, 2004 Reduction Reduction Total - -------------------------------------------------------------------------------- Balance at December 31, 2003 $ 19 $ 201 $ 220 Restructuring charges (1) (1) (2) Cash payments (14) (49) (63) Non-cash charges (1) (2) - (2) Other (2) - 6 6 - -------------------------------------------------------------------------------- Balance at September 30, 2004 $ 2(3) $ 157(4) $ 159 ================================================================================ (1) Primarily includes charges for officers' stock-based compensation. (2) Primarily includes the accretion of facilities restructuring reserves, which are initially recorded at net present value. Accretion expense is recorded in occupancy and equipment expense on the Condensed Consolidated Statement of Income. (3) Balance is related to the Company's 2002 restructuring initiatives. The Company expects to substantially utilize the remaining workforce reduction reserve through cash payments for severance pay and benefits over the respective severance periods through 2005. (4) Includes $6 million, $62 million, and $89 million related to the Company's 2003, 2002, and 2001 restructuring initiatives, respectively. The Company expects to substantially utilize the remaining facilities reduction reserve through cash payments for the net lease expense over the respective lease terms through 2017. 5. Discontinued Operations On August 31, 2004, the Company entered into a definitive purchase agreement with UBS Securities LLC and UBS Americas Inc. (collectively referred to as UBS) in which UBS agreed to acquire all of the partnership interests of Schwab Capital Markets L.P. and all of the outstanding capital stock of SoundView Technology Group, Inc. (collectively referred to as Schwab Soundview Capital Markets, or SSCM) for $265 million in cash. In this transaction, the Company and Schwab also committed to eight-year order routing and execution services agreements with UBS for the handling of Schwab's equity and listed options order flow. SSCM comprises substantially all of the Capital Markets segment. See note "19 - Subsequent Events" for details on the closing of this transaction. The results of operations, net of income taxes, and cash flows of SSCM have been presented as discontinued operations on the Condensed Consolidated Statements of Income and of Cash Flows, respectively, and the assets and liabilities of SSCM have each been combined and presented as assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheet. The Company's consolidated prior period revenues, expenses, taxes on income, assets, liabilities, and cash flows have been adjusted to reflect this presentation. The carrying amounts of SSCM assets and liabilities are as follows: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Assets Cash $ 97 $ 49 Receivables from brokers, dealers and clearing organizations 1 80 Securities owned 97 89 Goodwill and intangible assets 145 28 Other assets 31 15 - -------------------------------------------------------------------------------- Total assets $ 371 $ 261 - -------------------------------------------------------------------------------- Liabilities Payables to brokers, dealers and clearing organizations $ - $ 28 Accrued expenses and other liabilities 125 116 - -------------------------------------------------------------------------------- Total liabilities $ 125 $ 144 - -------------------------------------------------------------------------------- On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage subsidiary, CSE, to Barclays PLC. The results of the operations of CSE, net of income taxes, have been presented as discontinued operations on the Condensed Consolidated Statement of Income. The Company retained certain restructuring-related obligations following the sale of CSE, primarily related to facilities leases. The restructuring reserve balance related to CSE, which is net of estimated sublease income, is $13 million and $14 million at September 30, 2004 and December 31, 2003, respectively. The decrease in the reserve balance was due to cash payments and other adjustments of $4 million, substantially offset by a charge of $3 million for changes in estimates of facilities sublease income. - 7 - A summary of revenues and gains (losses) for discontinued operations is as follows: - -------------------------------------------------------------------------------- Three Nine Months Ended Months Ended September 30, September 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Revenues (1) $ 49 $ 55 $ 215 $ 144 Write-down of SSCM investment (2) $(105) $ - $(105) $ - Pre-tax profit (loss) (3) $ (26) $ 6 $ (13) $ (8) Total pre-tax gains (losses) $(131) $ 6 $(118) $ (8) After-tax gains (losses) $ (87) $ 3 $ (79) $ (6) - -------------------------------------------------------------------------------- (1) Includes revenues of $4 million in the first nine months of 2003 related to CSE. (2) Reflects a goodwill impairment charge of $95 million and a charge to reduce the carrying amount of the SSCM investment to its approximate fair value less selling costs. (3) Excludes write-down of SSCM investment. Includes restructuring charges related to SSCM of $16 million in the third quarter and first nine months of 2004, and $2 million in the third quarter and first nine months of 2003. Includes CSE post-sale adjustments of a $3 million loss in the third quarter and first nine months of 2004, and a $5 million gain in the third quarter of 2003. 6. Business Acquisitions and Divestiture In January 2004, the Company completed its acquisition of SoundView Technology Group, Inc. (SoundView) for approximately $340 million, or $289 million net of SoundView's cash and cash equivalents acquired. Additionally, the Company recorded securities owned of $93 million related to this acquisition. As a result of a purchase price allocation, the Company recorded goodwill of $194 million and intangible assets of $21 million related to this acquisition. In August 2004, the Company agreed to sell SSCM, including all outstanding capital stock of SoundView. See note "5 - Discontinued Operations" for further discussion. In October 2003, U.S. Trust acquired State Street Corporation's Private Asset Management group, a provider of wealth management services to clients in the New England area, for $365 million. In June 2003, the Company sold its investment in Aitken Campbell, a market-making joint venture in the U.K., to the Company's joint venture partner, TD Waterhouse Group, Inc. In the first quarter of 2003, the Company recorded an impairment charge of $5 million pre-tax to reduce the carrying value of its investment and a deferred income tax benefit of $16 million. The Company's share of Aitken Campbell's historical earnings, which was accounted for under the equity method, was not material to the Company's results of operations, EPS, or cash flows. 7. Loans to Banking Clients and Related Allowance for Credit Losses An analysis of the composition of the loan portfolio is as follows: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Residential real estate mortgages $ 4,880 $ 4,624 Consumer loans 877 735 Other 474 404 - -------------------------------------------------------------------------------- Total loans 6,231 5,763 Less: allowance for credit losses (29) (27) - -------------------------------------------------------------------------------- Loans to banking clients - net $ 6,202 $ 5,736 ================================================================================ Included in the loan portfolio are nonaccrual loans totaling $1 million at both September 30, 2004 and December 31, 2003. Nonaccrual loans are considered impaired by the Company, and represent all of the Company's nonperforming assets at both September 30, 2004 and December 31, 2003. For each of the third quarters and first nine months of 2004 and 2003, the impact of interest revenue which would have been earned on nonaccrual loans versus interest revenue recognized on these loans was not material to the Company's results of operations. The amount of loans accruing interest that were contractually 90 days or more past due was immaterial at both September 30, 2004 and December 31, 2003. Recoveries and charge-offs related to the allowance for credit losses on the loan portfolio were not material for each of the third quarters and first nine months of 2004 and 2003. 8. Loans Held for Sale In the third quarter of 2004, U.S. Trust reclassified $1.0 billion of existing loans to banking clients to loans held for sale, reflecting a securitization transaction expected to be completed in the fourth quarter of 2004. See note "19 - Subsequent Events" for further discussion. Loans held for sale also include fixed- and adjustable-rate mortgage loans originated by Schwab Bank and intended for sale. Schwab Bank's loans held for sale are stated at lower of cost or market value. Market value is determined using quoted market prices. - 8 - 9. Deposits from Banking Clients Deposits from banking clients consist of money market and other savings deposits, certificates of deposit, and noninterest-bearing deposits. Deposits from banking clients are as follows: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Interest-bearing deposits $ 9,545 $ 7,585 Noninterest-bearing deposits 654 723 - -------------------------------------------------------------------------------- Total $10,199 $ 8,308 ================================================================================ The average rate paid by the Company on its interest-bearing deposits from banking clients was 1.02% and 1.72% for the third quarters of 2004 and 2003, respectively, and 1.12% and 1.90% for the first nine months of 2004 and 2003, respectively. 10. Long-term Debt Long-term debt consists of the following: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Senior Medium-Term Notes, Series A $ 408 $ 466 Lease financing liability 135 - Note payable - 235 8.41% Trust Preferred Capital Securities 52 52 Fair value adjustment (1) 16 19 - -------------------------------------------------------------------------------- Total $ 611 $ 772 ================================================================================ (1) Represents the fair value adjustment related to hedged Medium-Term Notes. Upon adoption of Financial Accounting Standards Board Interpretation (FIN) No. 46 - Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 - Consolidated Financial Statements, in the first quarter of 2003, the Company consolidated a special purpose trust (Trust) and recorded a note payable of $235 million. This Trust was formed in 2000 to finance the acquisition and renovation of an office building and land. In June 2004, the Company exercised its option to purchase this property from the Trust and repaid $99 million of the note payable. Simultaneously, the Company completed a transaction on this property with American Financial Realty Trust, a publicly-traded real estate investment trust, resulting in proceeds of $136 million, which was used to repay the remainder of the note payable, and a 20-year lease. This transaction was accounted for as a financing. The lease financing liability of $136 million will be reduced by a portion of the lease payments over the 20-year term. Annual maturities on long-term debt outstanding at September 30, 2004 are as follows: - -------------------------------------------------------------------------------- 2004 $ 23 2005 60 2006 72 2007 43 2008 20 Thereafter 377 - -------------------------------------------------------------------------------- Total maturities 595 Fair value adjustment 16 - -------------------------------------------------------------------------------- Total $ 611 ================================================================================ 11. Pension and Other Postretirement Benefits U.S. Trust maintains a trustee managed, noncontributory, qualified defined benefit pension plan, the U.S. Trust Corporation Employees' Retirement Plan (the Pension Plan), for the benefit of eligible U.S. Trust employees. U.S. Trust also provides certain health care and life insurance benefits for active employees and certain qualifying retired employees and their dependents. The following table summarizes the components of the net periodic benefit expense related to the Pension Plan and health care and life insurance benefits: - -------------------------------------------------------------------------------- 2004 2003 ---------------- ---------------- Three months ended Pension Health & Pension Health & September 30, Plan Life Plan Life - -------------------------------------------------------------------------------- Service cost and expenses $ 3 $ - $ 3 $ - Interest cost 5 - 5 - Expected return on plan assets (6) - (6) - Amortization of prior service cost (1) - - - Amortization of net loss 1 - - - - -------------------------------------------------------------------------------- Net periodic benefit expense $ 2 $ - $ 2 $ - ================================================================================ - -------------------------------------------------------------------------------- 2004 2003 ---------------- ---------------- Nine months ended Pension Health & Pension Health & September 30, Plan Life Plan Life - -------------------------------------------------------------------------------- Service cost and expenses $ 8 $ - $ 10 $ - Interest cost 13 1 14 1 Expected return on plan assets (16) - (18) - Amortization of prior service cost (3) - - - Amortization of net loss 4 - - - - -------------------------------------------------------------------------------- Net periodic benefit expense $ 6 $ 1 $ 6 $ 1 ================================================================================ - 9 - 12. Comprehensive Income Comprehensive income includes net income and changes in equity except those resulting from investments by, or distributions to, stockholders. Comprehensive income is presented in the following table: - -------------------------------------------------------------------------------- Three Nine Months Ended Months Ended September 30, September 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Net income (loss) $ (41) $ 127 $ 233 $ 324 Other comprehensive income (loss): Net gain on cash flow hedging instruments 2 7 11 13 Change in net unrealized gain (loss) on securities available for sale 19 (10) (7) (12) Foreign currency translation adjustment 1 - 1 5 - -------------------------------------------------------------------------------- Total comprehensive income (loss), net of tax $ (19) $ 124 $ 238 $ 330 ================================================================================ 13. 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 presented in the following table: - -------------------------------------------------------------------------------- Three Nine Months Ended Months Ended September 30, September 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Net income (loss) $ (41) $ 127 $ 233 $ 324 - -------------------------------------------------------------------------------- Weighted-average common shares outstanding - basic 1,344 1,342 1,348 1,341 Common stock equivalent shares related to stock incentive plans 20 24 22 20 - -------------------------------------------------------------------------------- Weighted-average common shares outstanding - diluted 1,364 1,366 1,370 1,361 ================================================================================ Basic EPS: Income from continuing operations $ .03 $ .09 $ .23 $ .24 Gain (loss) from discontinued operations, net of tax (.06) - (.06) - Net income (loss) $ (.03) $ .09 $ .17 $ .24 - -------------------------------------------------------------------------------- Diluted EPS: Income from continuing operations $ .03 $ .09 $ .23 $ .24 Gain (loss) from discontinued operations, net of tax (.06) - (.06) - Net income (loss) $ (.03) $ .09 $ .17 $ .24 - -------------------------------------------------------------------------------- The computation of diluted EPS excludes outstanding stock options to purchase 95 million and 88 million shares for the third quarters of 2004 and 2003, respectively, and 95 million and 111 million shares for the first nine months of 2004 and 2003, 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 - 14. 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. The regulatory capital and ratios of the Company, U.S. Trust, United States Trust Company of New York (U.S. Trust NY), U.S. Trust Company, National Association (U.S. Trust NA), and Schwab Bank are presented in the following table: - -------------------------------------------------------------------------------- 2004 2003 --------------- --------------- September 30, Amount Ratio(1) Amount Ratio(1) - -------------------------------------------------------------------------------- Tier 1 Capital: Company $ 3,513 18.7% $ 3,784 23.6% U.S. Trust $ 692 14.2% $ 647 15.3% U.S. Trust NY $ 372 9.9% $ 361 10.3% U.S. Trust NA(2) $ 283 27.0% $ 254 40.0% Schwab Bank $ 346 24.3% $ 276 60.0% Total Capital: Company $ 3,543 18.8% $ 3,813 23.7% U.S. Trust $ 719 14.8% $ 673 15.9% U.S. Trust NY $ 396 10.6% $ 384 10.9% U.S. Trust NA(2) $ 287 27.2% $ 257 40.5% Schwab Bank $ 347 24.4% $ 276 60.0% Tier 1 Leverage: Company $ 3,513 7.7% $ 3,784 9.0% U.S. Trust $ 692 7.7% $ 647 8.8% U.S. Trust NY $ 372 5.5% $ 361 5.9% U.S. Trust NA(2) $ 283 11.2% $ 254 16.9% Schwab Bank $ 346 8.8% $ 276 24.7% - -------------------------------------------------------------------------------- (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. Additionally, Schwab Bank is subject to a minimum tier 1 leverage ratio of 8% for its first three years of operations. 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) During 2003, U.S. Trust consolidated its regional subsidiary banks located outside of New York and New Jersey into U.S. Trust NA, a single nationally-chartered banking entity. Amounts and ratios for September 30, 2003 have been calculated based on this consolidation. Based on their respective regulatory capital ratios at September 30, 2004 and 2003, the Company, U.S. Trust, U.S. Trust NY, U.S. Trust NA, and Schwab Bank are considered well capitalized (the highest category) pursuant to Federal Reserve Board guidelines. There are no conditions or events that management believes have changed the Company's, U.S. Trust's, U.S. Trust NY's, U.S. Trust NA's, or Schwab Bank's well-capitalized status. Schwab is subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 (the Rule). Schwab computes net capital under the alternative method permitted by this 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. At September 30, 2004, 2% of aggregate debits was $186 million, which exceeded the minimum dollar requirement for Schwab of $1 million. At September 30, 2004, Schwab's net capital was $1.1 billion (12% of aggregate debit balances), which was $956 million in excess of its minimum required net capital and $678 million in excess of 5% of aggregate debit balances. 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. 15. Commitments and Contingent Liabilities Guarantees: The Company provides certain indemnifications (i.e., protection against damage or loss) to counterparties in connection with the disposition of certain of its assets. Such indemnifications typically relate to title to the assets transferred, ownership of intellectual property rights (e.g., patents), accuracy of financial statements, compliance with laws and regulations, failure to pay, satisfy or discharge any liability, or to defend claims, as well as errors, omissions, and misrepresentations. These indemnification agreements have various expiration dates and the Company's liability under these agreements is generally limited to certain maximum amounts. At September 30, 2004, the Company's maximum potential liability under these indemnification agreements is limited to approximately $100 million. Additionally, the Company has guaranteed certain payments in the event of a termination of certain mutual fund sub-advisor agreements, related to the adoption of AXA Rosenberg LLC's U.S. family of mutual funds, known as the Laudus Funds. The maximum aggregate guarantee is $75 million through 2011, and $50 million thereafter. The Company does not believe that any material loss related to such indemnifications is likely and therefore the liabilities recorded for these guarantees are immaterial. The Company has clients that sell (i.e., write) listed option contracts that are cleared by various clearing houses. The clearing houses establish margin requirements on these transactions. The Company satisfies the margin requirements by arranging standby letters of credit (LOCs), in favor of the clearing houses, that are guaranteed by multiple banks. At September 30, 2004, the outstanding value of these LOCs - 11 - totaled $630 million. No funds were drawn under these LOCs at September 30, 2004. The Company also provides guarantees to securities clearing houses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company's liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these transactions. Legal contingencies: 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, results of operations, and cash flows. However, it is the opinion of management, after consultation with legal counsel, that the ultimate outcome of these existing claims and proceedings will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company. 16. Financial Instruments Subject to Market Risk Interest rate swaps: As part of its consolidated asset and liability management process, the Company utilizes interest rate swap agreements (Swaps) to manage interest rate risk. U.S. Trust uses LIBOR-based Swaps to hedge the interest rate risk associated with its variable rate deposits from banking clients. The Swaps are structured for U.S. Trust to receive a variable rate of interest and pay a fixed rate of interest. Information on these Swaps is summarized in the following table: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Notional principal amount (in millions) $ 825 $ 705 Weighted-average variable interest rate 1.80% 1.17% Weighted-average fixed interest rate 4.85% 6.41% Weighted-average maturity (in years) 2.7 1.0 - -------------------------------------------------------------------------------- At September 30, 2004, Swaps with a combined notional amount of $625 million were designated as cash flow hedges under SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities with changes in their fair values primarily recorded in other comprehensive income (loss), a component of stockholders' equity. Due to a divergence between LIBOR rates and the variable rate paid on banking client deposits, the remaining Swaps with a combined notional amount of $200 million were de-designated as cash flow hedges for accounting purposes in the second quarter of 2004. Changes in fair value of these Swaps, which were immaterial for the third quarter and first nine months of 2004, are recorded in interest expense. These Swaps mature over the remainder of 2004 and will not have a material impact on the Company's financial position, results of operations, EPS, or cash flows. At September 30, 2004 and December 31, 2003, U.S. Trust recorded a derivative liability of $13 million and $33 million, respectively, for all U.S. Trust Swaps. Based on current interest rate assumptions and assuming no additional Swap agreements are entered into, U.S. Trust expects to reclassify approximately $7 million, or $4 million after tax, from other comprehensive loss to interest expense over the next twelve months. CSC uses Swaps to effectively convert the interest rate characteristics of a portion of its Medium-Term Notes from fixed to variable. These Swaps are structured for CSC to receive a fixed rate of interest and pay a variable rate of interest based on the three-month LIBOR rate. The variable interest rates reset every three months. Information on these Swaps is summarized in the following table: - -------------------------------------------------------------------------------- September 30, December 31, 2004 2003 - -------------------------------------------------------------------------------- Notional principal amount (in millions) $ 293 $ 293 Weighted-average variable interest rate 4.24% 3.62% Weighted-average fixed interest rate 7.57% 7.57% Weighted-average maturity (in years) 4.5 5.3 - -------------------------------------------------------------------------------- These Swaps have been designated as fair value hedges under SFAS No. 133, and are recorded on the Condensed Consolidated Balance Sheet. Changes in the fair value of the Swaps are completely offset by changes in fair value of the - 12 - hedged Medium-Term Notes. Therefore, there is no effect on net income. At September 30, 2004 and December 31, 2003, CSC recorded a derivative asset of $16 million and $19 million, respectively, for these Swaps. Concurrently, the carrying value of the Medium-Term Notes was increased by $16 million and $19 million, at September 30, 2004 and December 31, 2003, respectively. 17. 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 three reportable segments - Individual Investor, Institutional Investor, and U.S. Trust. In the third quarter of 2004, as a result of the Company's exit from the capital markets business, the previously-reported Capital Markets segment has been eliminated. In the first quarter of 2004, the Company changed its methodology for the computation of its segment information. The new methodology utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development). Previously-reported segment information has been revised to reflect this new methodology. Previously, except for the U.S. Trust segment, for which expenses were directly incurred, technology, corporate, and general administrative expenses were allocated to the remaining segments generally in proportion to either their respective revenues or average full-time equivalent employees. The Company periodically reallocates certain revenues and expenses among the segments to align them with 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 (a non-GAAP income measure), which excludes items such as restructuring charges, acquisition- and merger-related charges, impairment charges, discontinued operations, and extraordinary items. Intersegment revenues are not material and are therefore not disclosed. Total revenues, income from continuing operations before taxes on income, and net income are equal to the amounts as reported on the Condensed Consolidated Statement of Income. Financial information for the Company's reportable segments is presented in the following table: - -------------------------------------------------------------------------------- Three Nine Months Ended Months Ended September 30, September 30, 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Revenues: Individual Investor $ 557 $ 615 $1,844 $1,720 Institutional Investor 213 212 668 604 U.S. Trust 197 159 572 461 Unallocated 19 11 44 49 - -------------------------------------------------------------------------------- Operating revenues 986 997 3,128 2,834 Non-operating revenue(1) 14 - 14 - - -------------------------------------------------------------------------------- Total $1,000 $ 997 $3,142 $2,834 ================================================================================ Adjusted operating income before taxes: Individual Investor $ 85 $ 133 $ 340 $ 286 Institutional Investor 62 82 207 226 U.S. Trust (2) 20 18 37 37 Unallocated 3 (2) 1 (1) - -------------------------------------------------------------------------------- Adjusted operating income before taxes 170 231 585 548 Excluded items (3) (98) (35) (100) (64) - -------------------------------------------------------------------------------- Income from continuing operations before taxes on income 72 196 485 484 Taxes on income (26) (72) (173) (154) Gain (loss) from discontinued operations, net of tax (87) 3 (79) (6) - -------------------------------------------------------------------------------- Net Income (Loss) $ (41) $ 127 $ 233 $ 324 ================================================================================ (1) Primarily consists of a pre-tax gain on an investment. (2) In accordance with the Company's new cost allocation methodology, amounts include costs ($17 million and $15 million in the third quarter of 2004 and 2003, respectively, and $46 million and $45 million in the first nine months of 2004 and 2003, respectively) allocated to U.S. Trust. (3) Includes restructuring charges of $112 million and $114 million for the third quarter and first nine months of 2004, respectively. Includes restructuring charges of $35 million and $59 million for the third quarter and first nine months of 2003, respectively (see note "4 - Restructuring") and a pre-tax gain on an investment of $14 million in the third quarter and first nine months of 2004. Also includes an impairment charge of $5 million related to the Company's investment in its U.K. market-making operation for the first nine months of 2003 (see note "6 - Business Acquisitions and Divestiture"). - 13 - 18. Supplemental Cash Flow Information Certain information affecting the cash flows of the Company is presented in the following table: - -------------------------------------------------------------------------------- Nine Months Ended September 30, 2004 2003 - -------------------------------------------------------------------------------- Income taxes paid $ 139 $ 167 - -------------------------------------------------------------------------------- Interest paid: Deposits from banking clients $ 85 $ 65 Brokerage client cash balances 58 63 Long-term debt 23 33 Short-term borrowings 3 11 Other 11 13 - -------------------------------------------------------------------------------- Total interest paid $ 180 $ 185 ================================================================================ Non-cash investing and financing activities: Reclassification of banking client loans to loans held for sale (1) $1,030 - Consolidation of special purpose trust: (2) Building and land - $ 229 Note payable and other liabilities - $ 228 Common stock and options issued for purchase of businesses $ 3 $ 4 - -------------------------------------------------------------------------------- (1) In the third quarter of 2004, U.S. Trust reclassified existing loans to banking clients to loans held for sale (see note "8 - Loans Held for Sale"). (2) Upon adoption of FIN No. 46 in the first quarter of 2003, the Company consolidated a special purpose trust (see note "10 - Long-term Debt"). 19. Subsequent Events On October 4, 2004, the Company announced several changes to its commission rates, including a reduction of its base online equity commission, expanded access to $9.95 online equity commissions, and lower commissions on online and broker-assisted trades of options contracts. These pricing changes became effective November 1, 2004. On October 26, 2004, U.S. Trust securitized $1.0 billion of residential mortgage loans originated through its private banking business and retained approximately 80% of the mortgage pass-through certificates created by the securitization process. This securitization transaction will not have a material impact on the Company's results of operations or EPS. On October 29, 2004, the Company completed the sale of its capital markets business, SSCM, to UBS. At closing, the Company and Schwab entered into eight-year order routing and execution services agreements with UBS for the handling of Schwab's equity and listed options order flow. - 14 - THE CHARLES SCHWAB CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Description of Business Overview: In the third quarter of 2004, the Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) intensified their focus on serving individual investors and the advisors who work with them. The Company announced its exit from the capital markets business, which is expected to be completed during the fourth quarter (see Discontinued Operations and Subsequent Events for further discussion), and significantly reduced commission pricing for a wide array of clients. However, continuing geopolitical and energy market uncertainties, a close presidential race, and summer vacation season all affected client engagement during much of the third quarter of 2004. Client daily average revenue trades declined by 10% from the second quarter of 2004, and 12% compared to the year-ago level. The Company's commission pricing reductions and the downturn in trading activity were the primary causes of the 29% decline in the Company's trading revenues from the second quarter of 2004. Although client trading activity decreased, the Company's non-trading revenues - asset management and administration fees, net interest revenue, and other revenues - reached a record level in the third quarter of 2004, as the Company continued its focus on building stronger client relationships. Net new client assets of $13.0 billion for the third quarter of 2004 were up 23% from the year-ago level. Additionally, assets in client accounts reached $1.0 trillion at September 30, 2004, an increase of $124.2 billion, or 14%, from a year ago. The Company provides securities brokerage, banking, and related financial services for 7.4 million active client accounts(a). Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 283 domestic branch offices in 45 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 38 offices in 15 states. Other subsidiaries include Charles Schwab Investment Management, Inc., the investment advisor for Schwab's proprietary mutual funds, CyberTrader, Inc., an electronic trading technology and brokerage firm providing services to highly active, online traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail bank. The Company provides financial services to individuals and institutional clients through three segments - Individual Investor, Institutional Investor, and U.S. Trust. See note "17 - Segment Information" in the Notes to Condensed Consolidated Financial Statements for a discussion of the previously-reported Capital Markets segment. The Individual Investor segment includes the Company's retail brokerage and banking operations. The Institutional Investor segment provides custodial, trading and support services to independent investment advisors (IAs), serves company 401(k) plan sponsors and third-party administrators, and supports company stock option plans. The U.S. Trust segment provides investment, wealth management, custody, fiduciary, and private banking services to individual and institutional clients. Management of the Company focuses on several key financial and non-financial metrics (as shown in the following table) in evaluating the Company's financial position and operating performance: - -------------------------------------------------------------------------------- Three Months Nine Months Ended Ended September 30, September 30, Key Metrics 2004 2003 2004 2003 - -------------------------------------------------------------------------------- Client Activity Metrics: Net new client assets (in billions) (1) $ 13.0 $ 10.6 $ 33.5 $ 31.3 Percent change 23% 7% Client assets (in billions, at period end) $1,000.9 $876.7 Percent change 14% Daily average revenue trades (in thousands) 128.1 145.1 149.2 133.8 Percent change (12%) 12% Company Financial Metrics: Revenue growth (decline) from prior year's period - 1% 11% (5%) After-tax profit margin (4.1%) 12.7% 7.4% 11.4% Return on stockholders' equity (3%) 12% 7% 10% Net income (loss) growth (decline) from prior year's period n/m n/m (28%) 72% Revenue per average full-time equivalent employee (annualized, in thousands) $ 260 $ 254 $ 261 $ 237 Percent change 2% 10% - -------------------------------------------------------------------------------- (1) Includes an individual inflow of $2.1 billion in the third quarter and first nine months of 2004, and an individual outflow of $6.0 billion in the first nine months of 2004, related to mutual fund clearing clients. n/m Not meaningful. Management continues to believe that the key to sustaining and improving the Company's competitive position will be its ability to combine people and technology in ways that provide investors with the access, information, guidance, advice and control they expect - as well as high-quality service - all at a lower cost than traditional providers of financial services. - -------- (a) Accounts with balances or activity within the preceding eight months. - 15 - Business Strategy: The Company's primary strategy is to meet the financial services needs of individual investors and independent IAs. To sustain and advance this core franchise, the Company remains focused on improving service for these clients and building stronger relationships with them. The Company provides investors and IAs with products and services that are tailored to (a) support a full spectrum of investment styles and life stages, and (b) utilize its scale in operations, distribution, and marketing. 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 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. See also Item 1 - Business - Narrative Description of Business - Business Strategy in the Company's Form 10-K for the year ended December 31, 2003. Restructuring: In the second quarter of 2004, the Company commenced a firm-wide cost reduction effort designed to mitigate the financial impact of its recent pricing changes and to strengthen its productivity and efficiency. The goals of this effort include eliminating work that is not essential to meeting client service standards or the Company's ongoing operating needs, reengineering work processes to maximize productivity, minimizing organizational complexity through functional streamlining, and addressing business unit performance across the Company. During the second quarter of 2004, the Company reallocated certain client service functions from its Orlando regional telephone service center to other centers. In the third quarter of 2004, the Company consolidated 38 branch offices into nearby locations, closed 15 additional branch offices, and took steps to streamline its technology organization. Additionally, the Company reduced its operating facilities, primarily by exiting certain administrative office space in California. The Company recorded pre-tax restructuring charges of $112 million and $116 million in the third quarter and first nine months of 2004, respectively, reflecting severance costs for approximately 1,050 employees and facilities reduction charges related to the 2004 cost reduction effort. The Company expects that its 2004 cost reduction effort will result in an additional 400 to 500 mandatory staff reductions by the end of 2004. The Company also expects that fourth quarter restructuring charges associated with its 2004 cost reduction effort will be approximately $65 million, or $40 million after-tax. The Company currently estimates that its 2004 cost reduction efforts will result in the identification and implementation of approximately $275 million in annualized cost savings by the end of 2004, with the expectation that the full benefit of these savings will be realized in 2005. The Company estimates that its 2004 cost reduction effort will extend through the remainder of 2004 and into 2005. Estimated additional charges for, or expense savings from, cost reduction efforts to be implemented during 2005 have not yet been established. The Company's 2003, 2002, and 2001 restructuring initiatives included workforce reductions, reductions in operating facilities, the removal of certain systems hardware, software, and equipment from service, and the withdrawal from certain international operations. The Company recorded a pre-tax restructuring credit of $2 million in the first nine months of 2004 related to these restructuring initiatives, primarily due to changes in estimates of sublease income associated with previously announced efforts to sublease excess facilities. The Company recorded total pre-tax restructuring charges of $35 million and $59 million in the third quarter and first nine months of 2003, respectively. As of September 30, 2004, the remaining facilities restructuring reserve of $211 million is net of estimated future sublease income of approximately $300 million. This estimated future sublease income amount is determined based upon a number of factors, including current and expected commercial real estate lease rates in the respective properties' real estate markets, and estimated vacancy periods prior to execution of tenant subleases. At September 30, 2004, approximately 80% of the total square footage targeted for sublease under the restructuring initiatives has been subleased, up from approximately 65% at December 31, 2003. The increase in subleased square footage is primarily due to the subleasing of certain property in New Jersey to a real estate investment trust in the second quarter of 2004, partially offset by the addition of properties in the third quarter of 2004 as part of the 2004 cost reduction effort. For further information on the Company's restructuring initiatives, see note "4 - Restructuring" in the Notes to Condensed Consolidated Financial Statements. Discontinued Operations: On August 31, 2004, the Company entered into a definitive purchase agreement with UBS Securities LLC and UBS Americas Inc. (collectively referred to as UBS) in which UBS agreed to acquire all of the partnership interests of Schwab Capital Markets L.P. and all of the outstanding capital stock of SoundView Technology Group, Inc. (collectively referred to as Schwab Soundview Capital Markets, or SSCM) for $265 million in cash. In this transaction, the Company and Schwab also committed to eight-year order routing and execution services agreements with UBS for the handling of Schwab's equity and listed options order flow. SSCM comprises substantially all of the Capital Markets segment. See Subsequent Events for details on the closing of this transaction. The results of operations, net of income taxes, and cash flows of SSCM have been presented as discontinued - 16 - operations on the Condensed Consolidated Statements of Income and of Cash Flows, respectively, and the assets and liabilities of SSCM have each been combined and presented as assets and liabilities of discontinued operations on the Condensed Consolidated Balance Sheet. The Company's consolidated prior period revenues, expenses, taxes on income, assets, liabilities, and cash flows have been adjusted to reflect this presentation. The Company estimates that it will record charges in the fourth quarter of 2004 of approximately $120 million, or $75 million after tax, related to severance costs for employees and facilities reduction charges associated with the withdrawal from the capital markets business. On January 31, 2003, the Company sold its United Kingdom (U.K.) brokerage subsidiary, Charles Schwab Europe (CSE), to Barclays PLC. The results of the operations of CSE, net of income taxes, have been presented as discontinued operations on the Condensed Consolidated Statement of Income. For further information on the Company's discontinued operations, see note "5 - Discontinued Operations" in the Notes to Condensed Consolidated Financial Statements. Regulatory Developments: On September 14, 2004, the Company announced the settlement of a charge brought by the U.S. Securities and Exchange Commission (SEC) against Schwab for violations of Rule 22c-1 of the Investment Company Act of 1940. As part of the settlement, Schwab agreed to pay a fine of $350,000 and consent to the entry of a cease and desist order without admitting or denying wrongdoing. As disclosed previously, an internal review had identified instances in which Schwab employees accepted substitute mutual fund orders from clients shortly after the 4:00 p.m. E.S.T. market close when clients' orders were rejected by Schwab's electronic order systems and could not be processed as originally submitted. The SEC determined that a number of the order substitutions in question were not permitted under SEC rules. As disclosed previously, the Company has been responding to inquiries and subpoenas from federal and state authorities relating to circumstances in which a small number of parties were permitted to engage in short-term trading of certain Excelsior(R)Funds through U.S. Trust. Although the Company is unable to predict the ultimate outcome of these matters, any enforcement actions instituted as a result of the investigations may subject the Company to fines, penalties or other administrative remedies. The Company is cooperating with regulators, and has taken steps to enhance its existing policies and procedures to further discourage, detect, and prevent market timing and late trading. Subsequent Events On October 4, 2004, the Company announced several changes to its commission rates, including a reduction of its base online equity commission, expanded access to $9.95 online equity commissions, and lower commissions on online and broker-assisted trades of options contracts. These pricing changes became effective November 1, 2004. The Company estimates that these pricing changes will reduce commission revenues by approximately $85 million, depending on actual client trading patterns, over the twelve months beginning November 2004. On October 29, 2004, the Company completed the sale of its capital markets business, SSCM, to UBS. At closing, the Company and Schwab entered into eight-year order routing and execution services agreements with UBS for the handling of Schwab's equity and listed options order flow. For a discussion of certain legal developments since September 30, 2004, see Part II - Other Information, Item 1 - Legal Proceedings. 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 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. 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 continually evaluates and considers a wide array of potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, services, and other assets. Any such transaction could have a material impact on the Company's financial position, results of operations, earnings per share (EPS), or cash flows. See Discontinued Operations for a discussion of the Company's exit from the capital markets business. Given the nature of the Company's revenues, expenses, and risk profile, the Company's earnings and CSC's common stock price have 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, - 17 - 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," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management's beliefs, objectives, and expectations as of the date hereof, are necessarily estimates based on the best judgment of the Company's senior management. These statements relate to, among other things, the Company's ability to pursue its business strategy and the Company's ability to sustain and improve its competitive position (see Description of Business - Business Strategy); the impact of the firm-wide cost reduction effort on the Company's results of operations and the Company's ability to realize the estimated cost savings (see Description of Business - Restructuring); the impact of the sale of SSCM on the Company's results of operations (see Description of Business - Discontinued Operations); the outcome of pending regulatory investigations (see Description of Business - Regulatory Developments); the potential impact of future strategic transactions (see Risk Management); the impact of commission pricing reductions on the Company's results of operations (see Subsequent Events and Revenues - Commissions); sources of liquidity and capital (see Liquidity and Capital Resources - Liquidity); the Company's cash position and cash flows (see Liquidity and Capital Resources - Cash and Capital Resources); and contingent liabilities (see Part II - Other Information, Item 1 - Legal Proceedings). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents. Important factors that may cause such differences are noted in this interim report and include, but are not limited to: the Company's success in building fee-based relationships with its clients; 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 ability to recognize the expected benefits of acquisitions or dispositions; geopolitical developments affecting the securities markets, the economy, and investor sentiment; the size and number of the Company's insurance claims; a significant decline in the real estate market, including the Company's ability to sublease certain properties; and the scope of severance payments related to workforce reductions. Other more general factors that may cause such differences include, but are not limited to: 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 and changing industry practices adversely affecting the Company; adverse results of litigation or regulatory matters; the inability to obtain external financing at acceptable rates; 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 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. There have been no material changes to these critical accounting policies during the first nine months of 2004. Three Months Ended September 30, 2004 Compared To Three Months Ended September 30, 2003 All references to EPS information in this report reflect diluted EPS unless otherwise noted. FINANCIAL OVERVIEW Total revenues for the third quarter of 2004 were $1.0 billion, comparable to the third quarter of 2003. The Company's 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 19% in the third quarter of 2004, compared to the year-ago level. The increase in non-trading revenues was largely due to increases in net interest revenue, resulting primarily from higher levels of and - 18 - changes in the composition of interest-earning assets, and asset management and administration fees, resulting primarily from higher levels of client assets and higher asset-based fees from certain client relationships. The Company's trading revenues, which include commissions and principal transaction revenues, decreased 41% from the third quarter of 2003, primarily due to lower average revenue earned per revenue trade resulting from reductions in the Company's commission pricing, as well as lower client trading activity. Total expenses excluding interest during the third quarter of 2004 were $928 million, up 16% from the third quarter of 2003. This increase was due to a $77 million, or 220%, increase in restructuring charges and a $37 million, or 9%, increase in compensation and benefits expense, primarily due to the restoration of the Company's 401(k) employee contribution match, as well as higher levels of discretionary bonuses and incentives to employees. Income from continuing operations before taxes on income was $72 million for the third quarter of 2004, down 63% from the third quarter of 2003. This decrease was primarily due to the combination of factors discussed separately above. Loss from discontinued operations, net of tax, was $87 million for the third quarter of 2004, compared to a gain from discontinued operations, net of tax, of $3 million for the third quarter of 2003. The Company recognized a net loss of $41 million, or $.03 per share, for the third quarter of 2004, compared to net income of $127 million, or $.09 per share, for the third quarter of 2003. The decrease in net income was primarily due to lower income from continuing operations before taxes on income as discussed above and the loss from discontinued operations. The Company's after-tax profit margin for the third quarter of 2004 was (4.1%), compared to 12.7% for the third quarter of 2003. The annualized return on stockholders' equity for the third quarter of 2004 was (3%), compared to 12% for the third quarter of 2003. Segment Information: In evaluating the Company's financial performance, management uses adjusted operating income, a non-generally accepted accounting principles (non-GAAP) income measure which excludes items described in the following paragraph. Management believes that adjusted operating income is a useful indicator of the ongoing financial performance of the Company's segments, and a tool that can provide meaningful insight into financial performance without the effects of certain material items that are not expected to be an ongoing part of operations (e.g., extraordinary items, non-operating revenues, restructuring charges, impairment charges, acquisition- and merger-related charges, and discontinued operations). In the third quarter of 2004, net loss of $41 million included the following items which in total had the effect of decreasing after-tax income by $148 million: a $9 million after-tax gain on an investment, $70 million of after-tax restructuring charges, and an $87 million after-tax loss from discontinued operations. In the third quarter of 2003, net income of $127 million included the following items which in total had the effect of decreasing after-tax income by $17 million: $20 million of after-tax restructuring charges and a $3 million after-tax gain from discontinued operations. As detailed in note "17 - Segment Information" in the Notes to Condensed Consolidated Financial Statements, adjusted operating income before taxes was $170 million for the third quarter of 2004, down $61 million, or 26%, from the third quarter of 2003 primarily due to decreases of $48 million, or 36%, in the Individual Investor segment and $20 million, or 24%, in the Institutional Investor segment. The decrease in the Individual Investor segment was due to lower average revenue earned per revenue trade resulting from reductions in the Company's commission pricing, as well as lower client trading activity. The decrease in the Institutional Investor segment was due to growth in expenses outpacing growth in revenues primarily as a result of higher client acquisition and servicing costs. REVENUES The Company categorizes its revenues as either non-trading or trading. As shown in the following table (in millions), non-trading revenues increased, while trading revenues decreased, in the third quarter of 2004 from the third quarter of 2003. - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Composition of Revenues 2004 2003 Change - -------------------------------------------------------------------------------- Non-trading revenues: Asset management and administration fees $ 523 $ 468 12% Net interest revenue 245 181 35 Other 47 36 31 - -------------------------------------------------------------------------------- Total non-trading revenues 815 685 19 - -------------------------------------------------------------------------------- Trading revenues: Commissions 163 290 (44) Principal transactions 22 22 - - -------------------------------------------------------------------------------- Total trading revenues 185 312 (41) - -------------------------------------------------------------------------------- Total $1,000 $ 997 - ================================================================================ Percentage of total revenues: Non-trading revenues 82% 69% Trading revenues 18% 31% - -------------------------------------------------------------------------------- - 19 - While the Individual Investor and Institutional Investor segments generate both non-trading and trading revenues, the U.S. Trust segment generates primarily non-trading revenues. Revenues by segment are as shown in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Revenues by Segment 2004 2003 Change - -------------------------------------------------------------------------------- Individual Investor $ 557 $ 615 (9%) Institutional Investor 213 212 - U.S. Trust 197 159 24 Unallocated 19 11 73 - -------------------------------------------------------------------------------- Operating revenues 986 997 (1) Non-operating revenue (1) 14 - n/m - -------------------------------------------------------------------------------- Total revenues $1,000 $ 997 - ================================================================================ (1) Primarily consists of a pre-tax gain on an investment. n/m Not meaningful. The decrease in revenues in the Individual Investor segment from the third quarter of 2003 was primarily due to lower average revenue earned per revenue trade and lower client trading activity. The increase in the U.S. Trust segment was primarily due to the acquisition of PAM and higher levels of client assets. See note "17 - 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, as shown in the table below (in millions), include mutual fund service fees, as well as fees for other asset-based financial services provided to individual and institutional clients. - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Asset Management and Administration Fees 2004 2003 Change - -------------------------------------------------------------------------------- Mutual fund service fees: Proprietary funds (SchwabFunds(R), Excelsior(R), and other) $ 219 $ 223 (2%) Mutual Fund OneSource(R) 93 76 22 Other 12 13 (8) Asset management and related services 199 156 28 - -------------------------------------------------------------------------------- Total $ 523 $ 468 12% ================================================================================ The increase in asset management and administration fees from the third quarter of 2003 was primarily due to higher levels of client assets and higher asset-based fees from certain client relationships, including increases in average assets in and service fees earned on Schwab's Mutual Fund OneSource service. Commissions The Company earns commission revenues, as shown in the following table (in millions), by executing client trades. - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Commissions 2004 2003 Change - -------------------------------------------------------------------------------- Equity and other securities $ 121 $ 237 (49%) Mutual funds 22 29 (24) Options 20 24 (17) - -------------------------------------------------------------------------------- Total $ 163 $ 290 (44%) ================================================================================ The decrease in commission revenues from the third quarter of 2003 was primarily due to lower average revenue earned per revenue trade as a result of significant reductions in commission pricing for a wide range of clients in the second quarter of 2004, as well as lower daily average revenue trades. As shown in the following table, average revenue earned per revenue trade decreased 33% and daily average revenue trades executed by the Company decreased 12% in the third quarter of 2004. - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Trading Activity 2004 2003 Change - -------------------------------------------------------------------------------- Daily average revenue trades (in thousands) (1) 128.1 145.1 (12%) Accounts that traded (in thousands) 1,144 1,267 (10) Average revenue trades per account that traded 7.2 7.3 (1) Trading frequency proxy (2) 2.8 3.8 (26) Number of trading days 64.0 63.5 1 Average revenue earned per revenue trade (3) $22.96 $34.11 (33) Online trades as a percentage of total trades 88% 87% - -------------------------------------------------------------------------------- (1) Includes all client trades (both individuals and institutions) that generate either commission revenue or revenue from principal markups (i.e., fixed income). (2) Represents annualized revenue trades per $100,000 in total client assets. (3) All periods have been adjusted to reflect the sale of the Company's capital markets business. The Company continually monitors its pricing in relation to competitors and periodically adjusts prices to enhance its competitive position, as well as to attract and retain clients. The Company continues to actively evaluate commission rates and fee structures for certain clients. See Subsequent Events. - 20 - Net Interest Revenue Net interest revenue, as shown in the following table (in millions), is the difference between interest earned on certain assets (mainly margin loans to clients, investments of segregated client cash balances, loans to banking clients, and securities available for sale) and interest paid on supporting liabilities (mainly deposits from banking clients and brokerage client cash balances). Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and hedging strategies. - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent 2004 2003 Change - -------------------------------------------------------------------------------- Interest Revenue: Margin loans to clients $ 114 $ 86 33% Investments, client-related 77 67 15 Loans to banking clients 74 57 30 Securities available for sale 36 17 112 Other 16 8 100 - -------------------------------------------------------------------------------- Total 317 235 35 - -------------------------------------------------------------------------------- Interest Expense: Deposits from banking clients 24 23 4 Brokerage client cash balances 29 14 107 Long-term debt 8 8 - Short-term borrowings 6 4 50 Other 5 5 - - -------------------------------------------------------------------------------- Total 72 54 33 - -------------------------------------------------------------------------------- Net interest revenue $ 245 $ 181 35% ================================================================================ Client-related daily average balances, interest rates, and average net interest spread for the third quarters of 2004 and 2003 are summarized in the following table (in millions): - -------------------------------------------------------------------------------- Three Months Ended September 30, 2004 2003 - -------------------------------------------------------------------------------- Interest-Earning Assets (client-related and other): Investments (client-related): Average balance outstanding $ 20,426 $ 22,096 Average interest rate 1.51% 1.20% Margin loans to clients: Average balance outstanding $ 8,953 $ 7,158 Average interest rate 5.05% 4.79% Loans to banking clients: Average balance outstanding $ 6,964 $ 5,188 Average interest rate 4.24% 4.38% Securities available for sale: Average balance outstanding $ 4,086 $ 1,776 Average interest rate 3.52% 3.76% Average yield on interest-earning assets 3.03% 2.51% Funding Sources (client-related and other): Interest-bearing brokerage client cash balances: Average balance outstanding $ 23,909 $ 23,269 Average interest rate .48% .25% Interest-bearing banking deposits: Average balance outstanding $ 9,306 $ 5,427 Average interest rate 1.02% 1.72% Other interest-bearing sources: Average balance outstanding $ 2,816 $ 2,899 Average interest rate 1.37% .98% Average noninterest-bearing portion $ 4,398 $ 4,623 Average interest rate on funding sources .62% .50% Summary: Average yield on interest-earning assets 3.03% 2.51% Average interest rate on funding sources .62% .50% - -------------------------------------------------------------------------------- Average net interest spread 2.41% 2.01% ================================================================================ The increase in net interest revenue from the third quarter of 2003 was primarily due to higher levels of and changes in the composition of interest-earning assets, including increases in margin loan balances, loans to banking clients and securities available for sale, partially offset by higher interest rates on brokerage client cash balances due to recent changes in the interest rate environment. - 21 - Principal Transactions Principal transaction revenues were $22 million in the third quarters of 2004 and 2003, and are primarily comprised of revenues from client fixed income securities trading activity. Other Revenues Other revenues for the third quarter of 2004 were $47 million, up $11 million, or 31%, from the third quarter of 2003, primarily due to higher net gains on investments. EXPENSES EXCLUDING INTEREST As shown in the table below (in millions), total expenses excluding interest increased in the third quarter of 2004 primarily due to higher levels of restructuring charges, compensation and benefits expense, professional services, and advertising and market development expense, partially offset by lower levels of depreciation and amortization expense. - -------------------------------------------------------------------------------- Three Months Ended Composition of Expenses, September 30, Percent Excluding Interest 2004 2003 Change - -------------------------------------------------------------------------------- Compensation and benefits $ 455 $ 418 9% Occupancy and equipment 97 106 (8) Depreciation and amortization 58 69 (16) Communications 53 59 (10) Professional services 62 44 41 Advertising and market development 43 31 39 Commissions, clearance and floor brokerage 9 10 (10) Restructuring charges 112 35 220 Other 39 29 34 - -------------------------------------------------------------------------------- Total $ 928 $ 801 16% ================================================================================ Expenses as a percentage of total revenues: Total expenses, excluding interest 93% 80% Compensation and benefits 46% 42% Advertising and market development 4% 3% - -------------------------------------------------------------------------------- Compensation and Benefits The increase in compensation and benefits expense from the third quarter of 2003 was primarily due to higher levels of employee benefits, discretionary bonuses to employees, and incentive compensation. The following table shows a comparison of certain compensation and benefits components and employee data (in millions, except as noted): - -------------------------------------------------------------------------------- Three Months Ended September 30, Percent Compensation and Benefits 2004 2003 Change - -------------------------------------------------------------------------------- Salaries and wages $ 294 $ 284 4% Incentive and variable compensation 89 78 14 Employee benefits and other 72 56 29 - -------------------------------------------------------------------------------- Total $ 455 $ 418 9% ================================================================================ Full-time equivalent employees (at end of quarter, in thousands) (1) 14.8 15.7 (6%) - -------------------------------------------------------------------------------- (1) Includes full-time, part-time and temporary employees, and persons employed on a contract basis. All periods have been adjusted to reflect the sale of the Company's capital markets business. Employee benefits and other expenses increased from the third quarter of 2003 primarily due to the restoration of the Company's 401(k) employee contribution match, which was suspended in 2003 (except for a discretionary award to certain non-officer employees made in the fourth quarter of 2003). Expenses Excluding Compensation and Benefits The increase in professional services expense from the third quarter of 2003 was primarily due to higher levels of consulting fees in several areas, including new and expanded products and services, and information technology projects and the Company's firm-wide cost reduction effort, as well as mutual fund sub-advisor fees. The increase in advertising and market development expense from the third quarter of 2003 was primarily due to the Company's increased television and other media spending. The decrease in depreciation and amortization expense from the third quarter of 2003 was primarily due to an increase in fully-amortized assets. Taxes on Income The Company's effective income tax rate on income from continuing operations was 36.1% for the third quarter of 2004, compared to a tax rate of 36.7% for the third quarter of 2003. - 22 - Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30, 2003 FINANCIAL OVERVIEW Total revenues for the first nine months of 2004 were $3.1 billion, up $308 million, or 11%, from the first nine months of 2003. The Company's non-trading revenues increased 18% in the first nine months of 2004 compared to the year-ago level primarily due to the factors described in the comparison between the three-month periods. The Company's trading revenues decreased 6% from the first nine months of 2003, primarily due to lower average revenue earned per revenue trade, partially offset by higher client trading activity. Total expenses excluding interest during the first nine months of 2004 were $2.7 billion, up 13% from the first nine months of 2003. This increase was primarily due to the factors described in the comparison between the three-month periods. Income from continuing operations before taxes on income was $485 million for the first nine months of 2004, comparable to the first nine months of 2003. Loss from discontinued operations, net of tax, was $79 million for the first nine months of 2004, compared to $6 million for the first nine months of 2003. Net income for the first nine months of 2004 was $233 million, or $.17 per share, down 28% from the first nine months of 2003. The decrease in net income was primarily due to a higher loss from discontinued operations. The Company's after-tax profit margin for the first nine months of 2004 was 7.4%, down from 11.4% for the first nine months of 2003. The annualized return on stockholders' equity for the first nine months of 2004 was 7%, down from 10% for the first nine months of 2003. Segment Information: In the first nine months of 2004, net income of $233 million included the following items which in total had the effect of decreasing after-tax income by $141 million: a $9 million after-tax gain on an investment, $71 million of after-tax restructuring charges, and a $79 million after-tax loss from discontinued operations. In the first nine months of 2003, net income of $324 million included the following items which in total had the effect of decreasing after-tax income by $20 million: a $6 million after-tax loss from discontinued operations, $36 million of after-tax restructuring charges, a $5 million investment write-down related to the Company's U.K. market-making operation, a $16 million tax benefit associated with the Company's sale of its U.K. market-making operation, and an $11 million tax benefit associated with the Company's merger with U.S. Trust. As detailed in note "17 - Segment Information" in the Notes to Condensed Consolidated Financial Statements, adjusted operating income before taxes was $585 million for the first nine months of 2004, up $37 million, or 7%, from the first nine months of 2003 primarily due to an increase of $54 million, or 19%, in the Individual Investor segment, partially offset by a decrease of $19 million, or 8%, in the Institutional Investor segment. The increase in the Individual Investor segment was primarily due to higher revenues resulting from increased client trading activity and levels of client assets. The decrease in the Institutional Investor segment was primarily due to the factors described in the comparison between the three-month periods. REVENUES As shown in the following table (in millions), non-trading and total revenues increased, while trading revenues decreased, in the first nine months of 2004 from the first nine months of 2003. - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Composition of Revenues 2004 2003 Change - -------------------------------------------------------------------------------- Non-trading revenues: Asset management and administration fees $1,547 $1,345 15% Net interest revenue 678 535 27 Other 110 91 21 - -------------------------------------------------------------------------------- Total non-trading revenues 2,335 1,971 18 - -------------------------------------------------------------------------------- Trading revenues: Commissions 738 793 (7) Principal transactions 69 70 (1) - -------------------------------------------------------------------------------- Total trading revenues 807 863 (6) - -------------------------------------------------------------------------------- Total $3,142 $2,834 11% ================================================================================ Percentage of total revenues: Non-trading revenues 74% 70% Trading revenues 26% 30% - -------------------------------------------------------------------------------- Revenues by segment are as shown in the following table (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Revenues by Segment 2004 2003 Change - -------------------------------------------------------------------------------- Individual Investor $1,844 $1,720 7% Institutional Investor 668 604 11 U.S. Trust 572 461 24 Unallocated 44 49 (10) - -------------------------------------------------------------------------------- Operating revenues 3,128 2,834 10 Non-operating revenue (1) 14 - n/m - -------------------------------------------------------------------------------- Total revenues $3,142 $2,834 11% ================================================================================ (1) Primarily consists of a pre-tax gain on an investment. n/m Not meaningful. - 23 - The increases in revenues in the Individual and Institutional Investor segments from the first nine months of 2003 were primarily due to higher trading volume and levels of client assets. The increase in the U.S. Trust segment was primarily due to the acquisition of PAM and higher levels of client assets. See note "17 - 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 for the first nine months of 2004 and 2003 are as shown in the table below (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Asset Management and Administration Fees 2004 2003 Change - -------------------------------------------------------------------------------- Mutual fund service fees: Proprietary funds (SchwabFunds(R), Excelsior(R), and other) $ 648 $ 663 (2%) Mutual Fund OneSource(R) 278 200 39 Other 41 36 14 Asset management and related services 580 446 30 - -------------------------------------------------------------------------------- Total $1,547 $1,345 15% ================================================================================ The increase in asset management and administration fees from the first nine months of 2003 was primarily due to the factors described in the comparison between the three-month periods. Commissions Commission revenues for the first nine months of 2004 and 2003 are as shown in the following table (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Commissions 2004 2003 Change - -------------------------------------------------------------------------------- Equity and other securities $ 580 $ 642 (10%) Mutual funds 86 82 5 Options 72 69 4 - -------------------------------------------------------------------------------- Total $ 738 $ 793 (7%) ================================================================================ The decrease in commission revenues from the first nine months of 2003 was primarily due to lower average revenue earned per revenue trade as a result of reductions in commission pricing in June 2004, partially offset by higher daily average revenue trades. As shown in the following table, average revenue earned per revenue trade decreased 16%, while daily average revenue trades executed by the Company increased 12% in the first nine months of 2004. - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Trading Activity 2004 2003 Change - -------------------------------------------------------------------------------- Daily average revenue trades (in thousands) (1) 149.2 133.8 12% Accounts that traded (in thousands) 2,355 2,249 5 Average revenue trades per account that traded 11.9 11.2 6 Trading frequency proxy (2) 3.4 3.7 (8) Number of trading days (3) 188.0 187.5 - Average revenue earned per revenue trade (4) $29.20 $34.65 (16) Online trades as a percentage of total trades 89% 86% - -------------------------------------------------------------------------------- (1) Includes all client trades (both individuals and institutions) that generate either commission revenue or revenue from principal markups (i.e., fixed income). (2) Represents annualized revenue trades per $100,000 in total client assets. (3) Effective in the third quarter of 2003, the Company considers reduced exchange trading sessions as half days. (4) All periods have been adjusted to reflect the sale of the Company's capital markets business. Net Interest Revenue Net interest revenue for the first nine months of 2004 and 2003 are as shown in the following table (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent 2004 2003 Change - -------------------------------------------------------------------------------- Interest Revenue: Margin loans to clients $ 325 $ 252 29% Investments, client-related 201 218 (8) Loans to banking clients 201 169 19 Securities available for sale 99 52 90 Other 29 26 12 - -------------------------------------------------------------------------------- Total 855 717 19 - -------------------------------------------------------------------------------- Interest Expense: Deposits from banking clients 74 69 7 Brokerage client cash balances 59 62 (5) Long-term debt 24 27 (11) Short-term borrowings 11 10 10 Other 9 14 (36) - -------------------------------------------------------------------------------- Total 177 182 (3) - -------------------------------------------------------------------------------- Net interest revenue $ 678 $ 535 27% ================================================================================ - 24 - Client-related daily average balances, interest rates, and average net interest spread for the first nine months of 2004 and 2003 are summarized in the following table (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, 2004 2003 - -------------------------------------------------------------------------------- Interest-Earning Assets (client-related and other): Investments (client-related): Average balance outstanding $ 20,642 $ 21,744 Average interest rate 1.30% 1.34% Margin loans to clients: Average balance outstanding $ 8,991 $ 6,715 Average interest rate 4.81% 5.02% Loans to banking clients: Average balance outstanding $ 6,369 $ 4,829 Average interest rate 4.20% 4.70% Securities available for sale: Average balance outstanding $ 3,848 $ 1,663 Average interest rate 3.43% 4.17% Average yield on interest-earning assets 2.78% 2.65% Funding Sources (client-related and other): Interest-bearing brokerage client cash balances: Average balance outstanding $ 23,938 $ 23,105 Average interest rate .33% .36% Interest-bearing banking deposits: Average balance outstanding $ 8,795 $ 4,879 Average interest rate 1.12% 1.90% Other interest-bearing sources: Average balance outstanding $ 2,844 $ 2,579 Average interest rate 1.05% 1.12% Average noninterest-bearing portion $ 4,273 $ 4,388 Average interest rate on funding sources .52% .58% Summary: Average yield on interest-earning assets 2.78% 2.65% Average interest rate on funding sources .52% .58% - -------------------------------------------------------------------------------- Average net interest spread 2.26% 2.07% ================================================================================ The increase in net interest revenue from the first nine months of 2003 was primarily due to higher levels of and changes in the composition of interest-earning assets. Principal Transactions Principal transaction revenues for the first nine months of 2004 were $69 million, down $1 million, or 1%, from the first nine months of 2003. Other Revenues Other revenues for the first nine months of 2004 were $110 million, up $19 million, or 21%, from the first nine months of 2003, primarily due to the factor described in the comparison between the three-month periods, as well as higher account service fees. EXPENSES EXCLUDING INTEREST As shown in the table below (in millions), total expenses excluding interest increased in the first nine months of 2004 primarily due to the factors described in the comparison between the three-month periods. - -------------------------------------------------------------------------------- Nine Months Ended Composition of Expenses, September 30, Percent Excluding Interest 2004 2003 Change - -------------------------------------------------------------------------------- Compensation and benefits $1,430 $1,230 16% Occupancy and equipment 299 322 (7) Depreciation and amortization 167 212 (21) Communications 170 169 1 Professional services 181 123 47 Advertising and market development 151 100 51 Commissions, clearance and floor brokerage 29 29 - Restructuring charges 114 59 93 Impairment charges - 5 (100) Other 116 101 15 - -------------------------------------------------------------------------------- Total $2,657 $2,350 13% ================================================================================ Expenses as a percentage of total revenues: Total expenses, excluding interest 85% 83% Compensation and benefits 46% 43% Advertising and market development 5% 4% - -------------------------------------------------------------------------------- Compensation and Benefits The increase in compensation and benefits expense, as well as the increase in employee benefits and other expenses, from the first nine months of 2003 was primarily due to the factors described in the comparison between the three-month periods. The following table shows a comparison of certain compensation and benefits components and employee data (in millions): - -------------------------------------------------------------------------------- Nine Months Ended September 30, Percent Compensation and Benefits 2004 2003 Change - -------------------------------------------------------------------------------- Salaries and wages $ 923 $ 864 7% Incentive and variable compensation 271 185 46 Employee benefits and other 236 181 30 - -------------------------------------------------------------------------------- Total $1,430 $1,230 16% ================================================================================ Expenses Excluding Compensation and Benefits The increases in professional services and advertising and market development expense, as well as the decrease in depreciation and amortization expense, from the first nine months of 2003 were primarily due to the factors described in the comparison between the three-month periods. - 25 - Taxes on Income The Company's effective income tax rate on income from continuing operations was 35.7% for the first nine months of 2004, compared to a tax rate of 31.8% for the first nine months of 2003. The increase was primarily due to tax benefits in 2003 related to the Company's merger with U.S. Trust and the Company's sale of its U.K. market-making operation. 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 to meet its operational needs and regulatory requirements. See note "14 - 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 and CSC's depository institution subsidiaries 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, providing adequate liquidity to meet CSC's depository institution subsidiaries' capital guidelines, and maintaining Schwab's net capital. Based on their respective regulatory capital ratios at September 30, 2004, the Company and its depository institution subsidiaries are considered well capitalized. CSC has liquidity needs that arise from its Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from the funding of cash dividends, acquisitions, and other investments. The Medium-Term Notes, of which $408 million was issued and outstanding at September 30, 2004, have maturities ranging from 2004 to 2010 and fixed interest rates ranging from 6.21% to 8.05% with interest payable semiannually (see Item 3 - Quantitative and Qualitative Disclosures About Market Risk - Financial Instruments Held For Purposes Other Than Trading - Interest Rate Swaps). The Medium-Term Notes are rated A2 by Moody's Investors Service (Moody's), A- by Standard & Poor's Ratings Group (S&P), and A by Fitch, Inc. (Fitch). CSC has a prospectus supplement on file with the Securities and Exchange Commission (SEC) enabling CSC to issue up to $750 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At September 30, 2004, all of these notes remained unissued. On May 5, 2004, the SEC declared effective CSC's Registration Statement under the Securities Act of 1933 on Form S-3 relating to a universal shelf registration for the issuance of up to $1.0 billion aggregate amount of various securities, including common stock, preferred stock, debt securities, and warrants. The Company currently intends to use any proceeds from the issuance of these securities for general corporate purposes, including, but not limited to, working capital and possible acquisitions. At September 30, 2004, all of these securities remained unissued. CSC has authorization from its Board of Directors to issue commercial paper up to the amount of CSC's committed, unsecured credit facility (see below), not to exceed $1.5 billion. At September 30, 2004, no commercial paper has been issued. CSC's ratings for these short-term borrowings are P-1 by Moody's, A-2 by S&P, and F1 by Fitch. CSC maintains an $800 million committed, unsecured credit facility with a group of twenty banks which is scheduled to expire in June 2005. This facility replaced a similar facility that expired in June 2004. These facilities were unused during the first nine months of 2004. Any issuances under CSC's commercial paper program (see above) 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 stockholders' equity, Schwab to maintain minimum net capital ratios, as defined, and CSC's depository institution subsidiaries to be well capitalized, 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 $785 million of the $835 million uncommitted, unsecured bank credit lines, provided by nine 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 nine months of 2004. Schwab Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $25.8 billion and - 26 - $25.6 billion at September 30, 2004 and December 31, 2003, 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. Upon adoption of Financial Accounting Standards Board Interpretation (FIN) No. 46 - Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 - Consolidated Financial Statements, in the first quarter of 2003, the Company consolidated a special purpose trust (Trust) and recorded a note payable of $235 million. This Trust was formed in 2000 to finance the acquisition and renovation of an office building and land. In June 2004, the Company exercised its option to purchase this property from the Trust and repaid $99 million of the note payable. Simultaneously, the Company completed a transaction on this property with American Financial Realty Trust, a publicly-traded real estate investment trust, resulting in proceeds of $136 million, which was used to repay the remainder of the note payable, and a 20-year lease. This transaction was accounted for as a financing. The lease financing liability of $136 million will be reduced by a portion of the lease payments over the 20-year term. To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of nine banks totaling $835 million at September 30, 2004 (as noted previously, $785 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 9 days during the first nine months of 2004, with the daily amounts borrowed averaging $62 million. There were no borrowings outstanding under these lines at September 30, 2004. To satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC), Schwab has unsecured letter of credit agreements with nine banks in favor of the OCC aggregating $630 million at September 30, 2004. Schwab pays a fee to maintain these letters of credit. No funds were drawn under these letters of credit at September 30, 2004. 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 September 30, 2004, Schwab's net capital was $1.1 billion (12% of aggregate debit balances), which was $956 million in excess of its minimum required net capital and $678 million in excess of 5% of aggregate debit balances. Schwab has historicallytargeted 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 requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility which is scheduled to expire in September 2005. The amount outstanding under this facility at September 30, 2004 was $220 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab. U.S. Trust U.S. Trust's liquidity needs are generally met through deposits from banking clients, equity capital, and borrowings. Certain Schwab brokerage clients can sweep the excess cash held in their accounts into a money market deposit account at U.S. Trust. At September 30, 2004, these balances totaled $502 million. In addition to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements, USTC's depository institution subsidiaries have established their own external funding sources. At September 30, 2004, U.S. Trust had $52 million in Trust Preferred Capital Securities outstanding with a fixed interest rate of 8.41%. Certain of USTC's depository institution subsidiaries have established credit facilities with the Federal Home Loan Bank System (FHLB) totaling $911 million. At September 30, 2004, $725 million was outstanding under these facilities. Additionally, at September 30, 2004, U.S. Trust had $114 million of federal funds purchased. U.S. Trust also engages in intercompany repurchase agreements with Schwab Bank and Schwab. At September 30, 2004, U.S. Trust had $400 million and $200 million in repurchase agreements outstanding with Schwab Bank and Schwab, respectively. CSC provides U.S. Trust with a $300 million short-term credit facility maturing in December 2006. Borrowings under this facility do not qualify as regulatory capital for U.S. Trust. The amount outstanding under this facility was $40 million at September 30, 2004. U.S. Trust uses interest rate swap agreements (Swaps) with CSC to hedge the interest rate risk associated with its variable rate deposits from banking clients. At September 30, 2004, these Swaps have a notional value of $650 million and a fair value of $6 million. 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, USTC's depository institution subsidiaries are subject to limitations on the amount of dividends they can pay to USTC. - 27 - Schwab Bank Schwab Bank's current liquidity needs are generally met through deposits from banking clients and equity capital. Certain Schwab brokerage clients can sweep the excess cash held in their accounts into a money market deposit account at Schwab Bank. At September 30, 2004, these balances totaled $3.7 billion. Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements. Additionally, CSC provides Schwab Bank with a $100 million short-term credit facility which matures in December 2005. Borrowings under this facility do not qualify as regulatory capital for Schwab Bank. No funds were drawn under this facility at September 30, 2004. Schwab Bank is subject to the same risk-based and leverage capital guidelines as U.S. Trust (see discussion above), except that Schwab Bank is subject to a minimum tier 1 leverage ratio of 8% for its first three years of operations. In addition, Schwab Bank is subject to limitations on the amount of dividends it can pay to CSC. 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 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. There have been no material changes to these liquidity risk factors in the first nine months of 2004. Cash and Capital Resources 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, acquisition activity, banking client deposit and loan activity, financing activity in short-term borrowings and long-term debt, payment of dividends, and repurchases of CSC's common stock. In the first nine months of 2004, cash and cash equivalents decreased $689 million, or 25%, to $2.1 billion primarily due to increases in loans to banking clients andsecurities available for sale, movements of brokerage client-related funds to meet segregation requirements, and net repayments of long-term debt. These decreases were substantially offset by an increase in deposits from banking clients, primarily related to sweep money market deposit accounts. Certain Schwab brokerage clients can sweep the excess cash held in their brokerage accounts into these money market deposit accounts at Schwab Bank or U.S. Trust. At September 30, 2004, these sweep deposit balances totaled $4.2 billion, up $2.5 billion from December 31, 2003. This sweep deposit activity is reflected on the Condensed Consolidated Statement of Cash Flows as a cash outflow from payables to brokerage clients (classified as an operating activity) and a cash inflow for deposits from banking clients (classified as a financing activity). Management does not believe that the decline in cash and cash equivalents in the first nine months of 2004 is an indication of a trend. The Company's capital expenditures were $151 million in the first nine months of 2004 compared to $97 million in the first nine months of 2003, or 5% and 3% of revenues for each period, respectively. Capital expenditures in the first nine months of 2004 were primarily 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 $63 million in the first nine months of 2004 and $44 million in the first nine months of 2003. The Company repaid $294 million of long-term debt and increased its long-term debt by $136 million during the first nine months of 2004 (see discussion at Liquidity - Schwab). The Company reduced its short-term borrowings by $156 million during the first nine months of 2004. During the first nine months of 2004, 6 million of the Company's stock options, with a weighted-average exercise price of $4.85, were exercised with cash proceeds received by the Company of $30 million and a related tax benefit of $12 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. During the first nine months of 2004, CSC repurchased 16 million shares of its common stock for $149 million. During the first nine months of 2003, CSC repurchased 4 million shares of its common stock for $32 million. As of September 30, 2004, CSC has authority to repurchase up to $169 million of its common stock. During the first nine months of 2004 and 2003, the Company paid common stock cash dividends of $74 million and $49 million, respectively. - 28 - 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 September 30, 2004 was $5.2 billion, down $67 million, or 1%, from December 31, 2003 due to lower long-term debt, substantially offset by higher stockholders' equity. At September 30, 2004, the Company had long-term debt of $611 million, or 12% of total financial capital, that bears interest at a weighted-average rate of 7.06%. At September 30, 2004, the Company's stockholders' equity was $4.6 billion, or 88% of total financial capital. Item 3. Quantitative and Qualitative Disclosures About Market Risk Financial Instruments Held For Trading Purposes The Company holds fixed income securities, which include municipal and government securities, and corporate bonds, in inventory to meet clients' trading needs. The fair value of such inventory was $62 million and $74 million at September 30, 2004 and December 31, 2003, respectively. These securities, and the associated interest rate risk, are not material to the Company's financial position, results of operations, or cash flows. Financial Instruments Held For Purposes Other Than Trading Debt Issuances At September 30, 2004, CSC had $408 million aggregate principal amount of Medium-Term Notes, with fixed interest rates ranging from 6.21% to 8.05%. At December 31, 2003, CSC had $466 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 September 30, 2004 and December 31, 2003, U.S. Trust had $52 million Trust Preferred Capital Securities outstanding, with a fixed interest rate of 8.41%. 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 September 30, 2004 and December 31, 2003, 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 Swaps to manage interest rate risk. For further discussion on these Swaps, see note "16 - Financial Instruments Subject to Market Risk" in the Notes to Condensed Consolidated Financial Statements. Loans Held for Sale Schwab Bank's loans held for sale portfolio consists of fixed- and adjustable-rate mortgages, which are subject to a loss in value when market interest rates rise. Schwab Bank uses forward sale commitments to manage this risk. These forward sale commitments have been designated as cash flow hedging instruments of the loans held for sale. Accordingly, the fair values of the forward sale commitments are recorded on the Condensed Consolidated Balance Sheet, with gains or losses recorded in other comprehensive income (loss). At September 30, 2004 and December 31, 2003, the derivative asset recorded by Schwab Bank for these forward sale commitments was immaterial. 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 balance growth or decline for client loans, deposits, and brokerage client cash, changes in the level and term structure of interest rates, the repricing of financial instruments, prepayment and reinvestment assumptions, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, 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 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 interest rates fall (i.e., interest-earning assets are repricing more quickly than interest-bearing liabilities). 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 results of a gradual 100 basis point increase or - 29 - decrease in interest rates relative to the Company's current base rate forecast on simulated net interest revenue over the next twelve months at September 30, 2004 and December 31, 2003. - -------------------------------------------------------------------------------- Impact on Net Interest Revenue September 30, December 31, Percentage Increase (Decrease) 2004 2003 - -------------------------------------------------------------------------------- Increase of 100 basis points 2.8% 1.7% Decrease of 100 basis points (3.1%) (6.4%) - -------------------------------------------------------------------------------- The simulations show reduced exposure to falling interest rates at September 30, 2004 compared to December 31, 2003. This reduced sensitivity results from higher interest rates and an expectation of interest rates continuing to increase, both of which lessen the impact of spread compression between interest-earning assets and brokerage client cash balances and banking deposits. Item 4. Controls and Procedures The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2004. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded, as of September 30, 2004, that the Company's disclosure controls and procedures were effective in recording, processing, summarizing, and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the Securities and Exchange Commission's rules and forms. Such evaluation did not identify any change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings Described below are certain new legal proceedings and certain developments with respect to pending legal proceedings during the quarter ended September 30, 2004, and a subsequent event relating to Soundview litigation claims. As previously disclosed, Soundview and one or more of its subsidiaries are among the numerous financial institutions named as defendants in multiple purported securities class actions filed in the United District Court for the Southern District of New York (the IPO Allocation Litigation). The parties, with the assent of the Court, have selected 17 focus cases as the subject of case-specific discovery, and, in some instances, class-certification motions. Wit Capital, a Soundview predecessor, is a defendant in one of the focus cases. Additionally, Soundview and/or related entities had underwriting commitments in approximately 11 of the remaining focus cases; Soundview entities are not named as defendants in these cases, but may have indemnification obligations to the lead underwriters depending on the outcome of these actions. On October 13, 2004, a federal judge in the Southern District of New York issued a ruling certifying the existence of a class in the focus cases. The IPO Allocation Litigation was brought on behalf of persons who either directly or in the aftermarket purchased IPO securities during the time period between March 1997 and December 2000. The plaintiffs allege that Soundview and the other underwriters named as defendants required persons receiving allocations of IPO shares to pay excessive and undisclosed commissions on unrelated trades and to purchase shares in the aftermarket at specific escalating prices in violation of the federal securities laws. Soundview has been named in 31 of the actions - each involving a different company's IPO - that have been consolidated with 280 other actions in which Soundview is not named as a defendant. Soundview intends to vigorously defend against the above mentioned actions. As part of the sale of Soundview to UBS, the Company has agreed to indemnify UBS for any expenses associated with these actions. The Company has been responding to certain inquiries and subpoenas from federal and state authorities relating to mutual fund trading, distribution, and servicing at or through Company affiliates, and has conducted its own review of such processes. For further information, see Regulatory Developments in Part I - Financial Information, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Description of Business. The nature of the Company's business subjects it to claims, lawsuits, regulatory examinations, and other proceedings in the ordinary course of business. The ultimate - 30 - outcome of the matters described above and the various other lawsuits, arbitration proceedings, and claims pending against the Company cannot be determined at this time, and the results of these 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, results of operations, and cash flows. However, it is the opinion of management, after consultation with legal counsel, that the ultimate outcome of these existing claims and proceedings will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Issuer Purchases of Equity Securities The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the third quarter of 2004. - -------------------------------------------------------------------------------- (In millions, except Total Number Approximate per share amounts) of Shares Dollar Value of Purchased as Shares that Total Number Average Part of Publicly May Yet be of Shares Price Paid Announced Purchased under Month Purchased (1) per Share Program (1) the Program - -------------------------------------------------------------------------------- July 3 $ 8.75 3 $ 292 August 13 9.14 13 169 September - - - 169 - -------------------------------------------------------------------------------- Total 16 $ 9.07 16 $ 169 ================================================================================ (1) All shares were repurchased under authorizations by CSC's Board of Directors covering up to $250 million and $500 million of common stock publicly announced by the Company on March 17, 2003 and September 20, 2001, respectively. Unless modified or revoked by the Board, the authorizations do not expire. The Company may receive shares to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options (granted under employee stock incentive plans), which are commonly referred to as stock swap exercises. Such exercises represented less than 500,000 per month for each of the months presented in the above table. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Effective July 20, 2004, the Company's Board of Directors appointed Charles R. Schwab as Chief Executive Officer, replacing David S. Pottruck. Mr. Schwab will continue to serve as Chairman of the Board of Directors. The following members of the Company's Executive Committee resigned from the Company during the third quarter of 2004: - -------------------------------------------------------------------------------- Dawn G. Lepore(1) Vice Chairman - Active Trader, Technology, Operations, Administration, and Business Strategy Mary S. McLeod Executive Vice President - Human Resources Geoffrey J. Penney Executive Vice President and Chief Information Officer - -------------------------------------------------------------------------------- (1) Resignation is effective October 10, 2004. Ms. Lepore's, Ms. McLeod's, and Mr. Penney's responsibilities have been reassigned in conjunction with a corporate reorganization. - 31 - Item 6. Exhibits The following exhibits are filed as part of this quarterly report on Form 10-Q. - -------------------------------------------------------------------------------- Exhibit Number Exhibit - -------------------------------------------------------------------------------- 10.260 The Charles Schwab Severance Pay Plan, restated as of September 14, 2004 (supersedes Exhibit 10.254). 10.261 Purchase Agreement by and among The Charles Schwab Corporation, CS Capital Markets and Co., Schwab Associates and Co., UBS Securities LLC, and UBS Americas Inc., dated as of August 31, 2004.*** 10.262 Equities Order Handling Agreement dated October 29, 2004 by and among UBS Securities LLC, Schwab Capital Markets L.P., Charles Schwab & Co., Inc., and The Charles Schwab Corporation. *** 10.263 Separation Agreement, General Release and Waiver of Claims by and among The Charles Schwab Corporation, Charles Schwab & Co., Inc., and David S. Pottruck dated August 2, 2004. 12.1 Computation of Ratio of Earnings to Fixed Charges. 31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.** 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.** ** Furnished as an exhibit to this quarterly report on Form 10-Q. *** Confidential treatment has been requested for certain portions of this exhibit. - -------------------------------------------------------------------------------- - 32 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHARLES SCHWAB CORPORATION (Registrant) Date: November 8, 2004 /s/ Christopher V. Dodds --------------------------- ----------------------------- Christopher V. Dodds Executive Vice President and Chief Financial Officer - 33 - EX-10 2 exh10_260.txt EXHIBIT 10.260 Exhibit 10.260 THE CHARLES SCHWAB SEVERANCE PAY PLAN As of September 14, 2004 ARTICLE 1 - PURPOSE OF PLAN The purpose of this Plan is to set forth the terms and conditions under which severance pay and other severance benefits will be provided to certain employees of the Company and/or its Affiliates. This Plan is intended to constitute an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, and is intended to memorialize the provisions of the Company's severance pay program. ARTICLE 2 - DEFINITIONS A. "Administrator" means Schwab or such person or committee as may be appointed from time to time by Schwab to supervise the administration of the Plan. B. "Affiliate" means any company which is a member of a controlled group of corporations (within the meaning of Code Section 414(b)) or a group of trades or businesses under common control (within the meaning of Code Section 414(c)) that includes the Company; provided, however, that the Board of Directors of Schwab may at any time determine, in its sole discretion, that any such company shall not be an "Affiliate" for purposes of this Plan and shall not be covered by this Plan. C. "Base Salary" means, without exception, the Participant's annual "pay rate" maintained under the authoritative system of record used to produce the Participant's regular semi-monthly pay. Base Salary shall be determined as of the date of the Participant's Notice of Eligibility. Base Salary shall exclude all other earnings or paid amounts such as bonuses, overtime, commissions, all differentials, variable pay, incentive pay, the value of employee benefits and any other amounts that are treated as "other earnings" under the Company's payroll system. The Administrator shall have sole discretionary authority to determine a Participant's Base Salary for all purposes and the Administrator's discretionary determinations shall be conclusive and binding on all persons. D. "Code" means the Internal Revenue Code of 1986, as amended. E. "Company" means The Charles Schwab Corporation, a Delaware corporation, and (unless the context requires otherwise) any Participating Company. F. "Eligible Employee" means any Employee who is classified by the Administrator as a Regular Employee, other than any individuals employed pursuant to the terms of a collective bargaining agreement between the Company or an Affiliate and a bargaining unit representing such Employee; provided that an Employee shall not be considered an Eligible Employee if the Employee is on an unpaid leave of absence and is not guaranteed a job upon completion of the leave. In addition, notwithstanding anything to the contrary in this Plan, an individual will not be eligible to participate in the Plan if the Administrator determines, in its sole discretion, that the individual is covered by any agreement, offer letter, policy, arrangement or plan (regardless of whether it is written or oral) that provides for payments to such individual in the event of termination of employment or resignation (including, without limitation, that provides for - 2 - payment of guaranteed amounts, cash payments representing the value of stock options or restricted stock, and/or similar amounts ("Guaranteed Payments")); provided, however, that the Administrator may, in its sole discretion, determine that an individual who is a party to an agreement, offer letter, policy, arrangement or plan (regardless of whether it is written or oral) providing for Guaranteed Payments (a "Guaranteed Payments Arrangement") is an Eligible Employee eligible to receive benefits under Article 6.4(h). G. "Employee" means any individual directly employed by the Company or a Participating Company and on whose behalf the Company withholds income tax from his or her compensation. "Employee" does not include independent contractors or consultants, persons who have signed independent contractor agreement(s) or vendor or consultant agreement(s) or have been performing services for the Company as an independent contractor, consultant or vendor or pursuant to an independent contractor, consultant or vendor agreement or any type of third party agreement; irrespective of whether any such individuals are determined by any third party (including without limitation any court, arbitrator or governmental or regulatory agency) to constitute employees of the Company any kind, including but not limited to, a common law employee, an agency temporary, a joint employee or a leased employee. H. "Job Elimination" means an involuntary termination of employment on account of changes in the Company's operations or organization, as determined by the Administrator in its sole discretion. Notwithstanding anything to the contrary contained herein, a Job Elimination shall not result (i) from an Employee's termination of employment on account of voluntary resignation, retirement or death prior to notice to the Employee of eligibility for Severance Benefits due to Job Elimination; (ii) if the Company or any successor employer has offered the Employee a "Comparable Position" (the Administrator shall have sole discretionary authority to determine whether a position is a "Comparable Position" under this paragraph taking into account such factors as it deems appropriate including without limitation the similarity of duties, similarity of exempt or nonexempt status, salary range and any increase in the commuting distance to the employee's principal place of employment); (iii) from a termination on account of the Employee's substandard performance or failure of condition of employment prior to or after Notice of Eligibility; (iv) from a termination resulting from an Employee's violation of law or of Company policy(ies), including without limitation, the failure to obtain a required license, absenteeism, fraud, theft, conflict of interest, or misconduct (including, but not limited to, dishonesty or harassment); (v) where, in connection with a merger, acquisition, spin-off, stock sale, sale of assets or portions of a business, or any other corporate transaction (a "Corporate Transaction"), an Employee is employed in the same or a substantially similar position at the closing of the Corporate Transaction or the Employee is offered a "Comparable Position" (as defined above); (vi) the Employee's failure to return to work within the time required following an approved leave of absence; (vii) a change in employment that results from a natural disaster, unforeseeable governmental action, act of war, or other similar unanticipated business disaster; or (viii) a transfer of employment among the Company and any of its Affiliates. I. "Non-Officer" means an Eligible Employee who is not an Officer. - 3 - J. "Notice of Eligibility" means a written notice, in a form approved by the Company, provided to an Eligible Employee that there will be a Job Elimination and that the employee is eligible to obtain Severance Benefits under the Plan. An Eligible Employee who has been provided a Notice of Eligibility is considered a Participant. K. "Notice Period" means a sixty (60) calendar day period typically commencing on the next day following the date of the Notice of Eligibility, or on such later date as the Company shall determine in its sole discretion. Participants are relieved from job responsibilities during the Notice Period and generally are not required to report work unless notified otherwise by the Company. Also during the Notice Period, all Compliance, Human Resources and Information Security policies and procedures that applied to Participants before receiving Notice of Eligibility continue in full force and effect and Participants remain subject to those policies and procedure. Participants will continue to receive Base Salary, participate in certain employee benefits, be eligible for consideration for bonus and other incentive compensation etc. during the Notice Period as though working pursuant to their regular schedule (except with regard to any period that would otherwise be a "furlough" period for a Participant who is a seasonal Employee, for which period seasonal Employee Participants will not receive pay or the other benefits but will continue to be considered Employees until the end of the furlough period), in accordance with normal Company policy and the terms of the applicable plans; provided, however, that non-production-based bonuses will be pro-rated to reflect the Participant's service prior to the Notice Period Date and will remain subject to discretionary adjustments by the Administrator in its sole discretion. L. "Notice Period Date" means the first day of the Notice Period. M. "Officer" means an Eligible Employee who has been elected an Officer of the Company or Schwab or who has a job grade/designation level "E1" or above with a Participating Company. N. "Participant" means any Eligible Employee who has been provided a Notice of Eligibility. O. "Participating Company" means the Company and any Affiliate that participates in the Plan, as determined by the Company in its sole discretion. Notwithstanding the foregoing, if a Participating Company ceases to be an Affiliate within the meaning of Article 2.B by reason of a Corporate Transaction (as defined in Article 2.H), then such entity shall cease to be a Participating Company upon the closing of such Corporate Transaction. Notwithstanding anything to the contrary in this Plan, no benefits shall be payable under the Plan on account of any employment termination (actual or constructive) that occurs on or after the closing of such Corporate Transaction in which such entity ceases to be a Participating Company. P. "Plan" means The Charles Schwab Severance Pay Plan. Q. "Plan Year" means the calendar year. - 4 - R. "Regular Employee" means any Employee with regular full-time or part-time employment or seasonal employment with the Company, who is considered and classified by the Company as a "regular" or "seasonal" employee. "Regular Employee" does not include, without limitation, any of the following: (i) Schwab Temps or floaters; (ii) Agency Temporaries or other temporary workers (iii)Employees on an unpaid leave of absence who do not have a job guarantee upon completion of the leave; (iv) Consultants/Independent contractors, persons who have signed Independent Contractor, consultant or vendor Agreement(s) or provide services to the Company pursuant to an Independent Contractor, consultant or vendor Agreement, or pursuant to an agreement with any third party, irrespective of whether any such individuals are determined by any third party (including without limitation any court, arbitrator or governmental or regulatory agency) to constitute an employee of the Company or any Affiliate (including but not limited to, a common law employee, a joint employee or a lease employee); and (v) Persons (including but not limited to those identified in subparagraphs (i) through (iv)) not otherwise considered by the Company to be a Regular Employee, irrespective of whether any such individuals are deemed by a court. arbitrator or government agency to be an employee of the Company or any Affiliate (including but not limited to, a common law employee, a joint employee or a lease employee). S. "Restated Effective Date" means May 1, 2003. T. "Return Date" means the date by which a Participant must sign and return a Severance Agreement where required to do so in order to obtain Severance Benefits in addition to participation in and payment for the Notice Period under this Plan. Except as otherwise determined by the Company in its sole discretion, the Return Date is the date twenty one (21) calendar days following the date the Participant is provided with Notice of Eligibility; provided however that: 1) the Return Date will be on the next business day if the twenty-first calendar day is not a business day; and 2) if the Participant is at least forty years old, and the Job Elimination affects two or more Participants at least forty years old, the Return Date will be on the forty-fifth (45) calendar day following the date the Participant is provided with Notice of Eligibility (or the next business day if the forty-fifth calendar day is not a business day); and - 5 - 3) if the Participant is under forty years old and is otherwise entitled, under applicable state or local fair employment practice law, to more than twenty-one (21) calendar days in which to consider whether to execute the Severance Agreement, the Return Date will be a date determined by reference to applicable state or local fair employment practices law. A Severance Agreement returned to the Company that is signed and physically received by the Return Date, or, if mailed, is addressed properly for delivery, postmarked by the United State Postal Service no later than the Return Date, and actually received by the Company no later than 10 calendar days from the Return Date, will be considered timely. Severance Agreements which are not signed and/or returned as provided here will not be accepted by the Company, unless the Company decides to accept it on a case-by-case basis, in its sole discretion. U. "Revocation Period" means the seven calendar day (or other longer legally required calendar day) period immediately following the date the Participant signs the Severance Agreement, as defined in Article 2W below, during which a Participant who is either: (i) at least forty (40) years old; or (ii) is under forty (40) years old and is employed in a state that requires a specific Revocation Period, may revoke his or her signed Severance Agreement. To be effective, a written request to revoke must be received by the Company (as defined by applicable law) no later than 5:00 p.m. PST on the seventh calendar day (or other longer period required by law) from the date the Participant signed the Severance Agreement or, if mailed, be postmarked no later than the seventh calendar day (or other longer period required by law) from the date the Participant signed the Severance Agreement. V. "Schwab" means Charles Schwab & Co., Inc., a California corporation. W. "Severance Agreement" means a written agreement in a form satisfactory to the Company, in its sole discretion, by which a Participant agrees to waive and release the Company from legal claims in exchange for payment of Severance Benefits as provided in Article 6. To be effective, a Severance Agreement must be signed and returned by the Return Date (and not revoked during any applicable Revocation Period). Severance Agreements are not required to be identical among Participants. X. "Severance Benefits" means all payments and benefits provided for in this Plan, including but not limited to all salary and benefits for periods during which a Participant remains an Employee after being provided a Notice of Eligibility (such as the Notice Period and/or Severance Period), all forms of compensation and/or benefits of any kind for or in connection with such periods, and all other amounts paid or payable to Participants in accordance with the Plan. The Severance Benefits a Participant may receive are net amounts from which applicable taxes, withholding and appropriate deductions have been taken, including but not limited to deduction of any outstanding amount owed to the Company by the Participant regardless of the reason for or source of the amount due. In order to receive Severance Benefits under Article 6, a Participant must timely sign and return (and not revoke, where a Revocation Period applies) a Severance Agreement as defined in Article 2W. All Severance Benefits shall be applied toward satisfaction of the Company's WARN obligations, if any, and shall constitute WARN notice and/or WARN benefits where WARN applies. - 6 - Y. "Severance Period" means the period of time following the Notice Period during which an Officer Participant is eligible to receive salary in installment payments pursuant to Section 6.3 in exchange for entering into a Severance Agreement. Officer Participants must be available to perform services as may be required. Compliance, Human Resources and Information Security policies continue to apply during the Severance Period. Z. "Termination Date" means the last day that the Employee is employed by the Company. For Non-Officer Participants, the Termination Date is the day the Notice Period ends (as it may be accelerated under Articles 5 and/or 6)). For Officer Participants, the Termination Date is the last day of the Notice Period (as it may be accelerated under Articles 5 and/or 6), or, if an Officer Participant signs, returns and does not revoke a Severance Agreement in the required time, the Termination Date is the last day of the Severance Period (as it may be accelerated under Articles 5 and/or 6). AA. "WARN" means the Federal Worker Adjustment Retraining and Notification Act, as amended, and any applicable state plant or facility closing or mass layoff law. In the event WARN applies to a Participant, any Notice Period and/or Severance Period, and all compensation and all benefits of any kind due or paid with respect to either are also deemed to constitute WARN notice and/or WARN benefits, and will be applied toward satisfying the Company's obligations under WARN. BB. "Year of Service" means a continuous complete twelve-month period commencing on a Participant's date of hire with the Company or an Affiliate (and, in the case of an Employee who is rehired after terminating employment with the Company or an Affiliate, including service prior to a break in service for other than a Severance), and anniversaries thereof, during which a Participant is employed by the Company or an Affiliate, and ending on the Participant's Notice Period Date. For purposes of the foregoing, a Participant will receive credit for any time on a paid leave of absence, but not for time on an unpaid leave of absence. Also for purposes of the foregoing, a Participant who was a seasonal employee at the time of receiving Notice of Eligibility will receive credit for any time on furlough, assuming the Participant returned to Schwab or an Affiliate at the end of the furlough period. A Participant will also receive credit for Service with BankAmerica Corporation and its affiliates during the time it was an affiliated company of the Company, if the Participant was employed by the Company before November 24, 1993, and service with BankAmerica Corporation and its affiliates prior to the date it became an affiliated company of the Company, if the Participant was employed by the Company prior to April 1, 1987. A Participant will also receive credit for service with any Affiliate prior to the time it became an Affiliate if the Participant was employed by such Affiliate on the date it became an Affiliate. - 7 - ARTICLE 3 - ELIGIBILITY 3.1. Eligible Employees will become eligible to participate in the Plan as of the date the Eligible Employee is provided with a Notice of Eligibility. ARTICLE 4 - EFFECT ON OTHER BENEFITS 4.1. Eligibility for other employee benefits (such as medical, dental, vision insurance) will cease in accordance with the terms of any respective plan no later than the last day of the month that includes the Termination Date. 4.2 A Participant will continue accruing paid time off benefits until the Termination Date, but in any event no later than the end of the Notice Period. The rate of accrual during the Notice Period will be the same as the rate of accrual prior to Notice of Eligibility. ARTICLE 5 - NOTICE AND SEVERANCE PERIODS 5.1 Notice Period. Following an Eligible Employee's Notice of Eligibility, the Participant will enter a Notice Period for a period of sixty (60) calendar days. During the Notice Period, Participants are not required to report to work unless notified otherwise and Participants remain subject to Company policies and procedures. If WARN is applicable to a Participant, the Notice Period and all compensation (including but not limited to salary/wages, benefits and benefit plan participation) attributable to the Notice Period shall constitute WARN notice and the payment of WARN benefits, respectively, and will be applied against any notice period or other payments that would otherwise be due to satisfy the Company's obligations under WARN. The Termination Date, which is originally established as the end of the 60 day Notice Period, will be accelerated or otherwise changed if any of the following events occur: a. If, prior to the end of the Notice Period, a Participant resigns or otherwise obtains an external position or acts as an employee, consultant or independent contractor or as a sole proprietor of a business or acts as an officer, director, or partner in another public or privately held company. In that case, the Participant is required to notify the Company immediately, the end of the Notice Period and the Termination Date will be accelerated to coincide with the next day after the Participant resigned or otherwise obtained that position. The Participant will receive a payment reflecting the balance of the Base Salary attributable to the unused portion of the original Notice Period, provided however that no payment will be made for the value of bonuses, or other incentive compensation or the value of other employee benefits that might otherwise have been received if the Termination Date had not been accelerated. The Participant remains eligible to sign and return the applicable Severance Agreement by the Return Date in order to obtain additional Severance Benefits under Article 6, provided however that: (i) Officer Participants who resign or otherwise obtain an external position or act as an employee, consultant or independent contractor or as a sole proprietor of a business or act as an officer, director, or partner in another public or privately held company prior to the end of the Notice Period, who so notify the Company, and who sign, return (and do not - 8 - revoke) a Severance Agreement within the required time, shall not enter the Severance Period. Such Officer Participants shall receive a lump sum payment for Base Salary that otherwise would have been payable during a Severance Period in accordance with section 6.3. Also, Officer Participants will receive a lump sum payment for COBRA premiums in accordance with section 6.3. Other than as provided here, no lump sum payment shall be made for the value of any bonuses, incentives or other employee benefits the Officer Participant would have received during the Notice Period or Severance Period. b. If a Participant is permitted by the Company to obtain, and does obtain, another regular full time or part time position or seasonal position within the Company before the end of the Notice Period (without regard to whether the end of the Notice Period has been accelerated pursuant to section 5.1(a)), his/her Termination Date under the Plan will be cancelled and the Participant is no longer eligible to receive any Severance Benefits or any payment of any kind for compensation (including benefits) otherwise attributable to the unused portion of the Notice Period. If a Participant already received payment of lump sum Severance Pay under sections 6.1 and/or 6.2, the Participant is required to repay the lump sum Severance Pay, including the COBRA premium, in full, as a condition of the employment. In addition, if a Participant already received a lump sum payment for the unused portion of the Notice period under section 5.1(a), the Participant is required to repay the amount by which this lump sum payment exceeds the amount the Participant would have received if the payment has been calculated based on the number of business days that actually elapsed between the beginning of the Notice Period and the date of the re-hire with the Company, as a condition of the employment. 5.2 Severance Period. For Officer Participants who sign and return (and do not revoke, if a Revocation Period applies) the Severance Agreement as required, the Notice Period is followed by a Severance Period. Officer Participants receive installment payments in the form of Base Salary during the Severance Period and continue to be eligible for certain employee benefits (as determined by the Company in accordance with the terms of the respective plans) in exchange for agreeing to remain available to perform services for the Company during the Severance Period. The length of the Severance Period is determined by the officer level and Years of Service, in accordance with section 6.3. During the Severance Period, Compliance, Human Resources and Information Security policies and procedures continue in full force and effect and Officer Participants remain subject to those policies and procedures. If WARN is applicable to an Officer Participant, the Severance Period and all compensation (including but not limited to salary/wages, benefits and benefit plan participation) attributable to the Severance Period shall constitute WARN notice and the payment of WARN benefits, respectively, and will be applied against any notice period or other payments that would otherwise be due to satisfy the Company's obligations under WARN. In addition: a. During the Severance Period, Officer Participants are not eligible for bonuses or any other incentive compensation. b. The Termination Date for Officer Participants who sign and return (and do not revoke, where applicable) the Severance Agreement in the required time is reset to the end of - 9 - the Severance Period under section 6.3. The Termination Date will be accelerated or otherwise changed: (i) if, prior to the end of the Severance Period, an Officer Participant resigns or otherwise obtains an external position or acts as an employee, consultant or independent contractor or as a sole proprietor of a business or acts as an officer, director, or partner in another public or privately held company. In that case, an Officer Participant must notify the Company immediately and the end of the Severance Period and the Termination Date will be accelerated to coincide with the next day after the Officer Participant resigned or otherwise obtained that position. The Officer Participant will receive a lump sum payment for the balance of Base Salary for the unused portion of the original Severance Period, provided however that no payment will be made for the value of bonuses, incentive compensation or other employee benefits. In addition, Officer Participants will receive a lump sum payment for COBRA premiums as provided in section 6.3. (ii) if an Officer Participant is permitted by the Company to obtain, and does obtain, another regular full time or part time or seasonal position within the Company after the Severance Period begins and before the date it is scheduled to end. In that case, the Termination Date under the Plan will be cancelled and the Officer Participant is no longer eligible to receive any Severance Benefits or any payment of any kind for compensation (including but not limited to benefits or the value of any benefits) otherwise attributable to the unused portion of the Severance Period. ARTICLE 6 - BENEFITS Upon being provided with a Notice of Eligibility, a Participant becomes entitled to receive the Severance Benefits described in sections 6.1, 6.2, and 6.3 (as applicable) only if the Participant returns to the Company a signed Severance Agreement no later than the Return Date. If a Revocation Period applies, a Participant's entitlement to these Severance Benefits also is conditioned upon the Participant not revoking (or attempting to revoke) the Severance Agreement during the Revocation Period. Subject to those conditions, the Participant will be entitled to receive the amounts set forth in Sections 6.1 and 6.2, or 6.3 (as applicable). 6.1 Non-Officer Severance Pay. Non-Officer Participants who experience an involuntary termination will receive a lump sum severance pay benefit hereunder equal to the greater of the amount determined under (a) or (b) below: a. The amount of Base Salary that would have been payable for one-half month of active employment (i.e., 11 business days) multiplied by the Non-Officer Participant's full Years of Service (but in no event to exceed the maximum amount equivalent to 176 business days). The Non-Officer Participant also will receive credit for a partial Year of Service (after aggregation of partial years), based on the following table: - 10 - Length of Partial Year No. of Days ---------------------- ----------- Not more than 3 months 3 Business Days More than 3 but not more than 6 months 6 Business Days More than 6 but not more than 9 months 9 Business Days More than 9 but less than 12 months 11 Business Days OR b. The amount of Base Salary that would have been payable for the number of business days determined under the following table: Base Salary No. of Days ----------- ----------- $29,999 or less 22 Business Days $30,000 to $39,999 44 Business Days $40,000 to $54,999 66 Business Days $55,000 to $74,999 88 Business Days $75,000 and over 110 Business Days The length of service under Formula A will be used in the event application of A and B result in the same amount. 6.2 COBRA Payment - Non-Officers A Non-Officer Participant who becomes entitled to receive Severance Benefits under section 6.1 will also receive payment for a portion of the Non-Officer Participant's COBRA health care coverage premium. The Non-Officer Participant shall receive a single lump sum payment in an amount equal to the amount the Non-Officer Participant will be charged for the COBRA premiums for the employee and his/her enrolled dependents for a number of days equal to the number of days for which the Non-Officer Participant is eligible to receive Severance Pay under Section 6.1. The payment for a portion of COBRA premiums is based on group medical, dental, vision, and employee assistance program ("EAP") coverage at the same benefits levels in effect for the Non-Officer Participant and any enrolled dependents at the time the Non-Officer Participant is given Notice of Eligibility. The single lump sum payment representing COBRA premiums is based on COBRA premium levels in effect at the Termination Date and in no event is a Participant entitled to receive payment for a subsequent increase, if any, in COBRA premium levels. If the Non-Officer Participant or his/her dependents were not enrolled for group health coverage at the time the Company gave Notice of Eligibility, the Non-Officer Participant will not receive any payments under this Section 6.2. 6.3 Officer Severance Pay Benefit. Officer Participants shall receive Base Salary (paid in installment payments in accordance with normal payroll practices) for a Severance Period based on the applicable provision below, taking into account officer level and Years of Service: - 11 - a. Officer (Vice President): Base Salary: An Officer (Vice President) Participant who experiences an involuntary termination shall receive Base Salary for a Severance Period as follows: Years of Service Severance Period ---------------- ---------------- Less than 2 years 9 months At least 2 years but no more than 5 years 11 months More than 5 years 12 months b. Officer (Senior Vice President and Executive Vice President). An Officer (Senior Vice President and Executive Vice President) Participant who experiences an involuntary termination shall receive Base Salary for a Severance Period as follows: Years of Service Severance Period ---------------- ---------------- Less than 2 years 12 months At least 2 years but no more than 5 years 14 months More than 5 years 16 months For purposes of determining the Severance Period above under section 6.3a and 6.3b, a "month" is considered 30 calendar days. An Officer Participant whose Termination Date is accelerated and is entitled to receive a lump sum payment for the installment payments contained in section 6.3a or 6.3b, also will receive a lump sum payment calculated in an amount equal to the amount the Officer Participant will be charged for COBRA premiums for him/herself and his/her enrolled dependents for the number of months for which the Officer Participant would otherwise have been eligible to receive installment payments during a Severance Period. The payment for a portion of COBRA premiums is based on group medical, dental, vision and EAP coverage at the same benefits level that is in effect for the Officer Participant and any enrolled dependents at the time the Officer Participant enters the Severance Period or the Termination Date, whichever is earlier. The single lump sum payment representing COBRA premiums is based on COBRA premium levels in effect at the Termination Date and in no event is a Participant entitled to receive payment for a subsequent increase, if any, in COBRA premium levels. If the Officer Participant or his/her dependents were not enrolled for group health coverage at the time the Company gave Notice of Eligibility, the Officer Participant will not receive any payments representing COBRA premiums. 6.4 Additional Provisions Related to Severance Benefits a) If a Participant who has incurred a Job Elimination and then has terminated employment is subsequently rehired by the Company (or an Affiliate), any subsequent Severance Benefit that may become payable to the Participant under this Plan following the date - 12 - of rehire on account of a Job Elimination shall be calculated based solely on the Participant's Years of Service following his date of rehire after Severance. b) Notwithstanding anything to the contrary contained herein, (i) an Employee or Participant whose employment with the Company (or an Affiliate) is terminated before or after receipt of Notice of Eligibility for any reason other than Job Elimination within the meaning of Article 2H shall not be entitled to receive any Severance Benefits hereunder, (ii) a Participant may lose eligibility to receive Severance Benefits if the Company becomes aware of circumstances which could or would have caused a Participant's termination from employment, such as engaging in violations of the law or of Company polic(ies), including without limitation, fraud, theft, inappropriate use of confidential information, or misconduct (including, but not limited to, dishonesty or harassment), and (iii) in the case of an Employee who the Administrator determines, in its sole discretion, is covered by any agreement, offer letter, policy, arrangement or plan (regardless of whether it is written or oral) that provides for payments to such individual in the event of termination of employment or resignation, except as provided in Article 6.4(h), the calculation of any payment to such Employee upon such termination or resignation shall be governed by the terms of such arrangement, and not by this Article 6. c) Any lump sum benefit payable pursuant to Sections 6.1 or 6.2 shall be paid during the next Payroll processing cycle that follows the later of (i) the date the Severance Agreement is received, assuming it is signed and returned to the Company in the required time and is not revoked in accordance with any applicable Revocation Period; or (ii) the Termination Date, as it may be accelerated under Article 5 or 6. Generally, the close date for a payroll cycle is the 2nd business day of that cycle. d) Except for any lump sum payment equal to three months of Base Salary, any lump sum benefit payable pursuant to section 6.3 shall be paid during the Payroll processing cycle that follows the later of (i) the date the signed Severance Agreement is received, assuming it is signed and returned to the Company in the required time and is not revoked in accordance with any applicable Revocation Period; or (ii) the Termination Date, as it may be accelerated under Article 5 or 6. The lump sum payment equal to three months of Base Salary shall be payable as soon as practicable following the end of the Notice Period provided that, by that date, the Severance Agreement is signed and returned to the Company in the required time and was not revoked in accordance with any applicable Revocation Period. e) (i) If a Non-Officer Participant receives payment of any or all of his/her Severance Benefit under sections 6.1 and 6.2 and after his Termination Date subsequently accepts re-employment by the Company or with an Affiliate, the Participant will be required, except as the Company otherwise determines in its sole discretion, as a condition of reemployment, to repay the amount (if any) by which the lump sum payment (including COBRA payments) exceeds the amount the Participant would have received if such payment had been calculated based on the number of business days that have actually elapsed between Termination Date and the date of the subsequent employment. The repayment obligation is applicable regardless of whether the Participant's severance pay was paid under 6.1 and/or 6.2 above. - 13 - Repayment of a pro rata share of Severance Benefits does not affect the validity of the Severance Agreement. (ii) If an Officer Participant receives a lump sum payment for any or all of his/her Severance Benefits under section 6.3 due to acceleration of the Termination Date, and the Participant subsequently accepts re-employment by the Company or with an Affiliate, the Participant will be required, except as the Company otherwise determines in its sole discretion, as a condition of reemployment, to repay the amount (if any) by which the lump sum payment (including COBRA payments) exceeds the amount the Participant would have received if such payment had been calculated based on the number of business days that have actually elapsed between Termination Date and the date of the subsequent employment. Repayment of a pro rata share of Severance Benefits does not affect the validity of the Severance Agreement. f) Notwithstanding anything to the contrary contained in this Plan, in the event WARN is applicable to a Participant: (1) any Notice Period and/or Severance Benefits paid or payable to the Participant will be deemed to constitute and shall be attributed to WARN notice and/or WARN benefits; (2) all Severance Benefits under this Plan will be reduced and/or offset by any notice, payments or benefits to which the Participant may be entitled under WARN; and (3) all Severance Benefits under this Plan will be reduced and/or offset by any amount of paid days and/or paid benefits in lieu of notice the Participant is given or is required to be given by the Company to satisfy its obligations under WARN. A Severance Agreement is not required for receipt of WARN benefits. g) Notwithstanding anything to the contrary contained herein, the Company may revoke a Participant's Severance Agreement during any applicable Revocation Period. h) Notwithstanding anything to the contrary contained herein, in the event that the Administrator determines, in its sole discretion, that an individual is a party to a Guaranteed Payments Arrangement (as defined in Article 2.F) and that such individual would, in the absence of the last sentence of Article 2F., be entitled to a benefit under Article 6.1 and 6.2 (in the case of a Non-Officer) or 6.3 (in the case of an Officer), then the Administrator may determine, in its sole discretion, that such individual shall be eligible to receive a cash severance benefit (instead, and in lieu, of any and all Guaranteed Payments under such Guaranteed Payments Arrangement) equal to the greater of either (1) the amount that the Administrator determines, in its sole discretion, to be the amount of the Participant's Guaranteed Payments under the Guaranteed Payments Arrangement or (2) the total amount of the cash severance payments to which the Administrator determines, in its sole discretion, the Participant would have been entitled under Article 6.1 and 6.2 (in the case of a Non-Officer) or 6.3 (in the case of an Officer, but determined without regard to payments for COBRA premiums) in the absence of the last sentence of Article 2F. Payment of such cash severance benefit shall be deemed to be subject to all of the terms and conditions of the Plan relating to the payment of benefits under Article 6, as construed by the Administrator in its sole discretion; provided, however, in the case of an Officer Participant whose benefit is determined by the Administrator to equal the amount described in Article 6.4(h)(1) above, the amount of such benefit that exceeds the amount described in Article 6.4(h)(2) above shall be paid in a single lump sum as soon as practicable - 14 - after the individual has executed and returned (and not revoked or attempted to revoke) a Severance Agreement and the applicable Revocation Period has expired. ARTICLE 7 - FUNDING The amount required to be paid as Severance Benefit under this Plan shall be paid from the general assets of the Company at the time such Severance Benefits are to be paid. ARTICLE 8 - ADMINISTRATION 8.1 Administrator's Authority. The administration of the Plan shall be under the supervision of the Administrator. It shall be the responsibility of the Administrator to assure that the Plan is carried out in accordance with its terms. The Administrator shall have full power and sole discretionary authority to administer, interpret and construe the Plan, and to determine all claims for benefits, subject to the requirements of ERISA. For this purpose, the Administrator shall have discretionary authority: a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; b) To interpret and construe the plan, its interpretation and construction thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan; c) To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan; d) To compute the amount of benefits which will be payable to any Participant accordance with the provisions of the Plan, and to determine the person or persons to whom such benefits will be paid; e) To authorize the payment of benefits; f) To appoint such agents, counsel, accountants, consultants and actuaries as may be required to assist in administering the Plan; and g) To allocate and delegate its responsibilities under the Plan and to designate other persons to carry out any of its responsibilities under the Plan, and such allocation, delegation or designation to be by written instrument and in accordance with Section 405 of ERISA. The interpretations and determinations of the Administrator shall be final and binding and are not required to be uniform among similarly situated individuals. The Administrator also reserves the right to provide additional benefits, in the Administrator's sole discretion. Determinations to be made in the discretion of the Company are made by the Company in its non-fiduciary capacity, with regard to the best interests of the Company, and are not required to - 15 - be uniform among similarly situated individuals. In administering the Plan, the Administrator shall be entitled, to the extent permitted by law, to rely conclusively on all tables, valuations, certificates, opinions and reports which are furnished by any accountant, counsel or other expert who is employed or engaged by the Administrator. Schwab shall be the "named fiduciary" for purposes of Section 402(a)(1) of ERISA with authority to control and manage the operation and administration of the Plan, and shall be responsible for complying with all of the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA. 8.2 Claims Procedure. (a) Applications for Benefits. No person shall be entitled to benefits under this Plan unless the Administrator has determined that he or she is entitled to them. All applications for benefits, and all inquiries concerning the Plan or present or future rights to benefits under the Plan, must be submitted to the Administrator. An application for benefits must be signed by the applicant. If an application for benefits is denied in whole or in part, the Administrator will provide the applicant with written notice of such denial and of the right to a review of the claim. Such written notice will explain, in a way that the applicant can understand, the specific reasons for the denial, references to the specific Plan provisions on which the denial is based, a description of any information or material necessary to perfect the application, an explanation of why such material is necessary, an explanation of the Plan's review procedure and the time limits applicable to such procedures, and a statement of the applicant's right to bring a civil action under section 502(a) of ERISA if the claim is denied on review. Such written notice will be given to the applicant within 90 days after the Administrator receives the application, unless special circumstances require an extension of time of up to an additional 90 days for processing the application. If such an extension of time for processing is required, written notification of the extension will be provided to the applicant prior to the termination of the initial 90 day period. This notice of extension will indicate the special circumstances requiring the extension of time and the date by which the Administrator expects to render its decision. The applicant will be permitted to appeal such denial in accordance with the procedures described below. 8.3 Review Procedure. (a) Review Panel. The Administrator will appoint a "Review Panel," consisting of two individuals who may (but need not) be employees of the Company or its subsidiaries. The Review Panel will be the named fiduciary that has the authority to act with respect to any appeal from a denial of benefits. An individual whose application is denied in whole or in part, or such individual's duly authorized representative, may appeal from such denial by submitting a request for a review of the application to the Review Panel within 60 days after receiving written notice of such denial from the Administrator. A request for review must be in writing. A request for review must provide all grounds on which it is based, all facts in support of the request and any other matters that the applicant deems pertinent. The Review Panel may require the applicant to submit such additional facts, documents or other material as it may deem necessary or appropriate to review the application. The Review Panel will provide the applicant with the opportunity to submit written comments, documents, records and other - 16 - information relating to the application. The Review Panel will provide to the applicant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the application. (b) Decisions on Appeal. The Review Panel's determination will take into account all comments, documents, records, and other information that the applicant has submitted without regard to whether such information was submitted or considered in the initial benefit determination. The Review Panel will provide the applicant with written notification of its decision within a reasonable period of time, but not later than 60 days after receiving the review request, unless special circumstances require an extension of time for reviewing the request, up to an additional 60 days. If such an extension for review is required, written notification of the extension will be provided to the applicant within the initial 60-day period. The notice of extension will indicate the special circumstances requiring the extension of time and the date by which the Review Panel expects to render a decision. If an extension of time is required due to the applicant's failure to submit information necessary to review the application, the period of time that the Review Panel has to review the application will be tolled from the date on which the notice of the extension is sent to the applicant until the date on which the applicant provides the requested additional information. In the event that the Review Panel confirms the denial of the application in whole or in part, the notice will explain, in a way that the applicant can understand, the specific reasons for the denial, references to the specific Plan provisions on which the decision is based, a statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the application, and a statement of the applicant's right to bring an action under section 502(a) of ERISA. The Review Panel will establish such rules and procedures, consistent with the Plan and with ERISA, as it may deem necessary or appropriate in carrying out its responsibilities. The Review Panel may require an applicant who wishes to submit additional information in connection with an appeal from the denial of benefits to do so at the applicant's own expense. (c) Legal Action. Notwithstanding anything to the contrary in the Plan, no legal action for benefits under the Plan may be brought unless and until an applicant has submitted a written application for benefits, received written notification from the Administrator that the application is denied, filed a written request for a review of the application, and received written notification that the Review Panel has affirmed the denial of the application. However, if a Participant does not receive notice within the time period described above, whether on initial determination or review, such Participant may initiate a lawsuit under section 502(a) of ERISA. In no event may a legal action be brought with respect to a claim under the Plan after the date that is one year from the date of the Administrator's decision on appeal or if the claimant has not exhausted his or her administrative remedies under the Plan. If a claims determination is subject to review by a court, such review shall be made under an abuse of discretion standard of review. Such determination may only be overturned if determined by a court to be arbitrary and capricious. (d) Claims for Benefits. Notwithstanding anything to the contrary in this Plan, no person shall have a colorable claim for vested or unvested benefits under this Plan unless the - 17 - Administrator (a) has determined that the person has incurred a Job Elimination; and (b) has issued to the person a Notice of Eligibility. (e) Indemnification. The Company agrees to indemnify, defend and hold harmless to the fullest extent permitted by law any Employee serving as or on behalf of the Administrator or as a member of a committee designated as Administrator (including any Employee or former Employee who formerly served as Administrator or as a member of such committee) against all liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the Company) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith. ARTICLE 9 - AMENDMENT AND TERMINATION The Plan and/or any of its terms may be amended at any time with or without prior notice by action of the Board of Directors of Schwab or its delegee. The Plan and/or any of its terms may be terminated at any time with or without prior notice by the Board of Directors of the Company or its delegee. ARTICLE 10 - MISCELLANEOUS Except where otherwise indicated by the context, any masculine terminology used herein shall also include the feminine and vice versa, and the definition of any term herein in the singular shall also include the plural, and vice versa. This Plan shall not be deemed to constitute a contract between the Company and any Eligible Employee or to be a consideration or an inducement for the employment of any Eligible Employee. Nothing contained in this Plan shall be deemed to give any Eligible Employee the right to be retained in the service of the Company or to interfere with the right of the Company to discharge any Eligible Employee at any time, irrespective of the effect which such discharge shall have upon such individual as a Eligible Employee of this Plan. This Plan shall be construed and enforced according to federal law, except where not preempted, by the laws of the State of California other than its laws respecting choice of law. - 18 - EX-10 3 exh10_261.txt EXHIBIT 10.261 Exhibit 10.261 ================================================================================ Purchase Agreement by and among The Charles Schwab Corporation, a Delaware corporation, CS Capital Markets & Co., a Delaware corporation, Schwab Associates & Co., a Delaware corporation, UBS Securities LLC, a Delaware limited liability company, and UBS Americas Inc., a Delaware corporation Dated As Of August 31, 2004 ================================================================================ Purchase Agreement This Purchase Agreement (this "Agreement") is dated as of August 31, 2004, by and among The Charles Schwab Corporation, a Delaware corporation ("Parent"), CS Capital Markets & Co., a Delaware corporation ("GP"), Schwab Associates & Co., a Delaware corporation ("LP" and together with Parent and GP collectively, "Sellers"), UBS Securities LLC, a Delaware limited liability company ("Purchaser") and UBS americas Inc., a Delaware corporation ("Purchaser II"). Certain capitalized terms have the meanings given to such terms in Article X. Recitals Whereas, GP, LP and SoundView Technology Corporation, a Delaware corporation ("Saturn Sub") indirectly wholly owned by SoundView Technology Group, Inc., a Delaware corporation (the "Company"), are collectively the sole owners of all of the partnership interests outstanding (the "Partnership Interests") of Schwab Capital Markets L.P., a New Jersey limited partnership ("CCM"); Whereas, Parent is the sole owner of all of the outstanding capital stock (the "Company Common Stock") of the Company; Whereas, Purchaser wishes to purchase from GP and LP, and Sellers wish to sell to Purchaser, the Partnership Interests owned by GP and LP in accordance with the provisions set forth herein; Whereas, Purchaser II wishes to purchase from Parent, and Parent wishes to sell to Purchaser II, the Company Common Stock in accordance with the provisions set forth herein; and Whereas, as an inducement to Purchaser to enter into this Agreement, Parent on behalf of itself and its Affiliates is agreeing to enter into the Order Handling Services Agreement (as defined herein) and the Options Order Business Agreement (as defined herein) effective as of the Closing. Now Therefore, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: Article I Purchase and Sale of CCM and the Company 1.1 Purchase and Sale. Subject to the terms and conditions set forth herein, at the Closing, (a) GP and LP shall sell, assign, transfer and convey to Purchaser or its designees, and Purchaser or its designees shall purchase and acquire from GP and LP, the Partnership Interests - 1 - owned by GP and LP, free and clear of all Liens and (b) Parent shall sell, assign, transfer and convey to Purchaser II or its designees, and Purchaser II or its designees shall purchase and acquire from Parent, the Company Common Stock, free and clear of all Liens. 1.2 Order Handling Services Agreement. At or prior to the Closing, Parent, Charles Schwab & Co., Inc., a California corporation ("CS&Co."), and Purchaser will enter into (a) an Equity Order Handling Agreement substantially in the form attached hereto as Exhibit A (the "Order Handling Services Agreement") and (b) an Options Order Handling Agreement substantially on the terms set forth in Exhibit B hereto (the "Options Order Business Agreement"). Between the date hereof and the Closing, the parties shall negotiate in good faith to produce a more fulsome agreement for the flow of options orders and, if no such more fulsome agreement is produced, then Exhibit B shall be the Options Order Business Agreement and the parties shall perform their respective obligations thereunder. 1.3 Purchase Price. In consideration of the sale of the Partnership Interests and the Company Common Stock as contemplated herein, at the Closing, Purchaser and Purchaser II agree to pay to Sellers in cash the aggregate amount of $265 million (the "Purchase Price"). 1.4 Allocation of Purchase Price. (a) Sellers and Purchaser (on behalf of itself and Purchaser II) agree to allocate the Purchase Price among the Partnership Interests and the Company Common Stock in accordance with the fair market value of such Partnership Interests and the Company Common Stock consistent with the matters set forth in Section 1.4 of the Disclosure Schedule. If Sellers disagree with respect to the matters set forth in footnote 1 to Section 1.4 of the Disclosure Schedule, Sellers shall notify Purchaser of such disagreement and the reasons for so disagreeing, in which case Sellers and Purchaser shall attempt to resolve the disagreement. To the extent Sellers and Purchaser cannot agree with respect to such matters, such matters shall be determined by PricewaterhouseCoopers or such other independent accounting firm as shall be mutually agreed, whose decision shall be final and binding and whose expenses shall be shared equally by Sellers and Purchaser. The allocation of the Purchase Price made pursuant to this Section 1.4 is known as the "Purchase Price Allocation". (b) The parties hereto agree to report the allocation of the total Purchase Price in a manner consistent with the Purchase Price Allocation (as adjusted to reflect adjustments to the Purchase Price made pursuant to this Agreement) and agree to act in accordance with the Purchase Price Allocation (as adjusted to reflect adjustments to the Purchase Price made pursuant to this Agreement) in the preparation and filing of all Tax Returns and in the course of any Tax audit, Tax review or Tax litigation relating thereto; provided that neither Sellers nor Purchaser will be obligated to appeal or litigate any challenge to such Purchase Price Allocation by a Governmental Entity. (c) The parties will promptly inform one another of any challenge by any Governmental Entity to the Purchase Price and agree to consult and keep one another informed with respect to the status of, and any discussion, proposal or submission with respect to, such challenge. - 2 - 1.5 License Agreement. At or prior to the Closing, Purchaser and Sellers shall enter into a License Agreement providing for the matters set forth in the term sheet in Section 1.5 of the Disclosure Schedule (the "License Agreement"). 1.6 Transition Services Agreement. At or prior to the Closing, Purchaser and Sellers shall enter into a Transition Services Agreement (the "Transition Services Agreement") providing for (a) the matters set forth in the term sheet in Section 1.6 to the Disclosure Schedule (including the methodology for allocating costs for the provision of such services and the time period during which such services must be provided), (b) all such other matters that are reasonably necessary for Sellers and their Affiliates to provide to Purchaser for Purchaser to operate the Business following the Closing in all material respects as it was conducted by Sellers and their Affiliates on the Balance Sheet Date and prior to the Closing so as to provide as seamless a transition of the Business and the Company Business from Sellers and their Affiliates to Purchaser as is reasonably practicable for the duration of the Transition Services Agreement and (c) all such other matters that are reasonably necessary for Purchaser to provide to Sellers and their Affiliates for Seller and their Affiliates to continue their businesses that historically have needed an interaction with the Business or the Company Business (other than the Business and the Company Business) in all material respects as it was conducted by Sellers and their Affiliates prior to the Closing so as to provide as seamless a transition for Sellers and their Affiliates as is reasonably practicable for the duration of the Transition Services Agreement, taking into account the existence of the Order Handling Services Agreement and the Options Order Business Agreement. Without limiting the generality of the foregoing, Sellers shall use their reasonable commercial efforts to retain the services of employees used or to be used by Sellers or their Affiliates to perform the services to be performed pursuant to the Transition Services Agreement (other than any employees of the Business or the Company Business) (the "Transition Services Employees") and to maintain any of their operational systems necessary to maintain the Business for the duration of the Transition Services Agreement in connection with the provision of the services thereunder, and Purchaser shall use its reasonable commercial efforts to keep employed the employees necessary for Purchaser or its Affiliates to perform the services to be performed pursuant to the Transition Services Agreement. Article II The Closing 2.1 Closing. The consummation of the purchase and sale transactions contemplated by this Agreement shall take place at a closing (the "Closing") to be held as soon as practicable, and in any event not later than two (2) Business Days after the satisfaction or waiver of each of the conditions set forth in Article VII hereof (other than the conditions that by their nature are to be satisfied at the Closing but subject to the fulfillment or waiver of those conditions) or at such other time as the parties hereto may agree. The Closing shall take place at the offices of Sullivan & Cromwell LLP, or at such other location as the parties hereto may agree in writing. The date on which the Closing occurs is sometimes referred to herein as the "Closing Date." The Closing of the purchases and sales contemplated herein shall be deemed effective as of the close of business on the Closing Date. - 3 - 2.2 Execution and Delivery. (a) At the Closing, GP and LP shall deliver to Purchaser assignments of the Partnership Interests owned by GP and LP duly executed by GP and LP. Such instruments and documents shall be sufficient to convey all of Sellers' interests in the Partnership Interests, free and clear of all Liens. (b) At the Closing, Parent shall deliver to Purchaser II stock certificates representing the Company Common Stock, together with stock powers duly executed in blank by Parent. Such instruments and documents shall be sufficient to convey all of Sellers' interest in the Company Common Stock, free and clear of all Liens. (c) At the Closing, in consideration of the purchase of the Partnership Interests and Company Common Stock, Purchaser and Purchaser II shall pay to Sellers an aggregate sum equal to the Purchase Price by wire transfer of immediately available funds in the amounts and to the accounts specified in writing, at least 3 Business Days prior to Closing, by Parent to Purchaser. (d) Sellers agree that they will from time to time after the Closing, at no cost to Purchaser or Purchaser II, execute and deliver such further documents as Purchaser or Purchaser II may prepare and reasonably request in order to effectively sell, transfer and convey the Partnership Interests to Purchaser and the Company Common Stock to Purchaser II. Article III Representations and Warranties of the Business Except as specifically disclosed in the correlative Section in the Disclosure Schedule, Sellers, jointly and severally, represent and warrant to Purchaser and Purchaser II as of the date hereof and as of the Closing as follows: 3.1 Corporate Organization, Standing and Power. Each of Sellers is a corporation duly organized, validly existing and in good standing under the Laws and Regulations of its jurisdiction of organization. CCM is a limited partnership duly organized and validly existing under the Laws and Regulations of the State of New Jersey. Pebble LLC is a limited liability company duly organized and validly existing under the Laws and Regulations of the State of Delaware. CCM and each of its Subsidiaries has the requisite power to carry on the Business as now being conducted by it and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would, individually or in the aggregate, have a Business Material Adverse Effect. Sellers have furnished or made available to Purchaser prior to the date of this Agreement a true and correct copy of the Agreement of Limited Partnership of CCM (as amended by the First Amendment thereto, the "Partnership Agreement") and the certificate or articles of incorporation, partnership agreement or operating agreement, each as applicable, and bylaws, and any other charter or organizational documents, of CCM and its Subsidiaries, and each such document in the form so furnished or made available to Purchaser is in full force and effect. None of CCM or any of its Subsidiaries is in violation of any of the provisions of its organizational documents. - 4 - 3.2 Capitalization. (a) All of the outstanding shares of capital stock and voting securities or other interests of each Subsidiary of CCM are owned, directly or indirectly, by CCM and are duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements or obligations of any character relating to the issued or unissued capital stock or other securities of any such Subsidiary. (b) GP is the sole general partner of CCM. LP holds a limited partnership interest in CCM. Saturn Sub holds a preferred limited partnership interest in CCM. LP and Saturn Sub are the sole limited partners of CCM. The Partnership Agreement and the Conveyance Agreement, dated January 2004, relating to Saturn Sub's preferred limited partnership interest, each as furnished to Purchaser, accurately and completely set forth all the terms of the Partnership Interests, including the attendant rights and obligations of GP, LP and Saturn Sub. The Partnership Interests have been validly issued and each of GP, LP and Saturn Sub owns its partnership interests in CCM free and clear of all Liens. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements or obligations of any character relating to the Partnership Interests. (c) Except as set forth in Section 3.2(c) of the Disclosure Schedule, none of CCM or any of its Subsidiaries (i) owns, or has any contract or other obligation to acquire, any equity securities or other securities of or ownership interest in any Person or any direct or indirect equity or ownership interest in any other business or (ii) has any contract or other obligation to provide funds to, or make any investment in, any Person. There is no funding obligation of CCM or any of its Subsidiaries with respect to a third party investment or other interest that has not been satisfied, except as specifically reflected on the Combined Financial Statements. (d) Upon delivery by Sellers of all the Partnership Interests at Closing, good and valid title to the Partnership Interests, free and clear of all Liens, other than those resulting only from Purchaser's ownership, will pass to Purchaser. 3.3 Authority; No Violation. (a) Each of Sellers has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved and adopted by each of Sellers and no additional corporate or shareholder authorization or consent is required in connection with the execution, delivery or performance by Sellers of this Agreement or any of the Ancillary Agreements. This Agreement has been duly and validly executed and delivered by each of Sellers. Assuming due authorization, execution and delivery of this Agreement by Purchaser and Purchaser II, this Agreement constitutes the valid and binding obligation of each of Sellers, enforceable against each of Sellers in accordance with its terms. Assuming due - 5 - authorization, execution and delivery of each of the Ancillary Agreements by Purchaser or any its Affiliates that is a party to the relevant agreement, each of the related Ancillary Agreements, when executed and delivered, will constitute, the valid and binding obligation of each of Sellers, enforceable against each of Sellers in accordance with its terms. (b) Neither the execution and delivery of this Agreement or any of the Ancillary Agreements by each of Sellers nor the consummation by each of Sellers of the transactions contemplated hereby or thereby, nor compliance by each of Sellers with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Partnership Agreement, or the certificates of incorporation or bylaws or other charter or organizational documents of each of CCM, any of its Subsidiaries or Sellers or any of their Affiliates or (ii) assuming that the consents and approvals specifically referred to in Section 3.4 (as to clause (x) with respect to Governmental Entities and as to clause (y) with respect to Governmental Entities and non-Governmental Entities) are duly obtained, (x) violate any Laws and Regulations applicable to any of Sellers, CCM or any of their Subsidiaries or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Sellers, CCM or any of their respective Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, or other instrument or obligation to which any of Sellers, CCM or any of their respective Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except (in the case of clauses (ii) (x) (other than with respect to Governmental Orders) and (y) above) for such violations, conflicts, breaches, defaults or the loss of benefits which, either individually or in the aggregate, would not be a Business Material Adverse Effect. 3.4 Consents and Approvals. Except for (i) any approvals or filings required by the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the consent or approval of the NASD, (iii) the consent or approval of the AMEX, (iv) the consent or approval of the Pacific Stock Exchange and (v) the consents, notices and approvals set forth in Section 3.4 of the Disclosure Schedule, no consents or approvals of any Governmental Entity or any third party are necessary in connection with (A) the execution and delivery by each of Sellers of this Agreement and the Ancillary Agreements and (B) the consummation by each of Sellers of the transactions contemplated hereby and thereby. 3.5 Financial Statements. (a) Section 3.5(a) of the Disclosure Schedule sets forth the following unaudited condensed combined financial statements of CCM and the Company and their Subsidiaries (collectively, the "Combined Financial Statements"): (i) the unaudited condensed combined balance sheet of CCM and the Company and their Subsidiaries (the "Combined Balance Sheet") as of June 30, 2004 (the "Balance Sheet Date") and (ii) the related unaudited condensed combined statement of operations and statements of cash flows for the six (6) months then ended. Subject to the absence of notes, the Combined Financial Statements have been prepared in accordance with GAAP consistently applied, and reflect all adjustments necessary to present fairly, and fairly present in all material respects, the consolidated financial condition and operating results and cash flows of CCM and the Company - 6 - and their Subsidiaries at the date and for the period indicated therein. All adjustments were of a normal and recurring nature. Section 3.5(b) of the Disclosure Schedule sets forth unaudited combined statement of income of "Schwab SoundView Capital Markets", including CCM and the Company and their Subsidiaries for the six (6) months ended June 30, 2004 on a management-reporting basis (the "Management Reports"), based on the books and records of CCM and the Company and their Subsidiaries and the Options Business of CS&Co., excluding the centralized corporate function expense and reflecting the other adjustments set forth therein. Section 3.5(c) of the Disclosure Schedule sets forth statements detailing all the centralized corporate function expense and other adjustments necessary to reconcile the Combined Financial Statements to the Management Reports for the six (6) month period ended June 30, 2004. The CCM Financial Statements have been prepared in accordance with GAAP consistently applied and fairly present in all material respects the consolidated financial condition and operating results and cash flows of CCM and its Subsidiaries at the date and for the period indicated therein. The books and records of CCM are true and complete in all material respects. The books and records of the Company are true and complete in all material respects. Section 3.5(d) of the Disclosure Schedule sets forth the unaudited statement of operating results of the Electronic Program Trading business of CCM for the six (6) month period ended June 30, 2004 and the unaudited statement of operating results of the Options Business of CS&Co. for the six (6) month period ended June 30, 2004 including all revenues and costs associated with the operations of such divisions in accordance with the method described therein. 3.6 Absence of Certain Changes or Events. (a) Since the Balance Sheet Date and except as otherwise reflected in the Combined Financial Statements, the Business has been conducted, in all material respects, in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition that, individually or in the aggregate, is a Business Material Adverse Effect; (ii) except as set forth in Section 3.6(a)(ii) of the Disclosure Schedule, any acquisition, sale or transfer of any material asset of CCM or its Subsidiaries; (iii) any change in the accounting methods or practices (including any change in depreciation or amortization policies or rates) materially affecting the assets of CCM or any of its Subsidiaries, except as have been required by a change in GAAP; (iv) except as set forth in Section 3.6(a)(iv) of the Disclosure Schedule, any declaration, setting aside, or payment of a dividend or other distribution with respect to the Partnership Interests; (v) the entry into any material contract related to CCM or its Subsidiaries, other than in the ordinary course of business consistent with past practice, or any material amendment or termination of, or default under, any contract related to CCM or its Subsidiaries; - 7 - (vi) any amendment or change to the certificate of incorporation or bylaws or agreement of limited partnership or other charter documents of CCM or any of its Subsidiaries; (vii) any material change in the risk management, execution and hedging policies, procedures or practices of CCM or its Subsidiaries, or any material failure to comply with such policies, procedures and practices; (viii) any material election related to CCM or its Subsidiaries with respect to taxes or material changes in tax accounting methods; (ix) any agreement by any of Sellers or by CCM or any of its Subsidiaries to do any of the things described in the preceding clauses (i) through (viii) (other than negotiations with Purchaser and its representatives regarding the transactions contemplated by this Agreement); (x) any change from the Management Reports in the manner in which the earnings of the Business and the Company Business are recorded (including line items) in CCM's and the Company's financial statements; or (xi) any other matter that would be prohibited by Section 5.2 if Section 5.2 applied to the period following the Combined Financial Statements. (b) Except as permitted by this Agreement, since the Balance Sheet Date, none of Sellers and none of CCM or any of their respective Subsidiaries has, except as required by applicable Laws and Regulations, (x) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer or director of CCM other than compensation increases in the ordinary course of business consistent with past practice or (y) granted any severance or termination pay to, entered into any contract to make or grant any severance or termination pay to, or paid any bonus other than the bonuses paid on August 20, 2004 under the CCM bonus plan to the extent of the accrual on the Balance Sheet therefor, bonuses paid on August 6, 2004 under the Parent corporate bonus plan to the extent of the accrual on the Balance Sheet therefor, bonuses required under agreements in effect as of the Balance Sheet Date to any employee of CCM to the extent such agreements are set forth in Section 3.10(a) of the Disclosure Schedule and termination pay to the extent and in the amounts set forth in Section 3.10(a) of the Disclosure Schedule and any termination pay for which Sellers (and not CCM or any of its Subsidiaries) are fully responsible. 3.7 Undisclosed Liabilities. Except as set forth in Section 3.7 of the Disclosure Schedule, there are no obligations or liabilities of any nature (matured or unmatured, fixed or contingent) related to CCM other than (i) those to the extent set forth or adequately provided for in the Combined Financial Statements, and (ii) those to the extent incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date which, individually or in the aggregate, have not had a Business Material Adverse Effect. 3.8 Legal Proceedings. Except as set forth in Section 3.8 of the Disclosure Schedule (none of which matters would have a Business Material Adverse Effect), none of Sellers and none of CCM or any of its Subsidiaries is a party to any, and there is no pending or, - 8 - to the Knowledge of Sellers, any threatened, Legal Proceeding relating to CCM or any of its Subsidiaries. The reserves for litigation set forth in the Combined Balance Sheet have been established in accordance with the FAS 5 requirements of accruing estimable and probable matters. There is no injunction, order, judgment or decree imposed upon any Seller, CCM or their respective Subsidiaries related to CCM or any of its Subsidiaries. 3.9 Taxes and Tax Returns. (a) (i) All federal, state, foreign and, to the Knowledge of Sellers, local Tax Returns required to be filed by CCM or any of its Subsidiaries with any Tax authority have been filed; (ii) all such Tax Returns are correct and complete in all material respects; (iii) all Taxes of CCM and its Subsidiaries that are due and payable with respect to the periods covered by such Tax Returns have been paid, other than Taxes which are being contested in good faith and are adequately reserved against or provided for (in accordance with GAAP) in the Combined Financial Statements; and (iv) neither CCM nor any of its Subsidiaries has any material liability for Taxes for any current or prior tax periods in excess of the amount reserved or provided for in the Combined Financial Statements (but excluding, for this purpose only, any liability reflected thereon for deferred taxes to reflect timing differences between tax and financial accounting methods). (b) Section 3.9(b) of the Disclosure Schedule identifies all pending audits or examinations with respect to Taxes involving CCM or any of its Subsidiaries. (c) Except as set forth in Section 3.9(c) of the Disclosure Schedule, there are no disputes pending with respect to, or claims or assessments asserted in writing for any material amount of Taxes for which CCM or any of its Subsidiaries could be liable, or otherwise involving CCM or any of its Subsidiaries, nor has CCM or any of its Subsidiaries given or been requested in writing to give any currently effective waivers extending the statutory period of limitation applicable to any Tax return for any period with respect to Taxes. (d) Neither CCM or any of its respective Subsidiaries (i) is a party to a Tax allocation or Tax sharing agreement related to the Business (other than an agreement solely among members of a group the common parent of which is Parent) or (ii) has any liability for the Taxes of any person (other than any of the Company or any of its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise. (e) Proper and accurate amounts have been withheld (and timely paid to the appropriate Governmental Entity) from the employees, customers and any other applicable payees of CCM and its Subsidiaries related to the Business for all periods through the date hereof in compliance with all tax withholding provisions of applicable federal, state, local and foreign laws (including, without limitation, income, social security and employment tax withholding for all types of compensation, back-up withholding and withholding on payments to non-United States persons). (f) Each of CCM and its Subsidiaries in connection with the conduct of the Business is in compliance with all applicable rules and regulations regarding the solicitation, - 9 - collection and maintenance of any forms, certifications and other information required in connection with federal, state, local or foreign tax withholding or reporting. None of CCM or its Subsidiaries takes custody of customer assets for information reporting purposes other than (i) temporary custody for escheat purposes, (ii) directives of the Office of Foreign Assets Control, and (iii) pursuant to attachment proceedings and other court orders. 3.10 Employee Benefit Plans. (a) Section 3.10(a) of the Disclosure Schedule sets forth a list of all "employee benefit plans," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all other employee benefit or compensation arrangements, agreements (oral or written), guarantees (oral or written), perquisite programs or payroll practices, including, without limitation, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options (including those held by directors, employees, and consultants), hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, that cover any employees of CCM or its Subsidiaries or otherwise are related to CCM or its Subsidiaries or to which contributions must be made thereunder for current or former directors, officers, employees or consultants related to CCM or its Subsidiaries (the "Business Employee Benefit Plans"), other than those that are not material to CCM or its Subsidiaries. Section 3.10(a) of the Disclosure Schedule separately identifies each Business Employee Benefit Plan that is sponsored or maintained by CCM or any of its Subsidiaries, or which covers only employees of CCM or its Subsidiaries. (b) None of the Business Employee Benefit Plans is a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA (a "Business Multiemployer Plan"). None of CCM or any of its Subsidiaries or Parent has withdrawn or expects to withdraw in a complete or partial withdrawal from any Business Multiemployer Plan, nor has any of them incurred or expects to incur any liability due to the termination or reorganization of a Business Multiemployer Plan. (c) None of the Business Employee Benefit Plans is a "single employer plan," as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV of ERISA. No liability has been incurred under Section 4062 of ERISA to the Pension Benefit Guaranty Corporation or to a trustee appointed under Section 4042 of ERISA that could result in a material liability to CCM or its Subsidiaries. None of CCM or any of its Subsidiaries maintains, or is required, either currently or in the future, to provide medical benefits to employees, former employees or retirees of CCM or its Subsidiaries after their termination of employment, other than pursuant to applicable Laws and Regulations. (d) Each Business Employee Benefit Plan that is intended to qualify under Section 401 of the Code, and each trust maintained pursuant thereto, received a favorable determination letter from the IRS covering all tax Laws and Regulations changes prior to the Economic Growth and Relief Reconciliation Act of 2001 or has applied for such favorable letter during the applicable remedial amendment period and, to the Knowledge of Sellers, nothing has occurred with respect to the operation of any such Business Employee Benefit Plan that would - 10 - cause the loss of such qualification or exemption or the imposition on CCM or its Subsidiaries or the Purchaser of any material liability, penalty or tax under ERISA or the Code. (e) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Business Employee Benefit Plans to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof, other than a failure to make contributions that is not material and has been fully corrected. None of the Business Employee Benefit Plans provides or promises post-employment medical or life benefits to any employee or former employee of CCM or its Subsidiaries. (f) There has been no violation of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the Business Employee Benefit Plans with the Secretary of Labor or the Secretary of the Treasury or the furnishing of required reports, documents or notices to the participants or beneficiaries of the Business Employee Benefit Plans which could result in any material liability to CCM or its Subsidiaries. (g) None of CCM or any of its Subsidiaries, the officers of CCM or its Subsidiaries or the Business Employee Benefits Plans which are subject to ERISA, any trusts created thereunder or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject CCM or its Subsidiaries or any officer of CCM or its Subsidiaries or the Purchaser to any material tax or penalty on prohibited transactions imposed by such Section 4975 or to any material liability under Section 502(i) or (1) of ERISA. (h) Except as set forth in Section 3.10(h) of the Disclosure Schedule, none of CCM or any of its Subsidiaries is a party to any contract, agreement or other arrangement related to CCM or its Subsidiaries which would reasonably be expected to result in the payment of money or any other property or rights or accelerate or provide any other rights or benefits, to any current or former employee related to CCM or its Subsidiaries (or other current or former service providers thereto) that would not have been required but for the transaction provided for herein. (i) True, correct and complete copies of the following documents, with respect to each of the Business Employee Benefit Plans maintained by CCM or its Subsidiaries, have been delivered or made available to Purchaser by Sellers : (i) all Business Employee Benefit Plans and related trust documents, and amendments thereto; (ii) the most recent Forms 5500 and (iii) summary plan descriptions. Descriptions of all other Business Employee Benefit Plans (all of which are being retained by Sellers) have been delivered or made available to Purchaser by Sellers. (j) There are no pending actions, claims or lawsuits which have been asserted, instituted or, to the Knowledge of Sellers, threatened, against the Business Employee Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Business Employee Benefit Plans with respect to - 11 - the operation of such plans (other than routine benefit claims) which could result in any material liability to Purchaser or CCM or its Subsidiaries. (k) All Business Employee Benefit Plans subject to ERISA or the Code have been maintained and administered, in all material respects, in accordance with their terms and with all provisions of ERISA and the Code, respectively (including rules and regulations thereunder) and other applicable federal and state Laws and Regulations and all employees related to CCM or its Subsidiaries required to be included as participants by the terms of such plans have been properly included, except to the extent that any failure to so include such employees would not subject the Purchaser or any of its Affiliates or CCM or its Subsidiaries to any material liability. 3.11 Employee Matters. (a) CCM and its Subsidiaries are in compliance with all applicable Laws and Regulations respecting the employment of employees and the engagement of leased employees, consultants and independent contractors, including, without limitation, all Laws and Regulations regarding discrimination and/or harassment, affirmative action, terms and conditions of employment, wage and hour requirements (including, without limitation, the proper classification, compensation and related withholding with respect to employees, leased employees, consultants and independent contractors), leaves of absence, reasonable accommodation of disabilities, occupational safety and health, workers' compensation and employment practices, except for such noncompliance as would not, individually or in the aggregate, have a Business Material Adverse Effect. None of CCM or any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract in connection with the conduct of the Business; nor to the Knowledge of Sellers are there any activities or proceedings of any labor union to organize any employees related to CCM. (b) Except as set forth in Section 3.11(b) of the Disclosure Schedule, none of Sellers or any of its Affiliates, including CCM or any of its Subsidiaries, has any employment agreement, minimum compensation promise or guarantee, leased employee agreement, consultant agreement or independent contractor agreement (in each case, whether written or unwritten) with any of the officers, directors, employees of CCM or its Subsidiaries or any other person providing service to CCM or its Subsidiaries. (c) As of the time of execution and delivery of this Agreement, to the Knowledge of Sellers (without a duty of due inquiry), no employee whose termination would be material to CCM or its Subsidiaries intends to terminate his or her employment with CCM or its Subsidiaries. (d) As of the time of execution and delivery of this Agreement, to the Knowledge of Sellers (without a duty of due inquiry), no employee whose termination would be material to CCM or its Subsidiaries is in violation in any respect of any term of any employment or services contract, patent disclosure agreement, noncompetition agreement, or any restrictive covenant to a former employer which would reasonably be expected to impede the right of any such employee to be employed or engaged in the Business. - 12 - 3.12 Compliance with Applicable Laws and Regulatory Matters. (a) Except as set forth in Section 3.12(a) of the Disclosure Schedule (none of which matters would have a Business Material Adverse Effect), CCM and its Subsidiaries have complied with all applicable Laws and Regulations, and are not in violation of, and have not received any notices of violation with respect to, any Laws and Regulations in connection with the conduct of the Business or the ownership or operation of CCM, except for such noncompliance and violations as would not have, individually or in the aggregate, a Business Material Adverse Effect. The reserves for regulatory matters set forth in the Combined Balance Sheet have been established in accordance with the FAS 5 requirements of accruing estimable and probable matters. (b) Set forth on Section 3.12(b)(i) of the Disclosure Schedule are all material licenses, permits, certificates, franchises and other authorizations related to the Business (collectively, the "Authorizations") held by CCM or its Subsidiaries, which Authorizations constitute all Authorizations necessary for the conduct of the Business. CCM and its Subsidiaries have complied with, and are not in violation of, any Authorization, except where such noncompliance or violation would not, individually or in the aggregate, have a Business Material Adverse Effect. Except as would not be material to CCM, all such Authorizations are in full force and effect and there are no proceedings pending or, to the Knowledge of Sellers, threatened that seek the revocation, cancellation, suspension or adverse modification thereof. Set forth on Section 3.12(b)(ii) of the Disclosure Schedule is a list of all Authorizations, listed by individual, held by each employee of CCM and its Subsidiaries. (c) Section 3.12(c) of the Disclosure Schedule sets forth a description of each Governmental Order applicable to CCM, and no such Governmental Order, individually or in the aggregate, has had or could reasonably be expected to have a Business Material Adverse Effect. (d) Section 3.12(d) of the Disclosure Schedule sets forth all Governmental Entities with which CCM and its Subsidiaries are required in connection with the conduct of the Business as a broker dealer to be registered; and none of CCM or any of its Subsidiaries, by virtue of its activities as a broker dealer in connection with the conduct of the Business, is required to be registered in or to obtain a license or similar authorization from any other Governmental Entity. CCM and its Subsidiaries and each of their respective employees, agents, associated persons or contractors related to CCM or its Subsidiaries who are required to be registered as a broker-dealer, investment adviser, a registered representative or other applicable regulatory category with the SEC, the securities commission of any state or foreign jurisdiction or any SRO are duly registered as such and such registrations are in full force and effect, except for failures to register that would not be material. (e) Except as set forth on Section 3.12(e) of the Disclosure Schedule, no activities of CCM or its Subsidiaries could result in any of them being required to be registered as an exchange or transfer agent, a clearing agency, a municipal securities dealer, a government securities dealer, a futures commission merchant, a commodity trading adviser or a commodity pool operator. - 13 - (f) None of CCM or any of its Subsidiaries in connection with the conduct of the Business is subject to registration as an investment company under the Investment Company Act or as an investment adviser under the Investment Advisers Act, or similar Laws and Regulations of any foreign Governmental Entity. (g) To the Knowledge of Sellers, there are no facts or circumstances that would (i) cause the NASD or any other required federal or state regulatory agency or other Governmental Entity not to approve the transfer of control and ownership of Partnership Interests to Purchaser; or (ii) cause the NASD or any federal or state regulatory agency or other Governmental Entity to revoke or restrict the Authorizations to operate as a broker-dealer after the change in ownership and control of CCM and its Subsidiaries contemplated by this Agreement. (h) None of CCM or any of its Subsidiaries in connection with the conduct of the Business is subject to any cease-and-desist or other order or enforcement action issued by, or party to any written agreement, consent agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from, or has adopted any board or member resolutions at the request or suggestion of, any regulatory authority or other Governmental Entity related to CCM or any of its Subsidiaries (each, a "Business Regulatory Agreement"), nor have any of CCM or its Subsidiaries been advised in writing or, to the Knowledge of Sellers, in any other manner, by any regulatory authority or Governmental Entity that it is considering issuing or requesting such a Business Regulatory Agreement nor is there any pending or, to the Knowledge of Sellers threatened, regulatory investigation related to CCM or its Subsidiaries. To the Knowledge of Sellers, none of the Sellers or any of their respective associated persons (as defined in Section 3(a)(21) of the Securities Exchange Act) related to CCM or any of its Subsidiaries has been convicted within the past ten years of any felony or misdemeanor described in Section 15(b)(4) of the Securities Exchange Act, or is, by reason of any misconduct, permanently or temporarily enjoined from acting in the capacities, or engaging in the activities, described in Section 15(b)(4)(C) of the Securities Exchange Act. No such Person has been or is subject to a "statutory disqualification" with respect to membership or participation in, or association with a member of, a self-regulatory organization, described in Section 3(a)(39) of the Securities Exchange Act or has been or is subject to the imposition by a SRO of special supervision or other special requirements as prerequisites for maintaining any securities license or regulation. (i) None of CCM or any of its Subsidiaries has received any notice from a competent authority alleging that in connection with the conduct of the Business, CCM or its Subsidiaries has failed to comply with any applicable data or consumer protection Laws and Regulations, nor has CCM or its Subsidiaries received any claim from any individual seeking compensation for breaches of applicable data and consumer protection Laws and Regulations in connection with the conduct of the Business. (j) To the Knowledge of Sellers, there are no facts or circumstances that would require any of them to give notice to any customers, consumers or other similarly situated individuals, pursuant to California Civil Code Sections 1798.29, et seq., or any similar Laws and - 14 - Regulations of any other state, of any actual or perceived data security breaches related to CCM or its Subsidiaries. (k) Each of CCM and its Subsidiaries has filed all reports, registration statements and other documents, together with any amendments required to be made with respect thereto, that it was required to file with any Governmental Entity and has paid all fees and assessments due and payable in connection therewith. No statements made in any such reports, registration statements, other documents or amendments were, at the time they were made, false or misleading with respect to any material fact. No delay in filing any such reports has not been remedied except where such failure to remedy would not be material. (l) Each of CCM and its Subsidiaries has adopted and implemented an anti-money laundering policy and a customer identification program that comply with the requirements of applicable Laws and Regulations. (m) Sellers have devised and maintained systems of internal controls with respect to CCM and its Subsidiaries sufficient to be in material compliance with the requirements of the Securities Exchange Act and the NASD. (n) CCM maintains "know your customer" policies and procedures and obtains information concerning customers sufficient to know the "essential facts" concerning its customers as required under the USA Patriot Act and the rules of SROs. (o) CCM has conducted and is conducting periodic internal audits, inquiries or reviews with respect to compliance by CCM and its Subsidiaries with selected NASD rules and internal guidelines and policies of Sellers and its Affiliates and of CCM and its Subsidiaries and no such audit, inquiry or review or, to the Knowledge of Sellers, any audit, inquiry or review performed by any Governmental Entity with respect to CCM or any of its Subsidiaries, has revealed any information with respect to CCM or its Subsidiaries that, individually or in the aggregate, would have a Business Material Adverse Effect. (p) None of CCM or its Subsidiaries holds any position in OTC derivatives. 3.13 Material Contracts. (a) Except for the contracts set forth in Section 3.13(a) of the Disclosure Schedule (collectively, the "Material Contracts"), none of CCM or any of its Subsidiaries is a party to or bound by any of the following: (i) any contract or agreement entered into other than in the ordinary course of business consistent with past practice for the acquisition of the securities of or any material portion of the assets of any other Person or entity or any investment in any other Person; (ii) any contract or agreement for the purchase of services in excess of $250,000; - 15 - (iii) any contract, agreement or instrument in excess of $250,000 that expires or may be renewed at the option of any Person other than CCM or any of its Subsidiaries so as to expire more than one year after the date of this Agreement; (iv) any material contract with any independent contractor or consultant (or similar arrangement) which is not cancelable without penalty and without more than thirty (30) days' notice; (v) any trust indenture, mortgage, promissory note, loan agreement or other contract, agreement or instrument for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, in each case, where CCM or any of its Subsidiaries is a lender, borrower or guarantor; (vi) any contract or agreement limiting the freedom of CCM or any of its Subsidiaries or any of their respective employees to engage in any line of business or to compete with any other Person; (vii) any contract or agreement with Sellers or any of their Affiliates; (viii) any agreement of guarantee, support, indemnification, assumption or endorsement of, or any similar commitment with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other Person other than those entered into in the ordinary course of business; (ix) any material agreement which would be terminable other than by CCM or any of its Subsidiaries or under which a payment or performance obligation would arise or be accelerated, in each case as a result of the consummation of the transactions contemplated by this Agreement; (x) any alliance, cooperation, joint venture, stockholders' partnership or similar agreement; (xi) any broker, distributor, dealer, agency, sales promotion, market research, market consulting or advertising agreement involving in excess of $250,000; (xii) any material research, development, sales representative, marketing or reseller agreement, or any service, support or maintenance agreement related to the business or technology of CCM or any of its Subsidiaries; (xiii) any agreement, option or commitment or right with, or held by, any third party to acquire, use or have access to any assets or properties, or any interest therein, of CCM or any of its Subsidiaries; (xiv) any outbound license, sublicense or development agreement or other material agreement or any material inbound license, sublicense or development agreement or other material agreement that affects or relates to the Intellectual Property, including, without - 16 - limitation, any material agreement pursuant to which any person or entity is authorized to use or has an ownership or security interest in any Intellectual Property; (xv) any "soft dollar" contract, arrangement or agreement, whether written or oral; (xvi) any material contract or agreement which would require any consent or approval of a counterparty as a result of the consummation of the transactions contemplated by this Agreement; and (xvii) any other contract the loss or presence of which would, individually or in the aggregate, have a Business Material Adverse Effect or that involves a payment or obligation that exceeds $250,000 annually or $500,000 in the aggregate or contains any obligation of CCM the failure of which to satisfy would have a Business Material Adverse Effect. (b) CCM and its Subsidiaries have performed all of the obligations required to be performed by them and are entitled to all accrued benefits under, and are not alleged to be in default in respect of, each Material Contract to which CCM or any of its Subsidiaries is a party or by which CCM or any of its Subsidiaries is bound, except in each case as would not, individually or in the aggregate, have a Business Material Adverse Effect. Each of the Material Contracts is in full force and effect, without amendment (other than as disclosed in Section 3.13(b) of the Disclosure Schedule), and there exists no default or event of default or event, occurrence, condition or act, with respect to CCM or any of its Subsidiaries or, to Knowledge of Sellers, with respect to any other contracting party, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default under any Material Contract, except, as would not, individually or in the aggregate, be material to CCM. True, correct and complete copies of all Material Contracts have been furnished or made available to Purchaser. 3.14 Assets. CCM, the Company and their Subsidiaries own, lease or have the right to use all the properties and assets used or held for use in the conduct of the Business and the Company Business or otherwise reflected in the Combined Balance Sheet (all such properties and assets being referred to as the "Entity Assets"). The Entity Assets constitute all the assets (other than real estate assets) used or held for use in the conduct of (i) the Business and necessary for Purchaser to operate the Business as currently conducted by Sellers and its Affiliates and (ii) other than with respect to employees, real estate leases, leasehold improvements and any assets the parties hereto have specifically agreed to exclude pursuant to any other provision of this Agreement, the Company Business and necessary for Purchaser and Purchaser II to operate the Company Business as currently conducted by Sellers and its Affiliates. CCM, the Company and their Subsidiaries have good title to, or in the case of leased or subleased Entity Assets, valid and subsisting leasehold interests in, all of the Entity Assets, free and clear of all Liens, except for Permitted Liens, and immediately following the Closing, such entities will have good title to, or in the case of leased or subleased Entity Assets, valid and subsisting leasehold interests in, all of the Entity Assets, free and clear of all Liens, except for Permitted Liens. Section 3.14 of the Disclosure Schedule contains a true, complete and correct list (designating the relevant lessors or sublessors) of all real property and improvements used in the Business or the Company Business - 17 - and either leased or subleased by CCM, the Company or any of their Subsidiaries or otherwise made available for their use. 3.15 Environmental Liability. There are no legal, administrative, arbitral or other proceedings, claims or actions or any private environmental investigations or remediation activities or governmental investigations of any nature that would be reasonably likely to result in the imposition on CCM or any of its Subsidiaries of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance, including CERCLA, pending or, to the Knowledge of Sellers, threatened against CCM or any of its Subsidiaries, which liability or obligation would be material to CCM. To the Knowledge of Sellers, there is no reasonable basis for any such proceeding, claim, action or investigation. None of CCM or any of its Subsidiaries is subject to any agreement, order, judgment or decree by or with any court, governmental authority, regulatory agency or third party imposing any liability or obligation with respect to the foregoing. CCM is and has been in compliance with all applicable Laws and Regulations and Authorizations relating to the environment, human health and safety, hazardous substances and waste material ("Environmental Laws"), and there are no liabilities under any Environmental Laws with respect to the Business, other than failures to comply or liabilities that would not, individually or in the aggregate, have a Business Material Adverse Effect or otherwise materially adversely affect Purchaser. None of CCM or its Subsidiaries has received any notice from any Governmental Entity during the past five years relating to or alleging a material violation of any Environmental Law. None of CCM or its Subsidiaries has any indemnification obligation with any Person with respect to Environmental Laws. 3.16 Insurance. CCM and its Subsidiaries have in full force and effect the insurance coverage with respect to the Business set forth in Section 3.16 of the Disclosure Schedule. There is no material claim related to CCM pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies have been paid and, CCM and its Subsidiaries are otherwise in compliance in all material respects with the terms of such policies. Sellers have no Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 3.17 Intellectual Property. (a) Section 3.17(a) of the Disclosure Schedule lists all Intellectual Property registered or filed in the name of CCM or its Subsidiaries, which CCM or any of its Subsidiaries owns exclusively (except as owned exclusively by Parent or its other Affiliates as set forth on Schedule 3.17(a)) and all Proprietary Software that is necessary or material to the current or proposed conduct of the Business. Section 3.17(a) of the Disclosure Schedule lists all Legal Proceedings before any Governmental Entity (including the United States Patent and Trademark Office or equivalent authority anywhere in the world) related to any of such Intellectual Property or related to any Proprietary Software whatsoever. No claim is currently pending or, to the Knowledge of Sellers threatened, challenging the ownership, validity, registerability, enforceability, infringement or use of, or licensed right to use, any Intellectual Property. The Intellectual Property listed in Section 3.17(a) of the Disclosure Schedule is valid, subsisting and enforceable (but as to Intellectual Property applications thereon that are not fully issued, only - 18 - that they are subsisting). To the Knowledge of Sellers, there is no valid basis to challenge the ownership or enforceability of any Intellectual Property, the validity, registerability, use of or the licensed right to use any Intellectual Property (provided that this sentence shall not limit or qualify the foregoing sentence). The Business IP is not subject to any outstanding order, judgment, decree or agreement adversely affecting CCM's and its Subsidiaries' (or Purchaser's following the Closing) use thereof or rights thereto. None of CCM or its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation or other conflict with respect to any Intellectual Property other than as set forth in agreements provided to Purchaser for its review. No commercially material Intellectual Property owned by CCM or any of its Subsidiaries is omitted from Schedule 3.17(a). (b) Section 3.17(b) of the Disclosure Schedule lists each item of software included in the Intellectual Property and developed by or for CCM and its Subsidiaries or the Business (the "Proprietary Software") that is necessary or material to the current or proposed conduct of the Business. All Proprietary Software does not, to the Knowledge of Sellers, contain any "time bombs," "Trojan horses," "back doors," "trap doors," "worms," viruses, or other devices or effects that (A) enable or assist any person to access without authorization the Proprietary Software, or (B) otherwise significantly adversely affect the functionality of the Proprietary Software. Except as set forth on Section 3.17(b) of the Disclosure Schedule, to the Knowledge of Sellers, the Proprietary Software does not contain any shareware, open source code, or other software the use of which requires disclosure or licensing of the Proprietary Software. Sellers shall have made available to Purchaser for hiring all personnel necessary to use, maintain, revise and operate the Proprietary Software as currently maintained, revised and operated. (c) Except as set forth on Section 3.17(c) of the Disclosure Schedule, CCM and its Subsidiaries (i) own all right, title and interest in and to each item of Intellectual Property, free and clear of any Liens other than Permitted Liens, or (ii) are a licensee of Intellectual Property pursuant to a contract that is a valid and binding obligation of CCM and its Subsidiaries and, to the Knowledge of Sellers, the other parties thereto and is in full force and effect. Except as set forth on Section 3.17(c) of the Disclosure Schedule, each material item of Intellectual Property shall be owned by Purchaser or immediately available for use by Purchaser on substantially identical terms and conditions immediately following the Closing, without any requirement for any consent from any third party or any affirmative act by Purchaser (e.g., notice to any third party). (d) Section 3.17(d) of the Disclosure Schedule lists each license or other agreement or authorization pursuant to which CCM and its Subsidiaries provided or agreed to provide (whether or not such agreement is contingent) a license, nonassertion agreement, covenant not to sue, enforcement right or any similar right, agreement or grant to any third party with respect to any Business IP. No such agreement operates to grant rights in or to or create any limitation (including by way of nonassertion) or encumbrance upon Intellectual Property owned or controlled by any entity which becomes an affiliate of CCM or any of its Subsidiaries other than those provided to Purchaser for its review. Except as set forth on Section 3.17(d) of the Disclosure Schedule, no other person or entity has any rights to any Business IP, and, to the Knowledge of Sellers, no person or entity is infringing, violating or misappropriating any of the Intellectual Property. - 19 - (e) Section 3.17(e) of the Disclosure Schedule identifies each license, nonassertion agreement, covenant not to sue or agreement pursuant to which CCM and its Subsidiaries use Intellectual Property in the operation of the Business that is owned by a party other than CCM or any of its Subsidiaries. During the preceding twenty-four (24) months, all royalties and other payments due from CCM or any of its Subsidiaries under such licenses or agreements have been paid when due. (f) Except as set forth on Section 3.17(f) of the Disclosure Schedule, in the operation of the Business, CCM and its Subsidiaries are not, and shall not be as a result of the execution and delivery of this Agreement or the performance of their obligations under this Agreement (assuming receipt of any consent or approval set forth in Section 3.4 of the Disclosure Schedule), in material breach of any license, sublicense or other agreement or any term or condition thereof, pursuant to which CCM or any of its Subsidiaries grant or are granted any license to the Intellectual Property and all such licenses, sublicenses and other agreements are valid and enforceable and no party thereto has given CCM or its Subsidiaries notice of its intention to cancel, terminate, change the scope of rights under, or fail to renew, and no party is in material breach or has repudiated any material provision thereof. To the Knowledge of Sellers, to the extent that Intellectual Property is sublicensed to CCM and/or its Subsidiaries by a third person, the sublicensed rights of CCM and/or its Subsidiaries shall continue in full force and effect even if the principal third person license terminates or is otherwise modified for any reason. To the Knowledge of Sellers, the Intellectual Property provided or otherwise made available to CCM and its Subsidiaries pursuant to such licenses, sublicenses or other agreements is valid, subsisting and enforceable and is not subject to any outstanding Governmental Order adversely affecting CCM's or its Subsidiaries' use thereof or their rights thereto. (g) Except as set forth on Section 3.17(g) of the Disclosure Schedule, to the extent that any Intellectual Property has been developed or created for or on behalf of CCM or any of its Subsidiaries, or the Business, by any Person other than CCM or any of its Subsidiaries, CCM or any of its Subsidiaries has a written agreement with such Person with respect thereto transferring or otherwise conferring to the foregoing all right, title and interest in and to the Intellectual Property by operation of Laws and Regulations or by valid assignment. To the extent internally developed, CCM and its Subsidiaries have followed standard business practices in developing the Intellectual Property, including requiring each employee or contractor to execute a written agreement in which such employee or contractor assigns or otherwise confers to the foregoing all right, title and interest in and to such Intellectual Property. All Proprietary Software, including each of its constituent parts, is owned exclusively by CCM and its Subsidiaries, and is not derived from and does not incorporate or otherwise use as a basis any Intellectual Property not owned exclusively by CCM and its Subsidiaries. Without limiting the foregoing provisions of this Section 3.17(g), modification of the Proprietary Software requires no Person's consent other than CCM or its Subsidiaries. (h) CCM and its Subsidiaries have taken reasonable steps in accordance with normal industry practice and in light of the nature of the particular item of Intellectual Property to protect the proprietary nature of each item of Intellectual Property, and to maintain in confidence all trade secrets and other material confidential information that CCM and its Subsidiaries own or use in connection with the Business ("Business Confidential Information"). To the Knowledge of Sellers, there has been no misappropriation of any - 20 - Business Confidential Information by any third party. Except as set forth on Section 3.17(h) of the Disclosure Schedule, none of CCM or any of its Subsidiaries has placed in escrow or otherwise disclosed the source code or documentation for any of the Proprietary Software. To the Knowledge of Sellers, none of the current employees of CCM and its Subsidiaries has any patents issued or applications pending for any device, process, design or invention of any kind now used or needed by CCM and/or its Subsidiaries in the furtherance of its business, which patents or applications have not been assigned to CCM and/or its Subsidiaries. CCM and its Subsidiaries have no Knowledge that any of their employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any Governmental Order, that would interfere with the use of such employee's best efforts to promote the interests of CCM and its Subsidiaries or that would conflict with the Business as conducted by Sellers or proposed to be conducted. Neither the execution nor delivery of this Agreement nor the carrying on of the Business by the employees of CCM and its Subsidiaries will, to the Knowledge of Sellers, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under any contract, covenant or instrument under which any of such employees is now obligated. To the Knowledge of Sellers, it is not and will not be necessary to utilize in the Business any inventions of any of the employees of CCM or any of its Subsidiaries (or people they currently intend to hire) made prior to or outside the scope of their employment with CCM and its Subsidiaries. (i) The conduct of the Business, and the Proprietary Software, do not, and have not, infringed or violated, or constituted a misappropriation of, any intellectual property rights of any person or entity; provided that the foregoing representation is given to the Knowledge of Sellers as concerns patent rights. Section 3.17(i) of the Disclosure Schedule lists any complaint, claim, notice or other communication (x) received in oral form by any partner, officer or employee of, CCM or any of its Subsidiaries, or (y) received in written form by CCM or any of its Subsidiaries, expressly or impliedly alleging the conduct of the Business, or the Proprietary Software, constitutes any infringement, violation or misappropriation of the intellectual property of any third party, or otherwise challenging the right of CCM or any of its Subsidiaries or any licensee or sublicensee of CCM or any of its Subsidiaries to own or use any Intellectual Property, or challenging the validity, scope or enforceability of any Intellectual Property or the right of CCM or any of its Subsidiaries to license others to use or sublicense any Intellectual Property. Sellers have made available to Purchaser complete and accurate copies of all written documentation in the possession of Sellers relating to any such complaint, claim, notice, threat or other communication. (j) Section 3.17(j) of the Disclosure Schedule sets forth a list of all Internet domain names and their expiration dates currently licensed or owned by CCM (collectively, the "Domain Names"). CCM has, and after the Closing will have, a current registration of each Domain Name and the right to continue to conduct the Business as currently conducted under the Domain Names. (k) None of the officers, directors or employees of Sellers, CCM or any of their respective Affiliates owns or holds rights (whether current or contingent) under any Intellectual Property and CCM has all right, title and interest in the Intellectual Property obtained through transactions involving any officers, directors or employees of Sellers, CCM or any of their respective Affiliates. - 21 - (l) Except as set forth on Section 3.17(l) of the Disclosure Schedule, the Intellectual Property included in the Entity Assets constitute all the intellectual property necessary for, used in, or held for, the current or proposed conduct of the Business, and neither Parent nor any of its Affiliates (other than CCM or its Subsidiaries) owns any intellectual property necessary to, used in or held for the current or proposed conduct of the Business. 3.18 Information Technology. (a) All electronic data processing, information, record keeping, communications, telecommunications, hardware, third party software, networks, peripherals, portfolio trading and computer systems, including any outsourced systems, services, or processes, computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation and Intellectual Property which are material to the conduct of the Business or the electronic program trading business of CCM are collectively referred to as "Technology Systems." Within the preceding twelve (12) months, there has not been any material malfunction, default, or failure with respect to any of the Technology Systems that has not been remedied or replaced in all material respects. The Technology Systems as they will be transferred to Purchaser pursuant to this Agreement or provided pursuant to the Transition Services Agreement are sufficient to support the information technology needs of the Business. Sellers shall have made available to Purchaser for hiring all personnel necessary to use, maintain, revise and operate the Technology Systems transferred to Purchaser pursuant to this Agreement as currently used, maintained, revised and operated. (b) Technology Systems are either owned by, licensed or leased to, or otherwise properly utilized pursuant to written authorization to CCM or any of its Subsidiaries. No action will be necessary as a result of the transactions effected by this Agreement to authorize, permit, or otherwise enable use of the Technology Systems to continue to the same extent and in the same manner that such Technology Systems have been used in the preceding twelve (12) months. CCM and its Subsidiaries are not in breach of any obligation owed under such licenses or leases. (c) Section 3.18(c) of the Disclosure Schedule lists all the material third party agreements, licenses, and leases related to the Technology Systems, including without limitation, all material maintenance and support contracts for the Technology Systems. (d) Except as disclosed in Section 3.18(d) of the Disclosure Schedule, (i) the Technology Systems (for a period of 18 months prior to the Closing Date) have not suffered a material unplanned disruption; (ii) except for ongoing payments due under relevant third party agreements, the Technology Systems are free from any material charge, mortgage or security interest; and (iii) access to business critical parts of the Technology Systems is not shared with any third party. (e) Details of the disaster recovery and business continuity arrangements for CCM are disclosed in Section 3.18(e) of the Disclosure Schedule. The material disaster recovery and business continuity arrangements for CCM are consistent with industry practice. - 22 - (f) None of CCM or any of its Subsidiaries has received notice of or is aware of any material circumstances including, without limitation, the execution of this Agreement, which would enable any third party to terminate any of CCM's or any of its Subsidiaries' material agreements or arrangements relating to the Technology Systems. (g) There are no material agreements with third parties for Technology Systems that would terminate on the consummation of the transactions contemplated by this Agreement or are otherwise not assignable without consent from any third party or without payment of any associated cost, fee, charge, or penalty. (h) [Intentionally Omitted]. (i) None of CCM or any of its Subsidiaries has received notice of or is aware of any claim or action alleging that the Technology Systems, or CCM's use of the Technology Systems, in any way violate any non-disclosure and/or non-use agreement, nor constitute an infringement or other violation of any copyright, trade secret, trademark, service mark, patent, invention, proprietary information, or other rights of any third party. 3.19 Interests of Officers, Directors and Employees. None of the officers, directors or employees of Sellers, CCM, any of their respective Subsidiaries or any of their respective Affiliates has any material interest in any property, real or personal, tangible or intangible used in the Business. 3.20 Order Flow. (a) [Intentionally Omitted]. (b) [Intentionally Omitted]. (c) Section 3.20(c) of the Disclosure Schedule sets forth a true and complete summary of commissions associated with trades executed by individual traders employed by CCM in 2003 and the first two calendar quarters of 2004. (d) Capitalized terms used in this Section 3.20 and not otherwise defined herein shall have the meaning set forth in the (i) Order Handling Agreement, when such term is used with respect to equity securities, or (ii) Options Order Business Agreement, when such term is used with respect to options. 3.21 Broker's Fees. Except for Greenhill & Co., none of Sellers has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. 3.22 Business Information. The representations or warranties made by Sellers herein or in any schedule hereto, including the Disclosure Schedule, or certificate furnished by Sellers pursuant to this Agreement do not contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. - 23 - Article IIIA Representations and Warranties of the Company Except as specifically disclosed in the correlative Section in the Disclosure Schedule, Sellers, jointly and severally, represent and warrant to Purchaser and Purchaser II as of the date hereof and as of the Closing as follows: 3A.1 Corporate Organization, Standing and Power. The Company is a corporation duly organized, validly existing and in good standing under the Laws and Regulations of the State of Delaware. The Company and each of its Subsidiaries has the requisite power to carry on the Company Business as now being conducted by it and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would, individually or in the aggregate, have a Company Material Adverse Effect. Sellers have furnished or made available to Purchaser II prior to the date of this Agreement a true and correct copy of the certificate or articles of incorporation, partnership agreement or operating agreement, each as applicable, and bylaws, and any other charter or organizational documents, of the Company and its Subsidiaries, and each such document in the form so furnished to Purchaser II is in full force and effect. None of the Company or any of its Subsidiaries is in violation of any of the provisions of its organizational documents. 3A.2 Capitalization. (a) The authorized capital stock of the Company consists of: 500,000,000 shares of common stock, par value $0.01 per share, of which 25,000,000 are issued and outstanding, all of which are duly authorized, validly issued, fully paid, nonassessable and owned, free and clear of all Liens, by Parent; 75,000,000 shares of Class B common stock, par value $0.01 per share; and 30,000,000 shares of preferred stock, par value $0.001 per share. There are no shares of Class B common stock or preferred stock outstanding. There are no bonds, debentures, notes or other indebtedness or securities of the Company that have the right to vote (or that are convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. Except as set forth above, no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements or obligations of any character relating to the issued or unissued capital stock or other securities of the Company or any of its Subsidiaries. (b) Section 3.2(b) of the Disclosure Schedule lists each direct and indirect Subsidiary of the Company. All of the outstanding shares of capital stock and voting securities or other interests of each Subsidiary of the Company, including Saturn Sub, are owned, directly or indirectly, by the Company and are duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (c) Except as set forth in Section 3.2(c) of the Disclosure Schedule, none of the Company or any of its Subsidiaries (i) owns, or has any contract or other obligation to acquire, any equity securities or other securities of or ownership interest in any Person or any direct or indirect equity or ownership interest in any other business or (ii) has any contract or - 24 - other obligation to provide funds to, or make any investment in, any Person. There is no funding obligation of the Company or any of its Subsidiaries with respect to a third party investment or other interest that has not been satisfied, except as specifically reflected on the Combined Financial Statements. (d) Upon delivery by Parent of the Company Common Stock at Closing, good and valid title to the Company Common Stock, free and clear of all Liens, other than those resulting only from Purchaser II's ownership, will pass to Purchaser II. 3A.3 No Violation. Neither the execution and delivery of this Agreement or any of the Ancillary Agreements by each of Sellers nor the consummation by each of Sellers of the transactions contemplated hereby or thereby, nor compliance by each of Sellers with any of the terms or provisions hereof or thereof, will (i) violate any provision of the certificates of incorporation or bylaws or other charter or organizational documents of each of the Company or any of its Subsidiaries or any of their Affiliates or (ii) assuming that the consents and approvals specifically referred to in Section 3.4 (as to clause (x) with respect to Governmental Entities and as to clause (y) with respect to Governmental Entities and non-Governmental Entities) are duly obtained, (x) violate any Laws and Regulations applicable to any of Sellers, the Company or any of their Subsidiaries or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Sellers, the Company or any of their respective Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, or other instrument or obligation to which any of Sellers, the Company or any of their respective Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except (in the case of clauses (ii) (x) (other than with respect to Governmental Orders) and (y) above) for such violations, conflicts, breaches, defaults or the loss of benefits which, either individually or in the aggregate, would not be a Company Material Adverse Effect. 3A.4 [Intentionally Omitted]. 3A.5 [Intentionally Omitted]. 3A.6 Absence of Certain Changes or Events. (a) Since the Balance Sheet Date and except as otherwise reflected in the Combined Financial Statements, the Company Business has been conducted, in all material respects, in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition that, individually or in the aggregate, is a Company Material Adverse Effect; (ii) except as set forth in Section 3.6(a)(ii) of the Disclosure Schedule, any acquisition, sale or transfer of any material asset of the Company or its Subsidiaries; - 25 - (iii) any change in the accounting methods or practices (including any change in depreciation or amortization policies or rates) materially affecting the assets of the Company or any of its Subsidiaries, except as have been required by a change in GAAP; (iv) except as set forth in Section 3.6(a)(iv) of the Disclosure Schedule, any declaration, setting aside, or payment of a dividend or other distribution with respect to the Company Common Stock; (v) the entry into any material contract related to the Company or its Subsidiaries, other than in the ordinary course of business consistent with past practice or any material amendment or termination of, or default under, any contract related to the Company or its Subsidiaries; (vi) any amendment or change to the certificate of incorporation or bylaws or agreement of limited partnership or other charter documents of the Company or any of its Subsidiaries; (vii) any material change in the risk management, execution and hedging policies, procedures or practices of the Company or its Subsidiaries, or any material failure to comply with such policies, procedures and practices; (viii) any material election related to the Company or its Subsidiaries with respect to taxes or material changes in tax accounting methods; (ix) any agreement by any of Sellers or by the Company or any of its Subsidiaries to do any of the things described in the preceding clauses (i) through (viii) (other than negotiations with Purchaser and its representatives regarding the transactions contemplated by this Agreement); (x) any change from the Management Reports in the manner in which the earnings of the Business and the Company Business are recorded (including line items) in CCM's and the Company's financial statements; or (xi) any other matter that would be prohibited by Section 5.2 if Section 5.2 applied to the period following the Combined Financial Statements. (b) Except as permitted by this Agreement, since the Balance Sheet Date, none of Sellers and none of the Company or any of their respective Subsidiaries has, except as required by applicable Laws and Regulations, (x) increased the wages, salaries, compensation, pension, or other fringe benefits or perquisites payable to any executive officer or director of the Company other than compensation increases in the ordinary course of business consistent with past practice or (y) granted any severance or termination pay to, entered into any contract to make or grant any severance or termination pay to, or paid any bonus other than the bonuses paid on August 20, 2004 under the Company bonus plan to the extent of the accrual on the Balance Sheet therefor, bonuses paid on August 6, 2004 under the Parent corporate bonus plan to the extent of the accrual on the Balance Sheet therefor, bonuses required under agreements in effect as of the Balance Sheet Date to any employee of the Company to the extent such agreements are set forth in Section 3.10(a) of the Disclosure Schedule and termination pay to the - 26 - extent and in the amount set forth in Section 3.10(a) of the Disclosure Schedule and any termination pay for which Sellers and not the Company or any of its Subsidiaries are fully responsible. 3A.7 Undisclosed Liabilities. Except as set forth in Section 3.7 of the Disclosure Schedule, there are no obligations or liabilities of any nature (matured or unmatured, fixed or contingent) related to the Company other than (i) those to the extent set forth or adequately provided for in the Combined Financial Statements, and (ii) those to the extent incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date which, individually or in the aggregate, have not had a Company Material Adverse Effect. 3A.8 Legal Proceedings. Except as set forth in Section 3.8 of the Disclosure Schedule, none of Sellers and none of the Company or any of its Subsidiaries is a party to any, and there is no pending or, to the Knowledge of Sellers, any threatened, Legal Proceeding relating to the Company or any of its Subsidiaries. The reserves for litigation set forth in the Combined Balance Sheet have been established in accordance with the FAS 5 requirements of accruing estimable and probable matters. There is no injunction, order, judgment or decree imposed upon any Seller, the Company or their respective Subsidiaries related to the Company or any of its Subsidiaries. 3A.9 Taxes and Tax Returns. (a) (i) All federal, state, foreign and, to the Knowledge of Sellers, local Tax Returns required to be filed by or with respect to the Company or any of its Subsidiaries with any Tax authority have been filed; (ii) all such Tax Returns are correct and complete in all material respects; (iii) all Taxes of the Company or any of its Subsidiaries that are due and payable with respect to the periods covered by such Tax Returns have been paid, other than Taxes which are being contested in good faith and are adequately reserved against or provided for (in accordance with GAAP) in the Combined Financial Statements; and (iv) neither the Company nor any of its Subsidiaries has any material liability for Taxes for any current or prior tax periods in excess of the amount reserved or provided for in the Combined Financial Statements (but excluding, for this purpose only, any liability reflected thereon for deferred taxes to reflect timing differences between tax and financial accounting methods). As of December 31, 2002, the Company and its Subsidiaries had a net operating loss carryforward of $80,804,938. Such net operating loss carryforward is due to expire as set forth on Section 3.9(a) of the Disclosure Schedule and is not subject to a limitation under Section 382 of the Code that is more restrictive than the limitation that will apply under Section 382 as a result of the transactions contemplated by this Agreement (based on the Purchase Price Allocation set forth in Section 1.4 hereof). (b) Section 3.9(b) of the Disclosure Schedule identifies all pending audits or examinations with respect to Taxes involving the Company or any of its Subsidiaries. (c) Except as set forth in Section 3.9(c) of the Disclosure Schedule, there are no disputes pending with respect to, or claims or assessments asserted in writing for any material amount of Taxes for which the Company or any of its Subsidiaries could be liable, or otherwise involving the Company or any of its Subsidiaries, nor has Parent, the Company or any - 27 - of their respective Subsidiaries given or been requested in writing to give any currently effective waivers extending the statutory period of limitation applicable to any Tax return for any period with respect to Taxes. (d) Except as set forth in Section 3.9(d) of the Disclosure Schedule, none of the Company or any of its Subsidiaries has been required to include in income any adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by the Company, Parent or any of their respective Subsidiaries, and the IRS has not initiated or proposed any such adjustment or change in accounting method (including, without limitation, any method for determining reserves for bad debts maintained by the Company or any of its Subsidiaries). Neither the Company nor any of its respective Subsidiaries (i) is a party to a Tax allocation or Tax sharing agreement or (ii) has any liability for the Taxes of any person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise. (e) Proper and accurate amounts have been withheld (and timely paid to the appropriate Governmental Entity) from the employees, customers and any other applicable payees of the Company and its Subsidiaries for all periods through the date hereof in compliance with all tax withholding provisions of applicable federal, state, local and foreign laws (including, without limitation, income, social security and employment tax withholding for all types of compensation, back-up withholding and withholding on payments to non-United States persons). (f) Each of the Company and its Subsidiaries is in compliance with all applicable rules and regulations regarding the solicitation, collection and maintenance of any forms, certifications and other information required in connection with federal, state, local or foreign tax withholding or reporting. None of the Company or its Subsidiaries takes custody of customer assets for information reporting purposes other than (i) temporary custody for escheat purposes, (ii) directives of the Office of Foreign Assets Control, and (iii) pursuant to attachment proceedings and other court orders. (g) None of the Company or any of its respective Subsidiaries has been a party to any "reportable transaction" within the meaning of Treasury Regulations Section 1.6011-4(b), any "confidential corporate tax shelter" within the meaning of Treasury Regulations Section 1.6111-2, or any "potentially abusive tax shelter" within the meaning of Treasury Regulations Section 1.6112-1(b). (h) Except as set forth in Section 3.9(h) of the Disclosure Schedule, none of the Company of any of its Subsidiaries is a party to any plan, program, agreement, arrangement, practice, policy or understanding that would result, separately or in the aggregate, in the payment or provision (whether in connection with any termination of employment or otherwise) of any "excess parachute payment" within the meaning of Section 280G of the Code with respect to a current or former employee or current or former consultant or contractor as a result of the transactions contemplated hereby. (i) Except as set forth in Section 3.9(i) of the Disclosure Schedule, none of the Company or its respective Subsidiaries is a party to any contract, agreement, plan or - 28 - arrangement covering any person that could give rise to the payment of any amount that would not be deductible by reason of Section 162(m) of the Code. 3A.10 Employee Benefit Plans. (a) Section 3.10(a) of the Disclosure Schedule sets forth a list of all "employee benefit plans," as defined in Section 3(3) of ERISA, and all other employee benefit or compensation arrangements, agreements (oral or written), guarantees (oral or written), perquisite programs or payroll practices, including, without limitation, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options (including those held by directors, employees, and consultants), hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, that cover any employees of the Company or its Subsidiaries or otherwise are related to the Company or its Subsidiaries or to which contributions must be made thereunder for current or former directors, officers, employees or consultants related to the Company or its Subsidiaries (the "Company Employee Benefit Plans"), other than those that are not material to the Company or its Subsidiaries. Section 3.10(a) of the Disclosure Schedule separately identifies each Company Employee Benefit Plan that is sponsored or maintained by the Company or any of its Subsidiaries, or which covers only employees related to the Company or its Subsidiaries. (b) None of the Company Employee Benefit Plans is a "multiemployer plan," as defined in Section 4001(a)(3) of ERISA (a "Company Multiemployer Plan"). None of the Company or any of its Subsidiaries or Parent has withdrawn or expects to withdraw in a complete or partial withdrawal from any Company Multiemployer Plan, nor has any of them incurred or expects to incur any liability due to the termination or reorganization of a Company Multiemployer Plan. (c) None of the Company Employee Benefit Plans is a "single employer plan," as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV of ERISA. No liability has been incurred under Section 4062 of ERISA to the Pension Benefit Guaranty Corporation or to a trustee appointed under Section 4042 of ERISA that could result in a material liability to the Company or its Subsidiaries. None of the Company or any of its Subsidiaries maintains, or is required, either currently or in the future, to provide medical benefits to employees, former employees or retirees of the Company or its Subsidiaries after their termination of employment, other than pursuant to applicable Laws and Regulations. (d) Each Company Employee Benefit Plan that is intended to qualify under Section 401 of the Code, and each trust maintained pursuant thereto, received a favorable determination letter from the IRS covering all tax Laws and Regulations changes prior to the Economic Growth and Relief Reconciliation Act of 2001 or has applied for such favorable letter during the applicable remedial amendment period and, to the Knowledge of Sellers, nothing has occurred with respect to the operation of any such Company Employee Benefit Plan that would cause the loss of such qualification or exemption or the imposition on the Company or its Subsidiaries or the Purchaser II of any material liability, penalty or tax under ERISA or the Code. - 29 - (e) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Company Employee Benefit Plans to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof, other than a failure to make contributions that are not material and have been fully corrected. None of the Company Employee Benefit Plans provides or promises post-employment medical or life benefits to any employee or former employee of the Company or its Subsidiaries. (f) There has been no violation of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the Company Employee Benefit Plans with the Secretary of Labor or the Secretary of the Treasury or the furnishing of required reports, documents or notices to the participants or beneficiaries of the Company Employee Benefit Plans which could result in any material liability to the Company or its Subsidiaries. (g) None of the Company or any of its Subsidiaries, the officers of the Company or its Subsidiaries or the Company Employee Benefits Plans which are subject to ERISA, any trusts created thereunder or any trustee or administrator thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company or its Subsidiaries or any officer of the Company or its Subsidiaries or the Purchase II to any material tax or penalty on prohibited transactions imposed by such Section 4975 or to any material liability under Section 502(i) or (1) of ERISA. (h) Except as set forth in Section 3.10(h) of the Disclosure Schedule, none of the Company or any of its Subsidiaries is a party to any contract, agreement or other arrangement related to the Company or its Subsidiaries which would reasonably be expected to result in the payment of money or any other property or rights or accelerate or provide any other rights or benefits, to any current or former employee related to the Company or its Subsidiaries (or other current or former service providers thereto) that would not have been required but for the transaction provided for herein. (i) True, correct and complete copies of the following documents, with respect to each of the Company Employee Benefit Plans maintained by the Company or its Subsidiaries, have been delivered or made available to Purchaser II by Sellers: (i) all Company Employee Benefit Plans and related trust documents, and amendments thereto; (ii) the most recent Forms 5500 and (iii) summary plan descriptions. Descriptions of all other Company Employee Benefit Plans (all of which are being retained by Sellers) have been delivered or made available to Purchaser II by Sellers. (j) There are no pending actions, claims or lawsuits which have been asserted, instituted or, to the Knowledge of Sellers, threatened, against the Company Employee Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Company Employee Benefit Plans with respect to the operation of such plans (other than routine benefit claims) which could result in any material liability to Purchaser II or the Company or its Subsidiaries. - 30 - (k) All Company Employee Benefit Plans subject to ERISA or the Code have been maintained and administered, in all material respects, in accordance with their terms and with all provisions of ERISA and the Code, respectively (including rules and regulations thereunder) and other applicable federal and state Laws and Regulations and all employees related to the Company or its Subsidiaries required to be included as participants by the terms of such plans have been properly included, except to the extent that any failure to so include such employees would not subject the Purchaser II or any of its Affiliates or the Company or its Subsidiaries to any material liability. 3A.11 Employee Matters. (a) The Company and its Subsidiaries are in compliance with all applicable Laws and Regulations respecting the employment of employees and the engagement of leased employees, consultants and independent contractors, including, without limitation, all Laws and Regulations regarding discrimination and/or harassment, affirmative action, terms and conditions of employment, wage and hour requirements (including, without limitation, the proper classification, compensation and related withholding with respect to employees, leased employees, consultants and independent contractors), leaves of absence, reasonable accommodation of disabilities, occupational safety and health, workers' compensation and employment practices, except for such noncompliance as would not, individually or in the aggregate, have a Company Material Adverse Effect. None of the Company or any of its Subsidiaries is a party to any collective bargaining agreement or other labor union contract in connection with the conduct of the Company Business; nor to the Knowledge of Sellers are there any activities or proceedings of any labor union to organize any employees related to the Company. (b) Except as set forth in Section 3.11(b) of the Disclosure Schedule, none of Sellers or any of its Affiliates, including the Company or any of its Subsidiaries, has any employment agreement, minimum compensation promise or guarantee, leased employee agreement, consultant agreement or independent contractor agreement (in each case, whether written or unwritten) with any of the officers, directors, employees of the Company or its Subsidiaries or any other person providing service to the Company. (c) As of the time of execution and delivery of this Agreement, to the Knowledge of Sellers (without a duty of due inquiry), no employee whose termination would be material to the Company or its Subsidiaries intends to terminate his or her employment with the Company or its Subsidiaries. (d) As of the time of execution and delivery of this Agreement, to the Knowledge of Sellers (without a duty of due inquiry), no employee whose termination would be material to the Company or its Subsidiaries is in violation in any respect of any term of any employment or services contract, patent disclosure agreement, noncompetition agreement, or any restrictive covenant to a former employer which would reasonably be expected to impede the right of any such employee to be employed or engaged in the Company Business. - 31 - 3A.12 Compliance with Applicable Laws and Regulatory Matters. (a) Except as set forth in Section 3.12(a) of the Disclosure Schedule (none of which matters would have a Company Material Adverse Effect), the Company and its Subsidiaries have complied with all applicable Laws and Regulations, and are not in violation of, and have not received any notices of violation with respect to, any Laws and Regulations in connection with the conduct of the Company Business or the ownership or operation of the Company, except for such noncompliance and violations as would not have, individually or in the aggregate, a Company Material Adverse Effect. The reserves for regulatory matters set forth in the Combined Balance Sheet have been established in accordance with the FAS 5 requirements of accruing estimable and probable matters. (b) Set forth on Section 3.12(b)(i) of the Disclosure Schedule are all material licenses, permits, certificates, franchises and other authorizations related to the Company Business (collectively, the "Company Authorizations") held by the Company or its Subsidiaries, which Company Authorizations constitute all Company Authorizations necessary for the conduct of the Company Business. The Company and its Subsidiaries have complied with, and are not in violation of, any Company Authorization, except where such noncompliance or violation would not, individually or in the aggregate, have a Company Material Adverse Effect. Except as would not be material to the Company, all such Company Authorizations are in full force and effect and there are no proceedings pending or, to the Knowledge of Sellers, threatened that seek the revocation, cancellation, suspension or adverse modification thereof. Set forth on Section 3.12(b)(ii) of the Disclosure Schedule is a list of all Company Authorizations, listed by individual, held by each employee of the Company and its Subsidiaries. (c) Section 3.12(c) of the Disclosure Schedule sets forth a description of each Governmental Order applicable to the Company, and no such Governmental Order, individually or in the aggregate, has had or could reasonably be expected to have a Company Material Adverse Effect. (d) Section 3.12(d) of the Disclosure Schedule sets forth all Governmental Entities with which the Company and its Subsidiaries are required in connection with the conduct of the Company Business as a broker dealer to be registered; and none of the Company or any of its Subsidiaries, by virtue of its activities as a broker dealer in connection with the conduct of the Company Business, is required to be registered in or to obtain a license or similar authorization from any other Governmental Entity. The Company and its Subsidiaries and each of their respective employees, agents, associated persons or contractors related to the Company or its Subsidiaries who are required to be registered as a broker-dealer, investment adviser, a registered representative or other applicable regulatory category with the SEC, the securities commission of any state or foreign jurisdiction or any SRO are duly registered as such and such registrations are in full force and effect, except for failures to register that would not be material. (e) Except as set forth on Section 3.12(e) of the Disclosure Schedule, no activities of the Company or its Subsidiaries could result in any of them being required to be registered as an exchange or transfer agent, a clearing agency, a municipal securities dealer, a government securities dealer, a futures commission merchant, a commodity trading adviser or a commodity pool operator. - 32 - (f) None of the Company or any of its Subsidiaries in connection with the conduct of the Company Business is subject to registration as an investment company under the Investment Company Act or as an investment adviser under the Investment Advisers Act, or similar Laws and Regulations of any foreign Governmental Entity. (g) To the Knowledge of Sellers, there are no facts or circumstances that would (i) cause the NASD or any other required federal or state regulatory agency or other Governmental Entity not to approve the transfer of control and ownership of the Company Common Stock to Purchaser II; or (ii) cause the NASD or any federal or state regulatory agency or other Governmental Entity to revoke or restrict the Company Authorizations to operate as a broker-dealer after the change in ownership and control of the Company and its Subsidiaries contemplated by this Agreement. (h) None of the Company or any of its Subsidiaries in connection with the conduct of the Company Business is subject to any cease-and-desist or other order or enforcement action issued by, or party to any written agreement, consent agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from, or has adopted any board or member resolutions at the request or suggestion of, any regulatory authority or other Governmental Entity related to the Company or any of its Subsidiaries (each, a "Company Regulatory Agreement"), nor have any of the Company or its Subsidiaries been advised in writing or, to the Knowledge of Sellers, in any other manner by any regulatory authority or Governmental Entity that it is considering issuing or requesting such a Company Regulatory Agreement nor is there any pending or, to the Knowledge of Sellers, threatened, regulatory investigation related to the Company or any of its Subsidiaries. To the Knowledge of Sellers, none of the Sellers or any of their respective associated persons (as defined in Section 3(a)(21) of the Securities Exchange Act) related to the Company or its Subsidiaries has been convicted within the past ten years of any felony or misdemeanor described in Section 15(b)(4) of the Securities Exchange Act, or is, by reason of any misconduct, permanently or temporarily enjoined from acting in the capacities, or engaging in the activities, described in Section 15(b)(4)(C) of the Securities Exchange Act. No such Person has been or is subject to a "statutory disqualification" with respect to membership or participation in, or association with a member of, a self-regulatory organization, described in Section 3(a)(39) of the Securities Exchange Act or has been or is subject to the imposition by a SRO of special supervision or other special requirements as prerequisites for maintaining any securities license or regulation. (i) None of the Company or any of its Subsidiaries has received any notice from a competent authority alleging that in connection with the conduct of the Company Business, the Company or its Subsidiaries has failed to comply with any applicable data or consumer protection Laws and Regulations, nor has the Company or its Subsidiaries received any claim from any individual seeking compensation for breaches of applicable data and consumer protection Laws and Regulations in connection with the conduct of the Company Business. (j) To the Knowledge of Sellers, there are no facts or circumstances that would require any of them to give notice to any customers, consumers or other similarly situated - 33 - individuals, pursuant to California Civil Code Sections 1798.29, et seq., or any similar Laws and Regulations of any other state, of any actual or perceived data security breaches related to the Company or its Subsidiaries. (k) Each of the Company and its Subsidiaries has filed all reports, registration statements and other documents, together with any amendments required to be made with respect thereto, that it was required to file with any Governmental Entity and has paid all fees and assessments due and payable in connection therewith. No statements made in any such reports, registration statements, other documents or amendments were, at the time they were made, false or misleading with respect to any material fact. No delay in filing any such reports has not been remedied except where such failure to remedy would not be material. (l) Each of the Company and its Subsidiaries has adopted and implemented an anti-money laundering policy and a customer identification program that comply with the requirements of applicable Laws and Regulations. (m) Sellers have devised and maintained systems of internal controls with respect to the Company and its Subsidiaries sufficient to be in material compliance with the requirements of the Securities Exchange Act and the NASD. (n) The Company maintains "know your customer" policies and procedures and obtains information concerning customers sufficient to know the "essential facts" concerning its customers as required under the USA Patriot Act and the rules of SROs. (o) The Company has conducted and is conducting periodic internal audits, inquiries or reviews with respect to compliance by the Company and its Subsidiaries with selected NASD rules and internal guidelines and policies of Sellers and its Affiliates and of the Company and its Subsidiaries and no such audit, inquiry or review or, to the Knowledge of Sellers, any audit, inquiry or review performed by any Governmental Entity with respect to the Company or any of its Subsidiaries, has revealed any information with respect to the Company or its Subsidiaries that, individually or in the aggregate, would have a Company Material Adverse Effect. (p) None of the Company or its Subsidiaries holds any position in OTC derivatives. 3A.13 Material Contracts. (a) Except for the contracts set forth in Section 3.13(a) of the Disclosure Schedule (collectively, the "Company Material Contracts"), none of the Company or any of its Subsidiaries is a party to or bound by any of the following: (i) any contract or agreement entered into other than in the ordinary course of business consistent with past practice for the acquisition of the securities of or any material portion of the assets of any other Person or entity or any investment in any other Person; - 34 - (ii) any contract or agreement for the purchase of services in excess of $250,000; (iii) any contract, agreement or instrument in excess of $250,000 that expires or may be renewed at the option of any Person other than the Company or any of its Subsidiaries so as to expire more than one year after the date of this Agreement; (iv) any material contract with any independent contractor or consultant (or similar arrangement) which is not cancelable without penalty and without more than thirty (30) days' notice; (v) any trust indenture, mortgage, promissory note, loan agreement or other contract, agreement or instrument for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, in each case, where the Company or any of its Subsidiaries is a lender, borrower or guarantor; (vi) any contract or agreement limiting the freedom of the Company or any of its Subsidiaries or any of their respective employees to engage in any line of business or to compete with any other Person; (vii) any contract or agreement with Sellers or any of their Affiliates; (viii) any agreement of guarantee, support, indemnification, assumption or endorsement of, or any similar commitment with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other Person other than those entered into in the ordinary course of business; (ix) any material agreement which would be terminable other than by the Company or any of its Subsidiaries or under which a payment or performance obligation would arise or be accelerated, in each case as a result of the consummation of the transactions contemplated by this Agreement; (x) any alliance, cooperation, joint venture, stockholders' partnership or similar agreement; (xi) any broker, distributor, dealer, agency, sales promotion, market research, market consulting or advertising agreement involving in excess of $250,000; (xii) any material research, development, sales representative, marketing or reseller agreement, or any service, support or maintenance agreement related to the business or technology of the Company or any of its Subsidiaries; (xiii) any agreement, option or commitment or right with, or held by, any third party to acquire, use or have access to any assets or properties, or any interest therein, of the Company or any of its Subsidiaries; - 35 - (xiv) any outbound license, sublicense or development agreement or other material agreement or any material inbound license, sublicense or development agreement or other material agreement that affects or relates to the Company Intellectual Property, including, without limitation, any material agreement pursuant to which any person or entity is authorized to use or has an ownership or security interest in any Company Intellectual Property; (xv) any "soft dollar" contract, arrangement or agreement, whether written or oral; (xvi) any material contract or agreement which would require any consent or approval of a counterparty as a result of the consummation of the transactions contemplated by this Agreement; and (xvii) any other contract the loss or presence of which would, individually or in the aggregate, have a Company Material Adverse Effect or that involves a payment or obligation that exceeds $250,000 annually or $500,000 in the aggregate or contains any obligation of the Company the failure of which to satisfy would have a Company Material Adverse Effect. (b) The Company and its Subsidiaries have performed all of the obligations required to be performed by them and are entitled to all accrued benefits under, and are not alleged to be in default in respect of, each Company Material Contract to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, except in each case as would not, individually or in the aggregate, have a Company Material Adverse Effect. Each of the Company Material Contracts is in full force and effect, without amendment (other than as disclosed in Section 3.13(b) of the Disclosure Schedule), and there exists no default or event of default or event, occurrence, condition or act, with respect to the Company or any of its Subsidiaries or, to Knowledge of Sellers, with respect to any other contracting party, which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default under any Company Material Contract, except, as would not, individually or in the aggregate, be material to the Company. True, correct and complete copies of all Material Contracts have been furnished or made available to Purchaser II. 3A.14 [Intentionally Omitted]. 3A.15 Environmental Liability. There are no legal, administrative, arbitral or other proceedings, claims or actions or any private environmental investigations or remediation activities or governmental investigations of any nature that would be reasonably likely to result in the imposition on the Company or any of its Subsidiaries of any liability or obligation arising under common law or under any local, state or federal environmental statute, regulation or ordinance, including CERCLA, pending or, to the Knowledge of Sellers, threatened against the Company or any of its Subsidiaries, which liability or obligation would be material to the Company. To the Knowledge of Sellers, there is no reasonable basis for any such proceeding, claim, action or investigation. None of the Company or any of its Subsidiaries is subject to any agreement, order, judgment or decree by or with any court, governmental authority, regulatory agency or third party imposing any liability or obligation with respect to the foregoing. The - 36 - Company is and has been in compliance with all applicable Environmental Laws, and there are no liabilities under any Environmental Laws with respect to the Company Business, other than failures to comply or liabilities that would not, individually or in the aggregate, have a Company Material Adverse Effect or otherwise materially adversely affect Purchaser II. None of the Company or its Subsidiaries has received any notice from any Governmental Entity during the past five years relating to or alleging a material violation of any Environmental Law. None of the Company or its Subsidiaries has any indemnification obligation with any Person with respect to Environmental Laws. 3A.16 Insurance. The Company and its Subsidiaries have in full force and effect the insurance coverage with respect to the Company Business set forth in Section 3.16 of the Disclosure Schedule. There is no material claim related to the Company pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies have been paid and, the Company and its Subsidiaries are otherwise in compliance in all material respects with the terms of such policies. Sellers have no Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 3A.17 Intellectual Property. (a) Section 3.17(a) of the Disclosure Schedule lists all Company Intellectual Property registered or filed in the name of the Company or its Subsidiaries, which the Company or any of its Subsidiaries owns exclusively (except as owned exclusively by Parent or its other Affiliates as set forth on Schedule 3.17(a)) and all Company Proprietary Software that is necessary or material to the current or proposed conduct of the Company Business. Section 3.17(a) of the Disclosure Schedule lists all Legal Proceedings before any Governmental Entity (including the United States Patent and Trademark Office or equivalent authority anywhere in the world) related to any of such Company Intellectual Property or related to any Company Proprietary Software whatsoever. No claim is currently pending or, to the Knowledge of Sellers, threatened, challenging the ownership, validity, registerability, enforceability, infringement or use of, or licensed right to use any Company Intellectual Property. The Company Intellectual Property listed in Section 3.17(a) of the Disclosure Schedule is valid, subsisting and enforceable (but as to Company Intellectual Property applications thereon that are not fully issued, only that they are subsisting). To the Knowledge of Sellers, there is no valid basis to challenge the ownership or enforceability of any Company Intellectual Property, the validity, registerability, use of or the licensed right to use, any Company Intellectual Property (provided that this sentence shall not limit or qualify the foregoing sentence). The Company IP is not subject to any outstanding order, judgment, decree or agreement adversely affecting the Company's and its Subsidiaries' (or Purchaser II's following the Closing) use thereof or rights thereto. None of the Company or its Subsidiaries has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation or other conflict with respect to any Company Intellectual Property other than as set forth in agreements provided to Purchaser II for its review. No commercially material Company Intellectual Property owned by the Company or any of its Subsidiaries is omitted from Schedule 3.17(a). (b) Section 3.17(b) of the Disclosure Schedule lists each item of software included in the Company Intellectual Property and developed by or for the Company and its - 37 - Subsidiaries or the Company Business (the "Company Proprietary Software") that is necessary or material to the current or proposed conduct of the Company Business. All Company Proprietary Software does not, to the Knowledge of Sellers, contain any "time bombs," "Trojan horses," "back doors," "trap doors," "worms," viruses, or other devices or effects that (A) enable or assist any person to access without authorization the Company Proprietary Software, or (B) otherwise significantly adversely affect the functionality of the Company Proprietary Software. Except as set forth on Section 3.17(b) of the Disclosure Schedule, to the Knowledge of Sellers, the Company Proprietary Software does not contain any shareware, open source code, or other software the use of which requires disclosure or licensing of the Company Proprietary Software. Sellers shall have made available to Purchaser II for hiring all personnel necessary to use, maintain, revise and operate the Company Proprietary Software as currently maintained, revised and operated. (c) Except as set forth on Section 3.17(c) of the Disclosure Schedule, the Company and its Subsidiaries (i) own all right, title and interest in and to each item of Company Intellectual Property, free and clear of any Liens other than Company Permitted Liens, or (ii) are a licensee of Company Intellectual Property pursuant to a contract that is a valid and binding obligation of the Company and its Subsidiaries and, to the Knowledge of Sellers, the other parties thereto and is in full force and effect. Except as set forth on Section 3.17(c) of the Disclosure Schedule, each material item of Intellectual Property shall be owned by Purchaser II or immediately available for use by Purchaser II on substantially identical terms and conditions immediately following the Closing, without any requirement for any consent from any third party or any affirmative act by Purchaser II (e.g., notice to any third party). (d) Section 3.17(d) of the Disclosure Schedule lists each license or other agreement or authorization pursuant to which the Company and its Subsidiaries provided or agreed to provide (whether or not such agreement is contingent) a license, nonassertion agreement, covenant not to sue, enforcement right or any similar right, agreement or grant to any third party with respect to any Company IP. No such agreement operates to grant rights in or to or create any limitation (including by way of nonassertion) or encumbrance upon Company Intellectual Property owned or controlled by any entity which becomes an affiliate of the Company or any of its Subsidiaries other than those provided to Purchaser II for its review. Except as set forth on Section 3.17(d) of the Disclosure Schedule, no other person or entity has any rights to any Business IP, and, to the Knowledge of Sellers, no person or entity is infringing, violating or misappropriating any of the Company Intellectual Property. (e) Section 3.17(e) of the Disclosure Schedule identifies each license, nonassertion agreement, covenant not to sue or agreement pursuant to which the Company and its Subsidiaries use Company Intellectual Property in the operation of the Business that is owned by a party other than the Company or any of its Subsidiaries. During the preceding twenty-four (24) months, all royalties and other payments due from the Company or any of its Subsidiaries under such licenses or agreements have been paid when due. (f) Except as set forth on Section 3.17(f) of the Disclosure Schedule, in the operation of the Company Business, the Company and its Subsidiaries are not, and shall not be as a result of the execution and delivery of this Agreement or the performance of their obligations under this Agreement (assuming receipt of any consent or approval set forth in - 38 - Section 3.4 of the Disclosure Schedule), in material breach of any license, sublicense or other agreement or any term or condition thereof, pursuant to which the Company or any of its Subsidiaries grant or are granted any license to the Company Intellectual Property and all such licenses, sublicenses and other agreements are valid and enforceable and no party thereto has given the Company or its Subsidiaries notice of its intention to cancel, terminate, change the scope of rights under, or fail to renew, and no party is in material breach or has repudiated any material provision thereof. To the Knowledge of Sellers, to the extent that Company Intellectual Property is sublicensed to the Company and/or its Subsidiaries by a third person, the sublicensed rights of the Company and/or its Subsidiaries shall continue in full force and effect even if the principal third person license terminates or is otherwise modified for any reason. To the Knowledge of Sellers, the Company Intellectual Property provided or otherwise made available to the Company and its Subsidiaries pursuant to such licenses, sublicenses or other agreements is valid, subsisting and enforceable and is not subject to any outstanding Governmental Order adversely affecting the Company's or its Subsidiaries' use thereof or their rights thereto. (g) Except as set forth on Section 3.17(g) of the Disclosure Schedule, to the extent that any Company Intellectual Property has been developed or created for or on behalf of the Company or any of its Subsidiaries, or the Company, by any Person other than the Company or any of its Subsidiaries, the Company or any of its Subsidiaries has a written agreement with such Person with respect thereto transferring or otherwise conferring to the foregoing all right, title and interest in and to the Company Intellectual Property by operation of Laws and Regulations or by valid assignment. To the extent internally developed, the Company and its Subsidiaries have followed standard business practices in developing the Company Intellectual Property, including requiring each employee or contractor to execute a written agreement in which such employee or contractor assigns or otherwise confers to the foregoing all right, title and interest in and to such Company Intellectual Property. All Company Proprietary Software, including each of its constituent parts, is owned exclusively by the Company and its Subsidiaries, and is not derived from and does not incorporate or otherwise use as a basis any Company Intellectual Property not owned exclusively by the Company and its Subsidiaries. Without limiting the foregoing provisions of this Section 3A.17(g), modification of the Company Proprietary Software requires no Person's consent other than the Company or its Subsidiaries. (h) The Company and its Subsidiaries have taken reasonable steps in accordance with normal industry practice and in light of the nature of the particular item of Company Intellectual Property to protect the proprietary nature of each item of Company Intellectual Property, and to maintain in confidence all trade secrets and other material confidential information that the Company and its Subsidiaries own or use in connection with their business ("Company Confidential Information"). To the Knowledge of Sellers, there has been no misappropriation of any Company Business Confidential Information by any third party. Except as set forth on Section 3.17(h) of the Disclosure Schedule, none of the Company or any of its Subsidiaries has placed in escrow or otherwise disclosed the source code or documentation for any of the Company Proprietary Software. To the Knowledge of Sellers, none of the current employees of the Company and its Subsidiaries has any patents issued or applications pending for any device, process, design or invention of any kind now used or needed by the Company and/or its Subsidiaries in the furtherance of its business, which patents or applications have not been assigned to the Company and/or its Subsidiaries. The Company and its Subsidiaries have no Knowledge that any of their employees is obligated under any contract (including licenses, - 39 - covenants or commitments of any nature) or other agreement, or subject to any Governmental Order, that would interfere with the use of such employee's best efforts to promote the interests of the Company and its Subsidiaries or that would conflict with the Company Business as conducted by Sellers or proposed to be conducted. Neither the execution nor delivery of this Agreement nor the carrying on of the Company Business by the employees of the Company and its Subsidiaries will, to the Knowledge of Sellers, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under any contract, covenant or instrument under which any of such employees is now obligated. To the Knowledge of Sellers, it is not and will not be necessary to utilize in the Company Business any inventions of any of the employees of the Company or any of its Subsidiaries (or people they currently intend to hire) made prior to or outside the scope of their employment with the Company and its Subsidiaries. (i) The conduct of the Company Business, and the Company Proprietary Software do not, and have not, infringed or violated, or constituted a misappropriation of, any intellectual property rights of any person or entity; provided that the foregoing representation is given to the Knowledge of Sellers as concerns patent rights. Section 3.17(i) of the Disclosure Schedule lists any complaint, claim, notice or other communication (x) received in oral form by any partner, officer or employee of, the Company or any of its Subsidiaries, or (y) received in written form by the Company or any of its Subsidiaries, expressly or impliedly alleging the conduct of the Company Business, or the Company Proprietary Software, constitutes any infringement, violation or misappropriation of the intellectual property of any third party, or otherwise challenging the right of the Company or any of its Subsidiaries or any licensee or sublicensee of the Company or any of its Subsidiaries to own or use any Company Intellectual Property, or challenging the validity, scope or enforceability of any Company Intellectual Property or the right of the Company or any of its Subsidiaries to license others to use or sublicense any Company Intellectual Property. Sellers have made available to Purchaser II complete and accurate copies of all written documentation in the possession of Sellers relating to any such complaint, claim, notice, threat or other communication. (j) Section 3.17(j) of the Disclosure Schedule sets forth a list of all Internet domain names and their expiration dates currently licensed or owned by the Company (collectively, the "Company Domain Names"). The Company has, and after the Closing will have, a current registration of each Company Domain Name and the right to continue to conduct the Company Business as currently conducted under the Company Domain Names. (k) None of the officers, directors or employees of Sellers, the Company or any of their respective Affiliates owns or holds rights (whether current or contingent) under any Company Intellectual Property and the Company has all right, title and interest in the Company Intellectual Property obtained through transactions involving any officers, directors or employees of Sellers, the Company or any of their respective Affiliates. (l) Except as set forth on Section 3.17(l) of the Disclosure Schedule, the Company Intellectual Property included in the Entity Assets constitute all the intellectual property necessary for, used in, or held for, the current or proposed conduct of the Company Business, and neither Parent nor any of its Affiliates (other than the Company or its Subsidiaries) owns any intellectual property necessary to, used in or held for the current or proposed conduct of the Company Business. - 40 - 3A.18 Information Technology. (a) All electronic data processing, information, record keeping, communications, telecommunications, hardware, third party software, networks, peripherals, portfolio trading and computer systems, including any outsourced systems, services, or processes, computers, computer software, firmware, middleware, servers, workstations, routers, hubs, switches, data communications lines, and all other information technology equipment, and all associated documentation and Company Intellectual Property which are material to the conduct of the Company Business are collectively referred to as "Company Technology Systems." Within the preceding twelve (12) months, there has not been any material malfunction, default, or failure with respect to any of the Company Technology Systems that has not been remedied or replaced in all material respects. The Company Technology Systems as they will be transferred to Purchaser II pursuant to this Agreement or provided pursuant to the Transition Services Agreement are sufficient to support the information technology needs of the Company Business. Sellers shall have made available to Purchaser II for hiring all personnel necessary to use, maintain, revise and operate the Company Technology Systems transferred to Purchaser II pursuant to this Agreement as currently used, maintained, revised and operated. (b) Company Technology Systems are either owned by, licensed or leased to, or otherwise properly utilized pursuant to written authorization to the Company or any of its Subsidiaries. No action will be necessary as a result of the transactions effected by this Agreement to authorize, permit, or otherwise enable use of the Company Technology Systems to continue to the same extent and in the same manner that such Company Technology Systems have been used in the preceding twelve (12) months. The Company and its Subsidiaries are not in breach of any obligation owed under such licenses or leases. (c) Section 3.18(c) of the Disclosure Schedule lists all the material third party agreements, licenses, and leases related to the Company Technology Systems, including without limitation, all material maintenance and support contracts for the Company Technology Systems. (d) Except as disclosed in Section 3.18(d) of the Disclosure Schedule, (i) the Company Technology Systems (for a period of 18 months prior to the Closing Date) have not suffered a material unplanned disruption; (ii) except for ongoing payments due under relevant third party agreements, the Company Technology Systems are free from any material charge, mortgage or security interest; and (iii) access to business critical parts of the Company Technology Systems is not shared with any third party. (e) Details of the disaster recovery and business continuity arrangements for the Company are disclosed in Section 3.18(e) of the Disclosure Schedule. The material disaster recovery and business continuity arrangements for the Company are consistent with industry practice. (f) None of the Company or any of its Subsidiaries has received notice of or is aware of any material circumstances including, without limitation, the execution of this Agreement, which would enable any third party to terminate any of the Company's or any of its - 41 - Subsidiaries' material agreements or arrangements relating to the Company Technology Systems. (g) There are no material agreements with third parties for Company Technology Systems that would terminate on the consummation of the transactions contemplated by this Agreement or are otherwise not assignable without consent from any third party or without payment of any associated cost, fee, charge, or penalty. (h) None of the Company or any of its Subsidiaries has received notice of or is aware of any claim or action alleging that the Company Technology Systems, or the Company's use of the Company Technology Systems, in any way violate any non-disclosure and/or non-use agreement, nor constitute an infringement or other violation of any copyright, trade secret, trademark, service mark, patent, invention, proprietary information, or other rights of any third party. 3A.19 Interests of Officers, Directors and Employees. None of the officers, directors or employees of Sellers, the Company, any of their respective Subsidiaries or any of their respective Affiliates has any material interest in any property, real or personal, tangible or intangible used in the Company Business. 3A.20 Tail Policy. There is in existence a fully paid officers' and directors' liability insurance policy (the "Tail Policy") satisfying all of Parent's and its Affiliates' obligations under Section 6.8(c) of that certain Agreement and Plan of Merger by and among Parent, Shakespeare Merger Corporation and the Company, dated as of November 18, 2003. Article IV Representations and Warranties of Purchaser and Purchaser II Each of Purchaser and Purchaser II as to itself represents and warrants to Sellers as follows: 4.1 Corporate Organization, Standing and Power. Purchaser is a limited liability company duly organized, validly existing and in good standing under the Laws and Regulations of the State of Delaware. Purchaser II is a corporation duly organized, validly existing and in good standing under the Laws and Regulations of the State of Delaware. Each of Purchaser and Purchaser II has the corporate or similar power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would constitute a Purchaser Material Adverse Effect. 4.2 Authority; No Violation. (a) Each of Purchaser and Purchaser II has full corporate or similar power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved and adopted - 42 - by each of Purchaser and Purchaser II. No other corporate or shareholder authorization or consent is required in connection with the execution, delivery or performance by Purchaser and Purchaser II of this Agreement or any of the Ancillary Agreements. This Agreement has been duly and validly executed and delivered by Purchaser and Purchaser II and (assuming due authorization, execution and delivery by Sellers), this Agreement constitutes a valid and binding obligation of each of Purchaser and Purchaser II, enforceable against Purchaser and Purchaser II in accordance with its terms. Assuming due authorization, execution and delivery by Sellers, each of the Ancillary Agreements, when executed and delivered, will constitute, a valid and binding obligation of Purchaser and Purchaser II, enforceable against Purchaser and Purchaser II or their Affiliates parties thereto in accordance with its terms. (b) Neither the execution and delivery of this Agreement or any of the Ancillary Agreements by Purchaser and Purchaser II, nor the consummation by Purchaser and Purchaser II of the transactions contemplated hereby or thereby, nor compliance by Purchaser and Purchaser II with any of the terms or provisions hereof, will (i) violate any provision of the certificate of incorporation or bylaws or other charter documents of Purchaser or Purchaser II or (ii) assuming that the consents and approvals referred to in Section 4.3 are duly obtained, (x) violate any Laws and Regulations applicable to Purchaser or Purchaser II or any of their Subsidiaries or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Purchaser or Purchaser II or any of their Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, or other instrument or obligation to which Purchaser and Purchaser II or any of their Subsidiaries is a party, or by which they or any of its properties, assets or business activities may be bound or affected, except (in the case of clause (ii) above) for such violations, conflicts, breaches, defaults or the loss of benefits which, either individually or in the aggregate, would not be a Purchaser Material Adverse Effect. 4.3 Consents and Approvals. Except for (i) any approvals or filings required by the HSR Act, (ii) the consent or approval of the NYSE and (iii) the consents, notices and approvals set forth in Section 4.3 of the Disclosure Schedules, no consents or approvals of any Governmental Entity or any third party are necessary in connection with (A) the execution and delivery by Purchaser and Purchaser II of this Agreement and (B) the consummation by Purchaser and Purchaser II of the transactions contemplated hereby. 4.4 Financing. Each of Purchaser and Purchaser II has all funds that would be necessary to pay on the Closing Date the Purchase Price as if only one of them were required to pay the Purchase Price and all fees and expenses of theirs related hereto, and has the financial capacity to perform all of its other obligations under this Agreement. 4.5 Legal Proceedings. As of the date hereof, neither Purchaser nor Purchaser II nor any of their Subsidiaries is a party to any, and there are no pending or, to the knowledge of Purchaser, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Purchaser or Purchaser II or any - 43 - of their Subsidiaries which would be a Purchaser Material Adverse Effect, nor, to the knowledge of Purchaser and Purchaser II, is there any basis for any proceeding, claim or any action against Purchaser or Purchaser II or any of their Subsidiaries which would be a Purchaser Material Adverse Effect. As of the date hereof, there is no injunction, order, judgment or decree imposed upon Purchaser, Purchaser II or any of their Subsidiaries or the assets of Purchaser or Purchaser II or any of their Subsidiaries which would be a Purchaser Material Adverse Effect. 4.6 Compliance with Applicable Law and Regulatory Matters. (a) Each of Purchaser and Purchaser II and each of their Subsidiaries have complied with all applicable Laws and Regulations, and are not in violation of, and have not received any notices of violation with respect to, any Laws and Regulations in connection with the conduct of their respective businesses or the ownership or operation of their respective businesses, assets and properties, except for such noncompliance and violations which would not be a Purchaser Material Adverse Effect. (b) As of the date hereof, there are no Governmental Orders applicable to Purchaser, Purchaser II or any of their Subsidiaries which would be a Purchaser Material Adverse Effect. (c) To Purchaser's and Purchaser II's management's actual knowledge, after due inquiry, as of the date hereof, there exists no substantial likelihood that (i) the NASD or any other required federal or state regulatory agency or other Governmental Entity would not approve the transfer of control and ownership of CCM and the Company to Purchaser and Purchaser II; or (ii) the NASD or any federal or state regulatory agency or other Governmental Entity would revoke or restrict Purchaser's Purchaser II's Authorizations to operate as a broker-dealer after the change in ownership and control of CCM and the Company contemplated by this Agreement. (d) Except as would not be a Purchaser Material Adverse Effect, as of the date hereof (i) neither Purchaser nor Purchaser II nor any of its Subsidiaries is subject to any cease-and-desist or other order or enforcement action issued by, or party to any written agreement, consent agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from, or has adopted any board or member resolutions at the request or suggestion of, any regulatory authority or other Governmental Entity that restricts the conduct of its business or that in any manner relates to its capital adequacy, its ability to pay dividends, its credit or risk management policies, its management, its trading privileges or its business (each, a "Purchaser Regulatory Agreement") and (ii) neither Purchaser nor Purchaser II nor any of its Subsidiaries has been advised in writing or, to the actual knowledge of management of Purchaser and Purchaser II, after due inquiry, in any other manner by any regulatory authority or Governmental Entity that it is considering issuing or requesting such a Purchaser Regulatory Agreement. 4.7 Broker's Fees. Neither Purchaser nor Purchaser II has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with the transactions contemplated by this Agreement. - 44 - 4.8 Purchaser Information. The representations or warranties made by Purchaser and Purchaser II herein or in any schedule hereto or certificate furnished by Purchaser pursuant to this Agreement do not contain any untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. Article V Conduct Prior to the Closing Date 5.1 Conduct of the Business Prior to the Closing Date. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, except as expressly contemplated or permitted by this Agreement, Sellers shall, and shall cause CCM and the Company and each of their respective Subsidiaries, to (a) conduct the Business and the Company Business in the usual, regular and ordinary course consistent with past practice, (b) use all reasonable commercial efforts consistent with past practice and policies to preserve intact CCM's and the Company's present business organizations, keep available the services of the employees of CCM and the Company and their Subsidiaries (it being understood that CCM and the Company and their Subsidiaries shall not be obligated to make out of the ordinary course of business payments to their respective employees in order to keep available the services of such employees) and preserve the relationships with customers, suppliers, distributors, licensors, licensees of CCM and the Company and their Subsidiaries, and others having significant business dealings with CCM and the Company and their Subsidiaries, (c) use all reasonable commercial efforts to maintain all of their existing permits, licenses, authorizations, orders and regulatory approvals and the minimum net capital and excess net capital necessary to conduct their businesses as currently conducted and (d) take no action or fail to take an action which would adversely affect or delay in any material respect the consummation of the transactions contemplated hereby, including, without limitation, the ability of either Purchaser or Sellers to obtain any necessary approvals of any regulatory agency or other Governmental Entity required for the transactions contemplated hereby. Following the date hereof until the Closing, each of CCM, the Company and their respective Subsidiaries shall provide to Purchaser and their Subsidiaries, promptly after the filing thereof, a copy of each report, registration statement, other document or amendment filed with any Governmental Entity. From the date hereof until the Closing, Parent will take all action necessary, including funding, so that if Sellers were preparing consistent financial statements as of the Closing, the earnings of the Business and the Company Business as of the Closing would be consistent (including line items) with the presentations contained in the Combined Financial Statements as of the Closing, and would reflect the Combined Balance Sheet as of the Balance Sheet Date as set forth in Section 3.5(a) of the Disclosure Schedule plus (i) the movement in the combined statement of operations of CCM and the Company consistent with Section 3.5(a) of the Disclosure Schedule, excluding the movement in the statement of operating results of the Electronic Program Trading business of CCM and including the movement in the statement of operating results of the Options Business of CS&Co. as set forth in Section 3.5(d) of the Disclosure Schedule, all prepared in a manner consistent with the operating results in Section 3.5(d) of the Disclosure Schedule, for the period from July 1, 2004 to the Closing and (ii) any effects of activities or transactions expressly contemplated or permitted by this Agreement. For the avoidance of - 45 - doubt, Sellers and their Affiliates (other than CCM, the Company and their respective Subsidiaries) will continue to fund all corporate allocations historically funded by them and CCM, the Company and their respective Subsidiaries will continue to fund all corporate allocations historically funded by them. 5.2 Conduct of the Business. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing Date, except as set forth in Section 5.2 of the Disclosure Schedule or except as expressly required by this Agreement, Sellers shall conduct the Business and the Company Business in the ordinary course of business consistent with past practice and Section 5.1 of this Agreement and shall not do, cause or permit any of the following, or allow, cause or permit CCM, the Company or any of their respective Subsidiaries to do, cause or permit any of the following, without the prior written consent of Purchaser, which consent shall not be unreasonably (in light of the purchase price to be paid hereunder and the contemplated closing) withheld: (a) Cause or permit any amendment, modification, alteration or rescission of the certificate or articles of incorporation, agreement of limited partnership bylaws or other charter or organizational documents of CCM, the Company or any of their respective Subsidiaries; (b) Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of partnership interests of CCM or capital stock or membership interests of the Company or any of its or CCM's Subsidiaries or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating CCM, the Company or any of their respective Subsidiaries to issue any such capital stock or interests; split, combine or reclassify any shares of capital stock or equity or partnership interests of CCM, the Company or any of their respective Subsidiaries or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect thereof (other than the distribution of the property of the Company identified on Schedule 5.2(b)), or redeem, repurchase or otherwise acquire or offer to redeem, repurchase or otherwise acquire any security or equity or partnership interest; (c) Transfer to any person or entity any rights in or to the Intellectual Property or the Company Intellectual Property; (d) Enter into or amend any agreements pursuant to which any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any of the products or technology related to the Business or the Company Business; (e) Other than activities inherent in the institutional sales trading, program trading, trading, market making, order execution and institutional research sales operations of the Business and the Company Business, sell, lease, license or otherwise dispose of or encumber any of the properties or assets of either CCM and its Subsidiaries or the Company and its Subsidiaries (other than as set forth on Schedule 5.2(b)); - 46 - (f) Other than short-sales, activities and other activities inherent in the institutional sales trading, program trading, trading, market making, order execution and institutional research sales operations of the Business and the Company Business, cause or permit CCM, the Company or any of their respective Subsidiaries to (A) incur any indebtedness for borrowed money, (B) assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other Person (except as set forth on Section 5.2(f) of the Disclosure Schedule) or (C) cancel, release, assign or modify any amount of indebtedness of any other person or entity; (g) Cause or permit CCM, the Company or any of their respective Subsidiaries to enter into any lease for real property or material operating lease; (h) Pay, discharge or satisfy in an amount individually or in the aggregate in excess of $100,000 any claim, liability, action, litigation, arbitration or proceeding (absolute, accrued, asserted or unasserted, contingent or otherwise) related to CCM or the Company, other than (A) the payment, discharge or satisfaction of liabilities reflected or reserved against in the Combined Financial Statements, (B) pursuant to the agreements listed on Section 5.2(h) of the Disclosure Schedule, (C) pursuant to Governmental Orders entered against CCM or the Company, (D) the discharge in the ordinary course of business consistent with past practice of accounts payable or (E) as otherwise permitted pursuant to this Section 5.2; (i) Cause or permit either CCM and its Subsidiaries or the Company and its Subsidiaries to make any capital expenditures, capital additions or capital improvements except (i) in the ordinary course of business consistent with past practice that do not exceed individually or in the aggregate $250,000 and (ii) pursuant to contracts or commitments set forth on Section 5.2(i) of the Disclosure Schedule; (j) Materially reduce the amount of any material insurance coverage related to CCM or the Company provided by existing insurance policies; (k) (i) Adopt, or amend in a manner that will increase the compensation or benefits to be provided to any director or employee of CCM, the Company or any of their respective Subsidiaries under, any Business Employee Benefit Plan or Company Employee Benefit Plan, respectively (except as required by Laws and Regulations), (ii) hire or enter into any employment agreement with any director or executive officer level employee related to CCM, the Company or any of their respective Subsidiaries other than in connection with the replacement of existing director or executive officer level positions related to CCM or the Company, respectively or (iii) other than in the ordinary course of business consistent with past practice, increase the base salaries or wage rates of any of the employees related to CCM, the Company or any of their respective Subsidiaries; (l) Grant any new awards, bonuses, severance or termination pay (i) to any director or officer related to CCM or the Company or (ii) to any other employee related to CCM or the Company, in each case, except grants required to be made pursuant to written or oral plans or agreements outstanding or CCM or Company policies in effect (as described on Section 3.10(a) of the Disclosure Schedule) on the date hereof; - 47 - (m) Commence any action, suit or proceeding related to CCM or the Company other than (i) in the ordinary course of business consistent with past practice, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of the Business or the Company Business, provided that it consults with Purchaser prior to the filing of such a suit or (iii) in respect of a breach of this Agreement; (n) Cause or permit CCM, the Company or any of their respective Subsidiaries to acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to either CCM and its Subsidiaries or the Company and its Subsidiaries, or acquire or agree to acquire any equity securities of any corporation, partnership, limited liability company, association or business organization which securities acquired or agreed to be acquired would constitute greater than five percent (5%) of the outstanding securities of such entity; (o) Other than as required by Laws and Regulations applicable to the Business or the Company Business, make or change any material election in respect of Taxes related to the Business or the Company Business, respectively, adopt or change in any respect any accounting method in respect of Taxes related to the Business or the Company Business, respectively, enter into any material closing agreement related to the Business or the Company Business, respectively, settle any material claim or assessment or pay any liabilities in respect of Taxes related to the Business or the Company Business, respectively, unless such claims, assessments or liabilities are reflected on the Combined Balance Sheet or their settlement or payment is inherent in the institutional sales trading, program trading, trading, market making, order execution and institutional research sales operations of the Business and the Company Business, or consent to any extension or waiver of the limitation period applicable to any material claim or assessment in respect of Taxes related to the Business or the Company Business, respectively; (p) Revalue any of the assets related to CCM or the Company other than in the ordinary course of business consistent with past practice or as required by applicable Laws and Regulations; (q) Make any change to the accounting methods or practices related to the Business or the Company Business, except as may be required by GAAP or any Laws and Regulations applicable to the Business or the Company Business, respectively or as required by Section 5.1 of this Agreement; (r) Except as required by applicable Laws and Regulations, or written rule, instruction or directive by a Governmental Entity: (i) materially change the risk management, execution and hedging policies, procedures or practices of CCM, the Company or any of their respective Subsidiaries which are included in Section 5.2(r) of the Disclosure Schedule and were provided to Purchaser prior to the date of this Agreement, or fail in any material respects to comply with such policies, procedures and practices or (ii) fail to use commercially reasonable - 48 - means to avoid any material increase in the aggregate exposure to risk related to the Business or the Company Business; (s) Change Domain Names necessary or material to CCM or its Subsidiaries or fail to renew existing Domain Name registrations necessary or material to CCM or its Subsidiaries on a timely basis; (t) Change Company Domain Names necessary or material to the Company or its Subsidiaries or fail to renew existing Company Domain Name registrations necessary or material to the Company or its Subsidiaries on a timely basis; (u) Enter into, amend in any material respect, extend or waive any rights under any Material Contract or Company Material Contract; or (v) Take or agree to take, any of the actions described in Sections 5.2(a) through (u) above. 5.3 Acquisition Proposals. Until the earlier of the termination of this Agreement or the Closing Date, each Seller agrees that neither it nor any of its Affiliates, nor any of its or its Affiliates' officers, directors, employees, agents or representatives (including any investment banker, attorney or accountant retained by any of them) will initiate or solicit, directly or indirectly, any inquiries or the making of any proposal or offer with respect to an Acquisition Transaction (any such inquiry, proposal or offer, an "Acquisition Proposal") or engage in any negotiations concerning, or provide any Business Confidential Information or Company Confidential Information or data to, or have any discussions with, any Person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. Sellers will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted before the date of this Agreement with respect to any Acquisition Proposal. Article VI Additional Agreements 6.1 Regulatory Matters. (a) The parties hereto shall cooperate with each other and promptly prepare and file all necessary documentation, and effect all applications, notices, petitions and filings (including, to the extent necessary, any notification required by the HSR Act), to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities which are necessary or advisable to consummate the transactions contemplated by this Agreement. The parties hereto agree that they will consult with each other with respect to the obtaining of all such permits, consents, approvals and authorizations and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. Purchaser, Purchaser II and Sellers shall use their reasonable commercial efforts to resolve any objections that may be asserted by any Governmental Entity with respect to this Agreement or the transactions contemplated by this Agreement. Purchaser, - 49 - Purchaser II and Sellers further covenant and agree, with respect to any threatened or pending preliminary or permanent injunction or other order, decree or ruling or statute, rule, regulation or executive order that would adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby, to use reasonable commercial efforts to prevent the entry, enactment or promulgation thereof, as the case may be. (b) Purchaser (on behalf of itself and Purchaser II) and Sellers shall, upon request, furnish each other with all information concerning themselves, their respective Subsidiaries, directors, officers, employees and stockholders and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice, application or other document made by or on behalf of Purchaser, Purchaser II, Sellers or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement. (c) Purchaser (on behalf of itself and Purchaser II) and Sellers shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any such consent or approval will not be obtained or that the receipt of any such approval will be materially delayed. 6.2 Access to Information. Subject to the Confidentiality Agreement, Sellers agree to provide Purchaser and Purchaser II and Purchaser's and Purchaser II's officers, directors, employees, accountants, counsel, financial advisors, agents and other representatives (collectively, the "Purchaser Representatives"), from time to time prior to the earlier of the termination of this Agreement and the period not to exceed 90 days following the Closing Date necessary for such information and access to personnel as Purchaser (on behalf of itself and Purchaser II) shall reasonably request with respect to the Business and the Company Business, including the work papers of Sellers' independent accountants. Except as required by Laws and Regulations, Purchaser shall hold, and shall cause Purchaser's Affiliates and Purchaser Representatives to hold, any non-public information received from Sellers, directly or indirectly, in accordance with the Confidentiality Agreement. 6.3 Public Disclosure. Unless otherwise permitted by this Agreement, Purchaser and Sellers shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement or any of the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld or delayed), except as may be required by Laws and Regulations or by obligations pursuant to any listing agreement with any national securities exchange or with the NASD, in which case the party proposing to issue such press release or make such public statement or disclosure shall use reasonable commercial efforts to consult with the other party before issuing such press release or making such public statement or disclosure. 6.4 Reasonable Commercial Efforts and Further Assurances. Each of the parties to this Agreement shall use its reasonable commercial efforts to effect the transactions - 50 - contemplated hereby and to fulfill and cause to be fulfilled the conditions to Closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting the consummation of this Agreement and the transactions contemplated hereby. 6.5 Employees; Employee Benefit Matters. (a) Purchaser and Purchaser II shall provide to Retained Employees (as defined below) of CCM and the Company and their Subsidiaries following the Closing (i) employee benefits that are no less favorable in the aggregate than the employee benefits provided to similarly-situated employees of Purchaser from time to time and (ii) base salaries and incentive compensation opportunities that are no less favorable in the aggregate to the base salaries and incentive compensation opportunities provided to similarly-situated employees of Purchaser from time to time. (b) Sellers shall take all action necessary to ensure that each employee of CCM, the Company and their Subsidiaries who is not identified on Section 6.5(b) of the Disclosure Schedule and such other employees as Purchaser identifies to Sellers within two weeks of the date hereof, which in the aggregate shall not be fewer than 125 employees and shall not be significantly different in category allocations than those set forth in Section 6.5(b) of the Disclosure Schedule (subject to such deletions as may be made by Purchaser without any substantive change to such category allocations and without decreasing such aggregate number of employees), is no longer employed by CCM, the Company or their respective Subsidiaries as of immediately prior to the Closing (such terminated employees, the "Non-Retained Employees"). Sellers shall cause each Non-Retained Employee to execute a release of all claims against CCM, the Company and their Subsidiaries to the extent such a release of claims is a condition for severance benefits under the applicable Business Employee Benefit Plan or Company Employee Benefit Plan under an agreement between the Sellers and such Non-Retained Employee and Sellers shall use reasonable efforts to seek a release of Purchaser and its Affiliates of such claims, provided that Sellers shall not be required to take any action or fail to take any action if doing so would be adverse to Sellers or any of its Affiliates following the Closing. Sellers shall retain all severance obligations under the Business Employee Benefit Plans and Company Employee Benefit Plans except to the extent Purchaser has any responsibility for the Schwab Soundview 2004 Severance Plan, subject to Section 6.5(j). Purchaser shall be responsible for all severance obligations related to any Retained Employees that arise as a result of the conduct of the Business or the Company Business or the conduct of the Purchaser or Purchaser II or any of their Affiliates following the Closing under Purchaser's applicable plans as in effect as of the date hereof. For purposes of this Agreement, "severance" shall include any notice or pay required to be provided in accordance with the WARN Act Workers Adjustment and Retraining Notification Act of 1988 (the WARN Act ) or any similar state or local statute. Purchaser shall use reasonable efforts to seek from each Retained Employee who is terminated by Purchaser prior to the one year anniversary of the Closing and is entitled to severance under Purchaser's severance plans a release of Sellers from any obligation to pay severance to such employees in respect of such termination, provided that Purchaser shall not be required to take any action or fail to take any action if doing so would be adverse to Purchaser or any of its Affiliates. - 51 - (c) Purchaser shall indemnify and hold Sellers and their Affiliates harmless from and against all claims, reasonable expenses (including reasonable attorneys' fees), losses and liabilities relating to (A) the Retained Employees' (as defined below) employment with the Purchaser, Purchaser II and their Affiliates on or after the Closing Date to the extent arising as a result of the conduct of the business or the employment of the Retained Employees following the Closing; and (B) Purchaser's or Purchaser II's failure to comply with all applicable Laws and Regulations in connection with the employee selection process resulting in the selection of the Non-Retained Employees to the extent (i) such Non-Retained Employees are employees of CCM or any of its Subsidiaries (and not of the Company and its Subsidiaries), (ii) such selection is not the result of the assignment by Sellers or the Business or the Company Business prior to the Closing of categories of people to accounts on a basis that would cause Purchaser inadvertently to violate applicable Laws and Regulations; and (iii) with respect to employees who have accounts, such selection is not based on quantitative data. Sellers acknowledge that as of the date hereof Purchaser and Purchaser II have not received any employment records or demographic data with respect to any employees of the Company or CCM or any of their Subsidiaries. (d) For purposes of the employee benefit plans of Purchaser and Purchaser II, Purchaser and Purchaser II shall credit each employee of CCM, the Company and their Subsidiaries who was identified by Purchaser and Purchaser II as provided in Section 6.5(b) and is an active employee immediately following the Closing or is on short-term disability, military or family leave and return to work at the conclusion of such leave (a "Retained Employee") with full credit for all service that would have been recognized by Seller or its Affiliates under the applicable Business Employee Benefit Plans or Company Employee Benefit Plans before the Closing Date for purposes of participation, eligibility, vesting, and benefit accrual, except for benefit accrual under any defined benefit or contribution pension plan; it being understood that no Retained Employee shall be permitted to participate in the Purchaser's frozen defined benefit plan. With respect to Purchaser's health and dental benefit plans, Purchaser shall cause any such plan to waive any pre-existing condition exclusions and actively-at-work requirements under such plans with respect to the Retained Employees and their eligible dependents (to the extent waived under the corresponding Business Employee Benefit Plan) and ensure that any covered expenses incurred on or before the Closing Date shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions after the Closing Date to the extent that such expenses are taken into account for similarly situated employees of Purchaser. Sellers shall retain any obligation for payment of long or short-term disability claims arising from disabilities of any employees or former employees of the Business or the Company Business that occurred prior to the Closing Date in accordance with the applicable Business Employee Benefit Plans and Company Employee Benefit Plans. (e) Sellers shall cause CCM, the Company and their Subsidiaries to cease to be participating employers in any of the Business Employee Benefit Plans and Company Employee Benefit Plans effective immediately prior to the Closing, subject to the Closing unless such cessation is automatic under the terms of the applicable Business Employee Benefit Plan and Company Employee Benefit Plan. Sellers shall retain (and indemnify, defend and hold harmless Purchaser, Purchaser II and their Affiliates and their respective employees and directors from) all liabilities and obligations whatsoever related to or arising from (i) any employees or former employees of CCM, the Company, or any of their Subsidiaries who are not Retained - 52 - Employees, including any severance or retention pay, except to the extent otherwise provided in Section 6.5(f) and (ii) any employment agreement entered into prior to the Closing by CCM, the Company or any of their Subsidiaries with any employees of CCM, the Company, or any of their Subsidiaries other than any employment agreement with any Retained Employee that is disclosed in the Disclosure Schedule, and (iii) any other matters for which Sellers have retained responsibility in Sections 6.5 and 6.6 of this Agreement. Prior to the Closing, Sellers will terminate the Business Employee Benefit Plans of CCM or any of its Subsidiaries. (f) Following the Closing, Sellers shall retain, and none of CCM, the Company or their Subsidiaries shall have, any liability or obligation arising from or related to the employment, or termination of employment, of any employee (or former employee) who is not a Retained Employee or any liability or obligation under or related to the Business Employee Benefit Plans or the Company Employee Benefit Plans, except for (i) the Company Employee Benefit Plans specifically identified as such on Section 3.10(a) of the Disclosure Schedule and (ii) the obligation to reimburse Sellers for any amounts exceeding $550,000 owing as of the Closing to Non-Retained Employees in respect of production-based bonuses earned during the period beginning July 1, 2004 and ending on the Closing Date to the extent such amounts were derived pursuant to the formulas contained in the plans set forth in Section 6.5(f) of the Disclosure Schedule and were derived consistent with past practice it being understood that with respect to any pool allocations, Purchaser shall have the right to review such allocations in advance. Following the Closing, CCM, the Company and their respective Subsidiaries shall not have any Controlled Group Liability. For purposes of this Agreement, "Controlled Group Liability" shall mean any liability (i) under Title IV of ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and 4971 of the Code, and (iv) as a result of failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code other than COBRA as set forth below. Sellers shall be responsible for providing or discharging any and all notifications, benefits and liabilities to employees and Governmental Entities required by the WARN Act or by any other applicable Laws and Regulations relating to plant closings or employee separations or other severance pay that are required to be provided before the Closing as a result of the transactions contemplated by this Agreement. Sellers shall retain all obligations with respect to continued coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") (and any similar state Laws and Regulations), Section 4980B of the Code, and Part 6 of Subtitle B of Title I of ERISA and the regulations thereunder for all employees who are not Retained Employees, and Purchaser shall retain all obligations under COBRA with respect to Retained Employees. (g) The Parent's 401(k) plan shall provide for the direct rollover or distribution to on behalf of all employees of CCM, the Company or their Subsidiaries of their vested account balances in accordance with such plan's regular distribution rules for employees. The Purchaser's 401(k) plans shall accept the direct rollover of the Retained Employees' benefit in cash and in outstanding promissory notes from the Parent's 401(k) plan as provided in Code Section 401(a)(31). (h) [Intentionally Omitted.] (i) Purchaser shall assume Sellers' aggregate liability as of the Closing Date for the Retained Employees' vacation pay for vacation accrued but not taken or paid by - 53 - Sellers (reduced by any vacation taken but not accrued). Such accrued vacation benefits shall be provided to Retained Employees in accordance with the terms of the Purchaser's applicable vacation pay policy or plan. (j) If a severance obligation is incurred following the Closing with respect to any Retained Employee covered by the severance promises described in the letters from Sellers to Mark Loehr dated December 18, 2003 and January 13, 2004 (describing a special severance program for employees of the Company) and the Schwab Soundview Severance Plan, Sellers shall be responsible for any amount that exceeds the severance obligation that would be incurred as calculated under the Purchaser severance plan applicable to such Retained Employee. Purchaser shall send Sellers a written invoice for such excess amount, and Sellers agree to promptly remit an amount in cash equal to the amount set forth in the invoice. (k) Prior to the Closing, Sellers shall cause the Plan and Rabbi Trust associated with the Deferred Compensation Plan to be cloned and shall cause the Rabbi Trust with respect to the Retained Employee(s)to be fully funded for the liability due to any Retained Employee under such Deferred Compensation Plan as of the Closing. The Company shall retain liability for the Deferred Compensation Plan for Retained Employees and shall remain the owner of the assets in such Rabbi Trust. (l) Prior to the fifteenth day following the date of this Agreement, Sellers shall not, and shall cause their respective Affiliates not to, directly or indirectly (on their own behalf or on behalf of any other Person), hire any Person who was an employee, officer, agent, consultant or independent contractor of CCM, the Company or any of their respective Subsidiaries as of the date hereof, or solicit any such individual to leave his or her employment or tenure of service with any such entity in order to become an employee, officer, agent, consultant or independent contractor of any Seller or its Affiliates. (m) On and following the fifteenth day following the date hereof and prior to the Closing, Sellers shall not, and shall cause their respective Affiliates not to, directly or indirectly (on their own behalf or on behalf of any other Person), hire any individual who was an employee, officer, agent, consultant or independent contractor of CCM, the Company or any of their respective Subsidiaries as of the date hereof, other than Non-Retained Employees (such individuals collectively, the "Pre-Closing Restricted Employees"), or solicit any Pre-Closing Restricted Employee to leave his or her employment or tenure of service with any such entity in order to become an employee, officer, agent, consultant or independent contractor of any Seller or any of its Affiliates. (n) On and following the Closing Date and prior to the second anniversary of the Closing, Sellers shall not, and shall cause their respective Affiliates not to, directly or indirectly (on their own behalf or on behalf of any other Person), (i) hire (A) any individual set forth on the list captioned "No-Hire Employees" furnished by Purchaser to Sellers on or prior to the date hereof, as it may be amended and supplemented from time to time by Purchaser as mutually agreed by the parties prior to the Closing (such individuals collectively, the "No-Hire Employees"), or (B) any individual solicited in violation of clause (ii) of this Section 6.5(n), or (ii) solicit (A) any No-Hire Employee, (B) any Retained Employee, or (C) any employee of CCM, the Company or their respective Subsidiaries who becomes an employee of any such - 54 - entity on or following the Closing (individuals described in clauses (A) through (C), collectively, the "Post-Closing Restricted Employees") for employment or retention as an employee, officer, agent, consultant or independent contractor of any Seller or any of its Affiliates. The placement of employment advertisements in newspapers of general circulation, the maintenance of booths at trade and/or job recruitment fairs and other similar activities not specifically targeted at any Post-Closing Restricted Employee shall not be deemed a violation of this Section 6.5(n). Further, none of Sellers or their Affiliates shall be prohibited from soliciting for employment or retention any Post-Closing Restricted Employee (i) who is in receipt of a notice of termination of employment issued by CCM, the Company or any of their respective Subsidiaries, or (ii) who contacts Sellers or their Affiliates concerning employment opportunities prior to any solicitation of such Post-Closing Restricted Employee by any of the Sellers or their respective Affiliates. (o) Following the date of this Agreement and prior to the expiration or termination of the Transition Services Agreement, Sellers shall not, and shall cause their respective Affiliates not to, employ any of the Transition Services Employees in, or reassign any Transition Services Employees to, positions whose duties would not include the performance of transition services pursuant to the Transition Services Agreement. (p) Sellers agree to cooperate with and assist Purchaser and Purchaser II in administering the Company Employee Benefit Plans, including participating in compliance audits, preparing governmental filings and explaining plan background and history, to the extent known by Sellers. 6.6 Outstanding Restricted Stock and Option Awards. (a) Schedule 6.6 of the Disclosure Schedule identifies for each employee of CCM and each of its Subsidiaries and the Company and each of its Subsidiaries (each, an "Identified Employee") who holds restricted shares of Parent common stock (the "Restricted Shares"), the following information: (i) such Identified Employee's full name; (ii) the total number of Restricted Shares granted; (iii) the total number of Restricted Shares unvested as of July 31, 2004; and (iv) the vesting schedule for such Restricted Shares, including the terms of any accelerated vesting covering such Restricted Shares, a specification of those Restricted Shares that cease to vest as of the Closing and a specification of those Restricted Shares (the "Cash-Out Restricted Shares") for which a lump sum cash payment equal to the fair market value of the unvested portion of the Cash-Out Restricted Shares is due if such Identified Employee is terminated without cause. In addition, Schedule 6.6 of the Disclosure Schedule identifies for each Identified Employee who holds options to purchase shares of Parent common stock (the "Options"), the following information: (i) such Identified Employee's full name; (ii) the total number of Options granted; (iii) the total number of Options unvested as of July 31, 2004 and the value of each such Option, using the Sellers' Black-Scholes valuation model; and (iv) the vesting schedule for such Options, including the terms of any accelerated vesting covering such Options, a specification of those Options that cease to vest as of the Closing and a specification of those Options (the "Cash-Out Options") for which a lump sum cash payment equal to the value of the unvested portion of the Cash-Out Options (and the amount of such payment using the Sellers' Black-Scholes valuation model for such Cash-Out Options) is due if such Identified Employee is terminated without cause. Schedule 6.6 of the Disclosure Schedule identifies for each Identified Employee who has been granted the right to receive cash which - 55 - vests over time (the "Cash Grants"), the following information: (i) such Identified Employee's full name; (ii) the aggregate amount of such Identified Employee's Cash Grant; (iii) the aggregate amount of such Cash Grant unvested as of July 31, 2004; and (iv) the vesting schedule for such Cash Grant. On or before the Closing, Sellers will provide Purchaser with an updated version of Schedule 6.6 of the Disclosure Schedule with respect to the Retained Employees as of the Closing Date. (b) Sellers will be responsible for, and make any payments required in respect of, all of the Restricted Shares, Cash-Out Restricted Shares, Options, Cash-Out Options and Cash Grants (collectively, "Awards") that have been awarded to any employee of any of CCM, the Company or any of their respective Subsidiaries prior to the Closing, in accordance with the applicable award agreement or plan document, except to the extent Purchaser has determined to include within the Retained Employees any person who has not agreed to the terms of employment offered by Purchaser. For the avoidance of doubt, Purchaser and its Affiliates shall not be responsible for, or make any payments required in respect of, any of the Awards that have been awarded to any employee of any of CCM, the Company or any of their respective Subsidiaries prior to the Closing, regardless of the vesting schedule of such awards or the basis for the termination of such employee, except to the extent Purchaser has determined to include within the Retained Employees any person who has not agreed to the terms of employment offered by Purchaser in which event Purchaser shall reimburse Parent or make such payments as are required to such employee. (c) Purchaser agrees to seek as part of the terms of the employment offer an unconditional release of Sellers' obligations in Section 6.6(b) from each employee intended to be a Retained Employee, as a condition of continued employment following the Closing. 6.7 Restructuring. (a) Prior to the Closing, Sellers shall take all reasonable commercial efforts necessary to cause each of CCM, the Company and each of their respective Subsidiaries to assign and transfer to the Sellers or one or more of their Subsidiaries (other than CCM, the Company or any of their respective Subsidiaries) any leases of real property and premises to which any of CCM, the Company or any of their respective Subsidiaries may be subject, including but not limited to the leases and other agreements specified on Section 3.14 of the Disclosure Schedule, and to obtain in writing the unconditional release of CCM, the Company and their respective Subsidiaries from all liabilities in connection therewith so that none of CCM, the Company or any of their respective Subsidiaries or Purchaser or Purchaser II or any of their Affiliates will be responsible therefor or subject thereto, except in connection with the subleases described in Section 7.2(j). To the extent CCM, the Company and each of their respective Subsidiaries are unable to obtain such releases prior to Closing, Sellers shall continue to endeavor to do so following Closing and will indemnify Purchaser for any damages resulting from the failure to obtain such releases prior to Closing. (b) Prior to the Closing, Sellers shall take all actions necessary to terminate research coverage on all companies for which CCM, the Company or their Subsidiaries are providing research coverage prior to the Closing, including any required notices of termination. - 56 - (c) Prior to or contemporaneously with the Closing, Sellers shall cause the Company and CCM to terminate that certain Strategic Alliance Agreement, dated as of November 24, 2003 (together with any other agreement related to the Perseus Agreement the "Perseus Agreement"), among the Company, CCM and Perseus Group, LLC. Following such termination, Parent and Purchaser shall, and shall cause their respective Affiliates and employees to, perform and discharge, at Sellers' expense, all of the Company's obligations pursuant to Section 17 of the Perseus Agreement. (d) Prior to the Closing, Sellers shall cause each of CCM and its Subsidiaries to assign and transfer to the Sellers or one or more of their Affiliates (other than CCM, the Company or any of their respective Subsidiaries) all the assets and liabilities related to the Electronic Program Trading business of CCM and its Subsidiaries other than any Intellectual Property, any Technology Systems and any Proprietary Software related to the Electronic Program Trading business of CCM and its Subsidiaries. 6.8 Noncompetition Agreement. At or prior to the Closing Date, Purchaser and Sellers shall enter into a Noncompetition Agreement which shall have a duration of five (5) years, will be substantially in the form attached hereto as Section 6.8 of the Disclosure Schedule (the "Noncompetition Agreement"). 6.9 Tax Matters. (a) Parent Indemnity. Parent shall be liable for and shall indemnify Purchaser and Purchaser II for (i) all Taxes attributable to, imposed on, or for which the Company or any of its Subsidiaries may otherwise be liable for events occurring or periods ending on or before the Closing Date and, with respect to any taxable year or period beginning on or before and ending after the Closing Date, the portion of such taxable year or period ending on the Closing Date, (ii) any Transfer Taxes imposed on Parent or CCM or the Company or their Subsidiaries with respect to the transactions contemplated by this Agreement as set forth in Section 6.10(b), (iii) all Taxes attributable to a breach of a representation set forth in Sections 3.9(d), 3.9(e), 3.9(f), 3A.9(a) (last sentence), 3A.9(d), 3A.9(e), 3A.9(f), 3A.9(g), 3A.9(h), or 3A.9(i), (iv) all Taxes that may become due from the Company or any of its Subsidiaries, as a result of any such entity having filed for any period including or preceding the Closing Date a consolidated, combined or unitary return with a corporation pursuant to Treas. Reg. SS 1.1502-6 or any analogous state, local or foreign law or pursuant to any contractual obligation, or (v) any Taxes for which Parent is liable pursuant to Section 6.10(c). Parent shall be entitled to any refund of Taxes of the Company or any of its Subsidiaries attributable to Taxes paid with respect to such periods, or otherwise paid by Parent pursuant to this Section 6.9(a). (b) Straddle Periods. For purposes of subsection (a) of this Section 6.9, whenever it is necessary to determine the liability for Taxes of the Company or any of its Subsidiaries for a portion of a taxable year or period that begins on or before and ends after the Closing Date, the determination of such Taxes for the portion of the year or period ending on or before, and the portion of the year or period beginning after, the Closing Date generally shall be determined by assuming that the Company and/or any of its Subsidiaries, as the case may be, had a taxable year or period which ended at the close of the Closing Date, except that tax items that - 57 - are calculated on an annual basis, such as the deduction for depreciation or certain taxes, shall be apportioned on a pro rata time basis. (c) Carrybacks. If Parent becomes entitled to a refund or credit of Taxes for any period for which it is liable under Section 6.9(a) to indemnify Purchaser and Purchaser II and such Taxes are attributable to the carryback of losses, credits or similar items attributable to the Company and its Subsidiaries and from a taxable year or period that begins after the Closing Date, Parent shall promptly pay to Purchaser II the amount of such attributable refund or credit together with any interest thereon. In the event that any refund or credit of Taxes for which a payment has been made pursuant to the immediately preceding sentence is subsequently reduced or disallowed, Purchaser II shall indemnify and hold harmless Parent for any Tax liability, including interest and penalties, assessed against Parent by reason of the reduction or disallowance up the amount of any payment received plus interest. (d) Tax Returns. Parent shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to the Company or any of its Subsidiaries for taxable years or periods ending on or before the Closing Date and shall pay any Taxes due in respect of such Tax Returns consistent with past practice, and Purchaser II shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to the Company or any of its Subsidiaries for taxable years or periods ending after the Closing Date and shall remit any Taxes due in respect of such Tax Returns. Purchaser II shall permit Parent to review and comment on each Tax Return for which Parent may be liable under Section 6.9(a) of this Agreement, and shall make such revisions to such Tax Returns as are reasonably requested by Parent. Parent shall pay to Purchaser II an amount equal to the Taxes for which Parent is liable pursuant to Section 6.9(a) but which are payable with Tax Returns to be filed by Purchaser II pursuant to the previous sentence within 10 days prior to the due date for the filing of such Tax Returns. (e) Cooperation. After the Closing Date, Purchaser II and Sellers and each of their respective Affiliates shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the preparation and filing of Tax Returns pursuant to this Section 6.9 and any audit, litigation or other proceeding with respect to Taxes. Each party will make available to the other, as reasonably requested, copies or originals of all information, records or documents relating to liability for Taxes for all periods prior to or including the Closing Date and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof, and Sellers will not destroy any such information, records or documents without first offering, with reasonable advance written notice, to deliver such information, records or documents to Purchaser II (at Purchaser II's expense). (f) No Section 338 Election. The parties shall not file an election under Section 338 of the Code (including Section 338(h)(10) of the Code) or any state law equivalent provision with respect to the transactions contemplated by this Agreement. (g) Tax Contests. Purchaser shall promptly notify Sellers in writing upon receipt by Purchaser or any of its Affiliates (including the Company and its Subsidiaries) of notice of any pending or threatened federal, state, local or foreign income or franchise tax audits or assessments which may affect the tax liabilities of the Company or any of its Subsidiaries for - 58 - which Sellers would be required to indemnify Purchaser or Purchaser II pursuant to Section 6.9(a); provided, that failure to comply with this provision shall not affect Purchaser's right to indemnification hereunder except to the extent such failure actually prejudiced the Sellers' ability to defend or contest such audit or assessment. Sellers shall have the sole right to represent the Company's or any of its Subsidiaries' interests in any tax audit or administrative or court proceeding relating to taxable periods ending on or before the Closing Date, and to employ counsel of its choice at its expense. Sellers shall be entitled to participate at their expense in the defense of any claim for Taxes for a year or period ending after the Closing Date which may be the subject of indemnification by Sellers pursuant to Section 6.9(a) and, with the written consent of Purchaser and at its sole expense, may assume the entire defense of such tax claim. Neither Purchaser nor Purchaser II nor the Company nor any of the Company's Subsidiaries may agree to settle any tax claim for the portion of the year or period ending on or before the Closing Date which may be the subject of indemnification by Sellers under Section 6.9(a) without the prior written consent of Sellers, which consent shall not be unreasonably withheld. (h) Survival. The obligations of the parties hereto set forth in this Section 6.9 shall be unconditional and absolute. (i) Certain Tax Liabilities. Notwithstanding any other provision of this Section 6.9 to the contrary, Parent shall not be obligated to indemnify Purchaser for any Taxes that are accrued but not yet payable as of the Closing Date and are attributable to current operations of the Company or any of its Subsidiaries, to the extent such current period Taxes are incurred in the ordinary course of business and are attributable to the tax period that begins on the Balance Sheet Date and includes the Closing Date (which for this purpose would include, but not be limited to, estimated income tax payments, payroll and withholding taxes and corporate filing extension payments). 6.10 Other Tax Matters. (a) Tax Sharing Agreement. Any tax sharing agreement between Parent or Sellers, on the one hand, and the Company, CCM or any of their respective Subsidiaries, on the other hand, shall be terminated as of the Closing Date and shall have no further effect for any taxable year (whether the current year, a future year, or a past year). (b) Transfer Taxes. All documentary, sales, use, real property transfer, real property gains, registration, value added, transfer, stamp, recording and similar Taxes, fees and costs together with any interest thereon, penalties, fines, costs, fees, additions to tax or additional amounts with respect thereto incurred in connection with the transactions contemplated by this Agreement ("Transfer Taxes") shall be borne by Parent. (c) Information Reporting and Backup Withholding. Sellers shall indemnify Purchaser and Purchaser II in accordance with Article IX hereof to the extent that any Taxes are imposed on Purchaser, Purchaser II, any of their Affiliates, the Company, CCM or any of their respective Subsidiaries that are attributable to a failure by such entity to comply with any federal, state, local or foreign Tax reporting or withholding requirement during the 6-month period beginning on the Closing Date, if such failure is due to the use by such entity of any procedure established by the Company, CCM, Sellers, Parent or any of their respective - 59 - Subsidiaries and in place as of the Closing Date for the solicitation, collection and maintenance of any forms, certifications and other information or otherwise is due to any form, certification or other required information in place as of the Closing Date (or the absence of any such form, certification or information as of the Closing Date), except to the extent such failure is due to a change in law following the Closing or to the extent that management of Purchaser or Purchaser II has actual knowledge following the Closing of such failure. (d) Partnership Taxes. Sellers shall be liable for and shall indemnify Purchaser and Purchaser II in accordance with Article IX hereof for all Taxes attributable to, imposed on, or for which CCM or any of its Subsidiaries may otherwise be liable for events occurring or periods ending on or before the Closing Date and, with respect to any taxable year or period beginning on or before and ending after the Closing Date, the portion of such taxable year or period ending on the Closing Date (determined in accordance with the principles of Section 6.9(b)). (e) Federal Tax Refund. Promptly following receipt, Purchaser shall remit to Sellers the federal Tax refund (and any interest thereon) actually received by the Company with respect to its request for a $10,268,997 tax refund filed on IRS Form 1120X, for the Tax years 1997, 1998 and 1999, net of any Tax burden on such receipt. 6.11 Jupiter. Sellers and their Affiliates shall, for the 18 month period following the date of this Agreement, not facilitate any prospective purchaser of the Business, the Company Business or any other businesses being sold by Sellers in their soliciting, attempting to hire or hiring any then employee of CCM, the Company or any of their respective Subsidiaries (other than research or research sales employees). Sellers shall enforce any non-solicitation and non-hire provision contained in any non-disclosure or confidentiality agreement entered into between Sellers or their Affiliates, on one hand, and any such prospective purchaser, on the other hand, to the extent that any non-enforcement of such a provision contained in such an agreement is reasonably likely to be adverse to Purchaser and Sellers are aware of any breach of such covenants. 6.12 Director and Officer Indemnification. (a) The certificate of incorporation and bylaws of the Company shall, and the Partnership Agreement shall, with respect to indemnification of officers, directors, employees and agents, not be amended, repealed or otherwise modified after the Closing in any manner that would adversely affect the rights thereunder of the persons who at any time prior to the Closing were identified as prospective indemnitees under the certificate of incorporation or bylaws of the Company or Partnership Agreement in respect of actions or omissions occurring at or prior to the Closing (including the transactions contemplated hereby), unless such modification is required by Laws and Regulations. (b) Purchaser shall cause the Company and CCM to indemnify, defend and hold harmless, the present and former officers, directors, employees and agents of the Company, CCM or any of their respective Subsidiaries in their capacities as such (each an "Agreed Indemnified Party") in accordance with the certificate of incorporation and bylaws and agreement of limited partnership, or other charter documents, of the Company, CCM and each of - 60 - their respective Subsidiaries and any agreements or plans identified on Section 6.12 of the Disclosure Schedule maintained by the Company, CCM and each of their respective Subsidiaries, to the fullest extent permitted by the terms thereof, subject to applicable Laws and Regulations, against all losses, expenses, claims, damages and liabilities arising out of actions or omissions occurring on or prior to the Closing. Sellers will promptly pay to Purchaser any amounts Purchaser notifies Sellers in writing are required to be paid pursuant to this Section 6.12(b). (c) In the event Purchaser or any of its successors or assigns or the Company or CCM or any of their respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Purchaser, the Company or CCM, as applicable, assume the obligations set forth in this section or proper provision is made to retain such liabilities or responsibilities. (d) Purchaser II shall not, and shall cause the Company not to, terminate the Tail Policy. (e) The provisions of this Section 6.12 shall survive the Closing and are intended to be for the benefit of, and shall be enforceable by, each Agreed Indemnified Party and his or her heirs and representatives. 6.13 Parent Loan. Purchaser acknowledges that CCM owes Parent the outstanding loan in the aggregate principal amount of $25,000,000. CCM intends to repay such amount prior to Closing. If because of regulatory requirements or otherwise CCM is prevented from repaying such amount, Purchaser will cause CCM to make such repayment to Parent promptly following the receipt of regulatory approval. Following the repayment of such amount, Purchaser will not permit CCM to make any further drawings under such loan and Purchaser and Parent shall cooperate to terminate such loan. 6.14 Pre-Closing Intellectual Property Transfer. Prior to the Closing (i) Sellers shall, and shall cause their Affiliates (other than CCM and its Subsidiaries), to transfer to CCM all of their respective right, title and interest in and to the Intellectual Property listed on Section 3.17(a) of the Disclosure Schedule that is indicated to be so transferred to CCM at Sellers' expense; (ii) Sellers shall, and shall cause their Affiliates (other than the Company and its Subsidiaries) to transfer to the Company all of their respective right, title and interest in and to the Intellectual Property listed on Section 3.17(a) of the Disclosure Schedule and indicated to be so transferred to the Company at Sellers' expense; (iii) Sellers shall duly submit recordation of such transfers with the United States Patent and Trademark Office (or other applicable office) and deliver to the Purchaser reasonable proof of such submission, at Sellers' expense; and (iv) Sellers shall, and shall cause their Affiliates (other than CCM, the Company and their respective Subsidiaries) prior to Closing, or as soon as reasonably practicable thereafter, to transfer to CCM or the Company, as the case may be, pursuant to a written agreement in a form reasonably acceptable to the Purchaser, all of their respective rights, title, interest and benefits in, to and under the Material Contracts and other agreements listed on Sections 3.13(a)(xiv), 3.17 and 3.18 - 61 - of the Disclosure Schedule (but excluding those agreements addressed by Section 7.2(i), those agreements to which CCM, the Company or their respective Subsidiaries are a party and derive all rights and benefits under such agreement in their capacity as such, and those agreements annotated on Sections 3.13(a)(xiv), 3.17 and 3.18 of the Disclosure Schedule as not being transferred pursuant to this transaction) to be so transferred to CCM or the Company, as the case may be, having obtained all consents required for such transfer, and prior to such transfer of such agreement providing the putative transferee all use, rights and benefits under such agreement pursuant to the Transition Services Agreement until such transfer, and retaining for itself none of the use, rights or benefits under such agreement. 6.15 Disposition of "Schwab" Element Trademark Applications. As concerns the trademark applications containing the "Schwab" word element listed on Section 3.17(a) of the Disclosure Schedule, ownership of which Parent will retain as indicated on Section 3.17(a) of the Disclosure Schedule (collectively, the "Retained Trademark Applications"), at any time on or after the Closing, Parent shall permit Purchaser to file in CCM's name and duly prosecute one or more new applications for trademark registration for the non-"Schwab" elements claimed in such Retained Trademark Applications. Parent will not cause or allow the Retained Trademark Applications to lapse or abandon unless Purchaser directs Parent to do so in writing, provided that Parent shall not be obligated to file a Statement of Use or a request for extension of time to file a Statement of Use, or submit responses to Office Actions or take other affirmative actions concerning such Retained Trademark Applications, provided that Sellers provide to Purchaser prompt written notice of such requirements as Sellers become aware of them. Nothing in this Agreement or in the Ancillary Agreements shall be deemed to transfer to Purchaser or Purchaser II any right, title, or interest in or to any trademark containing the "Schwab" word element, and no rights to use such trademarks are granted by Sellers under this Agreement or in the Ancillary Agreement except as expressly set forth in the License Agreement. 6.16 Books and Records. Sellers shall ensure that prior to or at the Closing, all books and records related to each of the Business and the Company Business, including originals of all employment records for the Retained Employees (including Human Resources Information System data, original employment applications, results of background checks and credit checks, fingerprint cards required by Laws and Regulations, results of pre-employment drug tests and original Form I-9s), are in the possession of CCM and the Company, respectively. Article VII Conditions Precedent 7.1 Conditions to Each Party's Obligation to Effect the Transactions Contemplated by this Agreement. The respective obligations of each party to effect the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent - 62 - jurisdiction preventing the consummation of the transactions contemplated by this Agreement shall be in effect; nor shall there be any statute, rule, regulation or order enacted, entered, or enforced which prevents or prohibits the consummation of the transactions contemplated by this Agreement. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable commercial efforts to have such injunction or other order lifted. (b) HSR Approval. The waiting period applicable to the consummation of the transactions contemplated hereby under the HSR Act shall have expired or been terminated. (c) Regulatory Approval. Purchaser and Purchaser II, on the one hand, and Sellers and its Subsidiaries, on the other, shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of the purchase and sale contemplated hereby and the Order Handling Agreement and set forth in Schedule 7.1 of the Disclosure Schedule. (d) Actions and Proceedings. There shall not be pending or threatened any action, suit or proceeding by any federal or state court or governmental entity challenging or seeking to materially restrain or prohibit the transactions contemplated by this Agreement or the Order Handling Agreement. 7.2 Conditions to Purchaser's Obligation To Effect The Transactions Contemplated By This Agreement. Purchaser and Purchaser II's obligations to effect the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of Sellers set forth in this Agreement shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on such date, except to the extent such representations and warranties are expressly made only as of an earlier date, in which case as of such earlier date; provided that, if any of such representations and warranties shall not be true and correct (for this purpose disregarding any qualification or limitation as to materiality or, a Business Material Adverse Effect or a Company Material Adverse Effect), then the condition stated in this clause (a) shall be deemed satisfied if and only if the cumulative effect of all inaccuracies of such representations and warranties (for this purpose disregarding any qualification or limitation as to materiality, Business Material Adverse Effect or Company Material Adverse Effect) shall not be or have a Business Material Adverse Effect or a Company Material Adverse Effect. Purchaser and Purchaser II shall have received a certificate signed on behalf of Sellers by an authorized officer of each Seller to the foregoing effect. (b) Performance of Obligations. Sellers shall have performed in all material respects its obligations required to be performed by them under this Agreement at or prior to the Closing Date. Purchaser and Purchaser II shall have received a certificate signed on behalf of Sellers by an authorized officer of each Seller to the foregoing effect. (c) Order Handling Services Agreement. Parent and CS&Co. shall have executed and delivered to Purchaser the Order Handling Services Agreement. - 63 - (d) Options Order Business Agreement. Parent and CS&Co. shall have executed and delivered to Purchaser the Options Order Business Agreement. (e) Noncompetition Agreement. Sellers shall have executed and delivered to Purchaser the Noncompetition Agreement. (f) License Agreement. Sellers shall have executed and delivered to Purchaser and Purchaser II the License Agreement. (g) Transition Services Agreement. Sellers shall have executed and delivered to Purchaser and Purchaser II the Transition Services Agreement. (h) No Actions or Proceedings. There shall not be pending any Legal Proceeding by any Person that is reasonably likely to result in the prohibition or any material limitation on the ownership, operation or control by Purchaser or Purchaser II or any of their Affiliates of any material portion of the Business, the Partnership Interests or the Company Common Stock. (i) Consents. Sellers shall have received the material non-governmental consents that are listed on Schedule 3.4 of the Disclosure Schedule hereof the failure of which to obtain would be material to CCM or the Company or Purchaser or Purchaser II, including those set forth on Schedule 7.2(i) (except to the extent that Purchaser has entered into agreements with respect to the matters described in the agreements specified therein with respect to the Business and the Company Business). (j) Real Estate. Sellers shall have entered into, or shall have caused the appropriate Subsidiaries of Parent to enter into, leases, subleases or licenses, as applicable, of real property listed on Section 1.6 of the Disclosure Schedule for the durations and in the manner the prices are to be derived as set forth therein. (k) Perseus. Prior to or contemporaneously with the Closing, the Company and CCM shall have terminated the Perseus Agreement. (l) Resignations. Each director and officer of each of the Company, its Subsidiaries, CCM and its Subsidiaries shall have resigned effective as of the Closing, unless Purchaser notifies Sellers to the contrary prior to the Closing. (m) Capitalization. The Company, its Subsidiaries, CCM and its Subsidiaries shall be in compliance with any minimum regulatory capital requirements as of the Closing Date. (n) Opinion of Counsel. Purchaser shall have received the written opinion of Howard Rice Nemerovski Canady Falk & Rabkin P.C., counsel to Sellers, in form and substance reasonably satisfactory to Purchaser, with respect to the due authorization, execution and delivery by Sellers, and the enforceability against the Sellers of this Agreement. 7.3 Conditions to Sellers' Obligation To Effect The Transactions Contemplated By This Agreement. Sellers' obligations to effect the transactions contemplated by this - 64 - Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of Purchaser and Purchaser II set forth in this Agreement shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on such date, except to the extent such representations and warranties are expressly made only as of an earlier date, in which case as of such earlier date. Sellers shall have received a certificate signed on behalf of each of Purchaser and Purchaser II by an authorized officer of Purchaser and Purchaser II to the foregoing effect. (b) Performance of Obligations. Purchaser and Purchaser II shall have performed in all material respects its obligations required to be performed by it under this Agreement at or prior to the Closing Date. Sellers shall have received a certificate signed on behalf of each of Purchaser and Purchaser II by an authorized officer of Purchaser and Purchaser II to the foregoing effect. (c) Order Handling Services Agreement. Purchaser shall have executed and delivered to Parent and CS&Co. the Order Handling Services Agreement. (d) Options Order Business Agreement. Purchaser shall have executed and delivered to Parent and CS&Co. the Options Order Business Agreement. (e) License Agreement. Purchaser shall have executed and delivered to Sellers the License Agreement. (f) Transition Services Agreement. Purchaser shall have executed and delivered to Sellers the Transition Services Agreement. (g) Opinion of Counsel. Sellers shall have received the written opinion of Sullivan & Cromwell LLP, counsel to Purchaser, in form and substance reasonably satisfactory to Sellers, with respect to the due authorization, execution and delivery by Purchaser and Purchaser II, and the enforceability against Purchaser and Purchaser II of this Agreement. Article VIII Termination and Amendment 8.1 Termination. This Agreement may be terminated: (a) by mutual consent of Sellers and Purchaser at any time prior to the Closing Date; (b) by either Sellers or Purchaser at any time prior to the Closing Date if the Closing shall not have occurred on or before January 31, 2005 (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been the cause of or resulted in the failure to consummate the - 65 - transactions contemplated by this Agreement by the close of business on January 31, 2005 and such action or failure to act constitutes a breach of this Agreement); (c) by Sellers at any time prior to the Closing Date, if Purchaser and Purchaser II shall not be capable of satisfying the conditions set forth in Section 7.3 (a) and (b) of this Agreement; provided that the right to terminate this Agreement by Sellers shall not be available to Sellers if Sellers are at that time in material breach of this Agreement; (d) by Purchaser at any time prior to the Closing Date, if Sellers shall not be capable of satisfying the conditions set forth in Section 7.2 (a) and (b) of this Agreement; provided that the right to terminate this Agreement by Purchaser shall not be available to Purchaser if Purchaser or Purchaser II is at that time in material breach of this Agreement; and (e) by either Sellers or Purchaser if at any time prior to the Closing Date any permanent injunction or other order of a court or other competent authority preventing the consummation of the transactions contemplated by this Agreement shall have become final and nonappealable. 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Purchaser, Purchaser II, Sellers or their respective officers, directors, stockholders or Affiliates; provided that (a) the provisions of Section 6.3 (Public Disclosure), Section 11.7 (Governing Law), Section 8.3 (Expenses) and this Section 8.2 shall remain in full force and effect and survive any termination of this Agreement, (b) the Confidentiality Agreement shall continue in full force and effect, and shall survive any termination of this Agreement, in accordance with its terms and (c) nothing herein shall relieve any party from liability for fraud or willful breach in connection with this Agreement or the transactions contemplated hereby. 8.3 Expenses. Whether or not the transactions contemplated by this Agreement are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, the fees and expenses of advisers, brokers, finders, agents, accountants and legal counsel) shall be paid by the party incurring such expense. 8.4 Amendment. This Agreement may not be amended or modified at any time, except by execution of an instrument in writing signed on behalf of each of the parties hereto. 8.5 Extension; Waiver. At any time prior to the Closing Date any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein, but any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. - 66 - Article IX Indemnification 9.1 Survival of Representations and Warranties and Agreements. The respective representations and warranties of Sellers and Purchaser contained in this Agreement shall survive the Closing but shall expire on April 30, 2006; provided, however, that, notwithstanding the foregoing, (i) the representations and warranties set forth in Sections 3.1 (with respect to the first five sentences only), 3.2(a), 3.2(b), 3.2(d), 3.3(a), 3.3(b)(i), 3A.1, 3A.2(a), 3A.2(b), 3A.2(d), 3A.3(i), 4.1, 4.2(a), 4.2(b)(i) and 4.4 shall survive the Closing and continue in full force and effect indefinitely, (ii) the representations and warranties set forth in Sections 3.17 and 3.18 shall survive the Closing but shall expire on the fifth anniversary of the Closing Date and (iii) the representations and warranties set forth in Sections 3.9 and 3A.9 shall survive the Closing and continue in full force and effect until 30 days following the expiration of the statutes of limitation for the year or period at issue (giving effect to any waiver, mitigation or extension thereof). Notwithstanding the preceding sentence, any representation or warranty in respect of which indemnity may be sought under this Agreement shall survive the time at which it would otherwise terminate pursuant to the preceding sentence, if notice of the breach or inaccuracy giving rise to such right of indemnity shall have been given to the party against which such indemnity may be sought prior to such time. The respective covenants and agreements of Sellers and Purchaser contained in this Agreement (including, without limitation, the respective indemnification obligations of Sellers and Purchaser set forth in this Article IX) shall survive the Closing and the consummation of the transactions contemplated by this Agreement indefinitely unless otherwise provided by their terms. 9.2 Indemnification by Sellers. (a) Sellers, jointly and severally, shall indemnify, defend and hold Purchaser, Purchaser II and their Affiliates and their respective officers, directors, employees, agents, advisers, and representatives (collectively, the "Purchaser Indemnitees") harmless from and after the Closing Date for the period set forth in Section 9.1 (including any extension thereof as expressly provided for in such Section) from and against any claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries, and deficiencies, including interest, penalties, reasonable expenses of investigation with respect to third party claims and reasonable attorney's fees and expenses, whether or not involving a claim by a third party ("Damages"), incurred or suffered by any Purchaser Indemnitee to the extent resulting or arising from or relating to: (i) any inaccuracy in any of the representations and warranties made by Sellers in this Agreement (for this purpose disregarding any qualification or limitation as to materiality (such as "material", "in all material respects" and the like, or "Business Material Adverse Effect" or "Company Material Adverse Effect") other than the reference to "Business Material Adverse Effect" or "Company Material Adverse Effect", as applicable, set forth in the parenthetical of the first sentence of each of Sections 3.8, 3.12(a) and 3A.12(a)) or in the certificate referred to in Section 7.2(a); or (ii) any breach of any covenant or agreement of Sellers made in this Agreement, any Ancillary Agreement (other than the Order Handling Agreement or Options Order Business Agreement) or in the certificate referred to in Section 7.2(b). Notwithstanding the foregoing, with respect to Damages arising under Section 9.2(a)(i), (i) Sellers shall not be liable to indemnify any Purchaser Indemnitees against such Damages unless and until the aggregate amount of Damages incurred or suffered by all Purchaser Indemnitees exceeds - 67 - $2,650,000 and then only to the extent of such excess, and (ii) Sellers' maximum liability to the Purchaser Indemnitees for such Damages shall not exceed $175 million. (b) Sellers, jointly and severally, shall indemnify, defend and hold the Purchaser Indemnitees harmless from and against any Damages, incurred or suffered by any Purchaser Indemnitee to the extent resulting or arising from or relating to any Company Liability, including the consolidated IPO litigation matters . Sellers shall be entitled to the recovery of all amounts available under the Escrow Agreement identified on Section 3.8 of the Disclosure Schedule (the "Escrow Agreement"). Purchaser will use reasonable commercial efforts, at Sellers' expense, to seek recovery under the Escrow Agreement. 9.3 Indemnification by Purchaser. Purchaser shall indemnify, defend and hold Sellers, their Affiliates (not including CCM or any of its Subsidiaries) and their respective officers, directors, employees, agents, advisers, and representatives (collectively, the "Seller Indemnitees") harmless from and after the Closing Date for the period set forth in Section 9.1 (including any extension thereof as expressly provided for in such Section) from and against any Damages incurred or suffered by any Seller Indemnitee to the extent resulting or arising from or relating to: (a) any inaccuracy in any of the representations and warranties made by Purchaser in this Agreement or in the certificate referred to in Section 7.3(a) or (b) any breach of any covenant or agreement of Purchaser made in this Agreement, any Ancillary Agreement (other than the Order Handling Agreement) or in the certificate referred to in Section 7.3(b). Notwithstanding the foregoing, with respect to Damages arising under Section 9.3(a), (i) Purchaser shall not be liable to indemnify any Seller Indemnitees against such Damages unless and until the aggregate amount of Damages incurred or suffered by all Seller Indemnitees exceeds $2,650,000 and then only to the extent of such excess and (ii) Purchaser's maximum liability to the Seller Indemnitees for such Damages shall not exceed $175 million. 9.4 Indemnification Procedure. (a) Any party seeking indemnification hereunder (the "Indemnified Party") shall give prompt notice (a "Certificate") to the party from which indemnification is sought (the "Indemnifying Party") of any claim for indemnification hereunder, which notice shall specify in reasonable detail the basis for any anticipated liability and the provisions of this Agreement pursuant to which such Indemnified Party claims to be entitled to indemnification hereunder. The failure to so notify the Indemnifying Party shall not limit any of the obligations of the Indemnifying Party (except to the extent such failure materially prejudices the Indemnifying Party). (b) In case the Indemnifying Party shall object to the indemnification of an Indemnified Party in respect of any claim or claims specified in any Certificate, the Indemnifying Party shall, within ten (10) Business Days after receipt by the Indemnifying Party of such Certificate, deliver to the Indemnified Party a written notice to such effect and the Indemnifying Party and the Indemnified Party shall, within the ten (10) Business Day period beginning on the date of receipt by the Indemnified Party of such written objection, attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims to which the Indemnifying Party shall have so objected. If the Indemnified Party and the Indemnifying Party shall succeed in reaching agreement on their respective rights with respect to - 68 - any of such claims, the Indemnified Party and the Indemnifying Party shall promptly prepare and sign a memorandum setting forth such agreement. (c) Claims for Damages specified in any Certificate to which an Indemnifying Party shall not object in writing within ten (10) Business Days of receipt of such Certificate, claims for Damages covered by a memorandum of agreement of the nature described in Section 9.4(b) and claims for Damages the validity and amount of which have been the subject of a final and binding judicial determination, the time for appeal having expired, are hereinafter referred to, collectively, as "Agreed Claims." Within ten (10) Business Days of the determination of the amount of any Agreed Claims, subject to the limitations of this Article IX, the Indemnifying Party shall pay to the Indemnified Party an amount equal to the Agreed Claim by cashier's check or wire transfer to the bank account or accounts designated in writing by the Indemnified Party not less than one (1) Business Day prior to such payment. (d) Promptly after the assertion by any third party of any claim against any Indemnified Party that in the reasonable judgment of such Indemnified Party may result in the incurrence by such Indemnified Party of Damages for which such Indemnified Party would be entitled to indemnification pursuant to this Agreement, such Indemnified Party shall deliver to the Indemnifying Party a written notice describing in reasonable detail such claim, but any failure on the part of the Indemnified Party to provide prompt notice shall not limit any of the obligations of the Indemnifying Party (except to the extent such failure materially prejudices the defense of such claim). For a period of fifteen (15) Business Days following its receipt of the notice specified in the previous sentence, the Indemnifying Party may, at its option, elect to assume the defense of the Indemnified Party against such claim (and, in such event, the Indemnifying Party shall promptly employ counsel, who shall be reasonably satisfactory to such Indemnified Party) at such Indemnifying Party's expense. If the Indemnifying Party elects to assume such defense, then the Indemnifying Party shall diligently defend any such claim as if such Indemnifying Party had 100% of the liability with respect to such claim. Any Indemnified Party shall have the right but not the obligation to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Indemnifying Party unless (i) the Indemnifying Party shall have failed, within fifteen (15) Business Days after having been notified by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim or to notify the Indemnified Party in writing that it shall assume the defense of such claim, (ii) the employment of such counsel has been specifically authorized in writing by the Indemnifying Party, or (iii) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised by such counsel that there may be one or more legal defenses available to the Indemnifying Party which are not available to, or the assertion of which would be adverse to the interests of, the Indemnified Party. No Indemnifying Party shall be liable to indemnify any Indemnified Party for any settlement of such action or claim effected without the consent of the Indemnifying Party, which consent may not be unreasonably withheld, delayed or conditioned, it being understood that it shall be unreasonable to withhold, delay or condition any such consent unless the Indemnifying Party has acknowledged that it has an obligation to indemnify the Indemnified Party with respect to such action or claim. Notwithstanding any other provision of this Agreement, Sellers shall not settle or compromise any claim, including any Company Liability or any Legal Proceedings relating to CCM, the Company or any of their - 69 - respective Subsidiaries without the prior written consent of Purchaser unless such settlement or compromise (a) is solely for monetary amounts for which Sellers have agreed to indemnify Purchaser Indemnitees and (b) such settlement or compromise does not include any acknowledgement or statement or admission of liability or statement which could reasonably be expected to be adverse to Purchaser or its Affiliates and includes a complete and unconditional release of the Purchaser Indemnitees. Notwithstanding anything to the contrary contained in this Agreement, Parent shall assume, at Parent's expense, the defense and control of all Legal Proceedings relating to the Company or any of its Subsidiaries, regardless of whether such Legal Proceedings are described in the Disclosure Schedule, including the consolidated IPO litigation matters identified on Section 9.2(b) of the Disclosure Schedule. Purchaser agrees to cooperate in all reasonable respects in the defense of claims covered by this Section 9.4(d), including, as required, the furnishing of books and records, personnel and witnesses and the execution of documents, in each case as reasonably necessary for such defense, and all out-of-pocket costs and expenses incurred by Purchaser or Purchaser II or any of their Affiliates in connection therewith shall be Damages paid by Sellers as incurred. 9.5 Certain Offsets; Tax Treatment of Payments. Any indemnification payment made pursuant to this Article IX shall be (i) reduced by the amount of any insurance proceeds actually received by the Indemnified Party with respect to the Damages incurred or suffered by the Indemnified Party; provided that the reduction specified in this Section 9.5 shall not be applied if to do so would excuse any insurer from any obligation to cover any Damages and (ii) reduced by any net Tax benefit actually realized by the Indemnified Party through a reduction in Taxes otherwise due as a result of the Damages incurred or suffered by the Indemnified Party (as calculated in good faith by the Indemnified Party) and (iii) increased (on a grossed-up basis) by any net Tax cost actually imposed on the Indemnified Party as a result of receiving such indemnification payment (as calculated in good faith by the Indemnified Party) The parties agree to treat any payment pursuant to this Article IX as an adjustment to the Purchase Price for Tax purposes to the fullest extent permitted by applicable Laws and Regulations. 9.6 Exclusive Remedy. After the Closing Date, this Article IX shall provide the exclusive remedy for any of the matters addressed herein or other claims arising out of this Agreement, other than for fraud and other than for the remedies of specific performance, injunctive relief or other non-monetary equitable remedies. 9.7 Coordination with Sections 6.9 and 6.10. Notwithstanding any other provision of this Article IX to the contrary, but subject to Section 9.1, this Article IX shall not apply to any indemnification with respect to Sections 6.9 or 6.10 hereof or any breach of representation or warranty set forth in Sections 3.9 and 3A.9 (Taxes and Tax Returns) which shall be governed solely by Section 6.9 and 6.10 hereof. - 70 - Article X Definitions 10.1 Certain Defined Terms. Unless the context otherwise requires, the following terms, when used in this Agreement, shall have the respective meanings specified below (such meanings to be equally applicable to the singular and plural forms of the terms defined): "Acquisition Proposal" shall have the meaning stated in Section 5.3. "Acquisition Transaction" shall mean a purchase, lease or other acquisition of all or any substantial part of the assets of CCM, it being agreed that, for purposes of this Agreement and by way of example only, a majority interest in the Partnership Interests shall be considered a substantial part of the assets of CCM. "Affiliate" of a Person shall mean any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. "Agreed Claims" shall have the meaning stated in Section 9.4(c) "Agreed Indemnified Party" shall have the meaning stated in Section 6.12(b). "Agreement" shall have the meaning stated in the preamble to this document. "AMEX" shall mean the American Stock Exchange LLC. "Ancillary Agreements" shall mean the Order Handling Services Agreement, the Options Order Business Agreement, the Noncompetition Agreement, the License Agreement and the Transition Services Agreement. "Authorizations" shall have the meaning stated in Section 3.12(b). "Balance Sheet Date" shall have the meaning stated in Section 3.5. "Business" shall mean the NASDAQ market-making, non-NASDAQ OTC market-making (commonly known as Pink Sheet and Bulletin Board market-making), systematic internalization of retail order flow (in listed and/or OTC securities, as well as in options), stock order routing/execution, options trading/order routing (including any receipt of payments for order flow) institutional sales and trading (in both domestic as well as international securities) and institutional research sales businesses of CCM and its Subsidiaries and the options business of CS&Co. to which the unaudited statement of operating results of the Options Business of CS&Co. included in Section 3.5(d) of the Disclosure Schedule relates. "Business Confidential Information" shall have the meaning stated in Section 3.17(h). "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banks in New York City are authorized or obligated by Laws and Regulations to close. - 71 - "Business Employee Benefit Plans" shall have the meaning stated in Section 3.10(a). "Business IP" means all Intellectual Property owned or controlled by CCM or any of its Subsidiaries, including all Proprietary Software, or to be owned or controlled by CCM pursuant to Section 6.14. "Business Material Adverse Effect" shall mean any effect that (i) is, or would be reasonably likely to be, material and adverse to the business, operations, financial condition or results of operations of CCM or its Subsidiaries or (ii) does, or would be reasonably likely to, prevent Sellers from consummating the transactions contemplated by this Agreement, other than (in the case of both clauses (i) and (ii) above) (A) any effect to the extent resulting from events, facts or circumstances relating to the economy in general, including market fluctuations and changes in interest rates, or to the industry in general and not specifically relating to the Business, (B) any effect resulting from changes in Laws and Regulations generally applicable to entities engaged in businesses similar to the Business or (C) a Business Operational Material Adverse Effect. "Business Multiemployer Plan" shall have the meaning stated in Section 3.10(b). "Business Operational Material Adverse Effect" shall mean any effect to the extent resulting from the loss of employees or customers of the Business or the diminution in customer order volumes, in each case resulting from the announcement of the transactions contemplated hereby. "Business Regulatory Agreement" shall have the meaning stated in Section 3.12(h). "Cash-Out Options" shall have the meaning stated in Section 6.6(a). "Cash-Out Restricted Shares" shall have the meaning stated in Section 6.6(a). "Cash Grants" shall have the meaning stated in Section 6.6(a). "CCM" shall mean Schwab Capital Markets L.P., a New Jersey limited partnership. "CCM Financial Statements" shall mean collectively: (i) the audited consolidated financial statements of CCM and its Subsidiaries for the fiscal year ended December 31, 2002 and (ii) the audited consolidated financial statements of CCM and its Subsidiaries for the fiscal year ended December 31, 2003. "CCM Order Detail" shall have the meaning stated in Section 3.20(a). "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. "Certificate" shall have the meaning stated in Section 9.4(a). "Closing" shall mean the consummation of the transactions contemplated by this Agreement. - 72 - "Closing Date" shall have the meaning stated in Section 2.1. "COBRA" shall have the meaning stated in Section 6.5(f). "Code" shall mean the Internal Revenue Code of 1986, as amended. "Combined Balance Sheet" shall have the meaning stated in Section 3.5. "Combined Financial Statements" shall have the meaning stated in Section 3.5. "Company" shall mean SoundView Technology Group, Inc., a Delaware corporation. "Company Authorizations" shall have the meaning stated in Section 3A.12(b). "Company Business" means the business of the Company and its Subsidiaries. "Company Business Operational Material Adverse Effect" shall mean any effect to the extent resulting from the loss of employees or customers of the Company Business or the diminution in customer order volumes in each case resulting from the announcement of the transactions contemplated hereby. "Company Common Stock" shall have the meaning stated in the Recitals. "Company Confidential Information" shall have the meaning stated in Section 3A.17(h). "Company Domain Names" shall have the meaning stated in Section 3A.17(j). "Company Employee Benefit Plans" shall have the meaning stated in Section 3A.10(a). "Company Intellectual Property" shall mean all patents, trademarks, trade names, trade dress, service marks, other indicia of origin and all goodwill associated therewith and symbolized thereby, domain names, databases and other compilations of information, copyrights, mask works, net lists, technology, know-how, trade secrets, inventions, discoveries, invention disclosures, ideas, algorithms, processes, computer software programs and applications (in both source code and object code form and including data and related documentation), customer lists and supplier lists and tangible or intangible proprietary or confidential information or material, and registrations applications, reissues, continuations, continuations-in-part, divisions, revisions, extensions, reexaminations, renewals, reversions and restorations in respect of the foregoing, owned, licensed by, or otherwise used by or held for use in the Company Business. "Company IP" means all Company Intellectual Property owned or controlled by the Company or any of its Subsidiaries, including all Company Proprietary Software, or to be owned or controlled by the Company pursuant to Section 6.14. - 73 - "Company Liability" shall mean any debts, liabilities, commitments and obligations of any kind (whether fixed, contingent or absolute, matured or unmatured, liquidated or unliquidated, accrued or not accrued, asserted or not asserted, known or unknown, determined, determinable or otherwise, whenever or however arising (including, whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by GAAP to be reflected in financial statements or disclosed in the notes thereto of the Company or any of its Subsidiaries), except to the extent specifically reflected in the Combined Balance Sheet or to the extent arising out of the conduct of the Company Business following the Closing. "Company Material Adverse Effect" shall mean any effect that (i) is, or would be reasonably likely to be, material and adverse to the business, operations, financial condition or results of operations of the Company or its Subsidiaries or (ii) does, or would be reasonably likely to, prevent Sellers from consummating the transactions contemplated by this Agreement, other than (in the case of both clauses (i) and (ii) above) (A) any effect to the extent resulting from events, facts or circumstances relating to the economy in general, including market fluctuations and changes in interest rates, or to the industry in general and not specifically relating to the Company Business or (B) any effect from changes in Laws and Regulations generally applicable to entities engaged in businesses similar to the Company Business or (C) a Company Business Operational Material Adverse Effect. "Company Material Contracts" shall have the meaning stated in Section 3A.13(a). "Company Multiemployer Plan" shall have the meaning stated in Section 3A.10(b). "Company Permitted Lien" shall mean any Lien consisting of (i) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or similar common Laws and Regulations or statutory liens or encumbrances arising in the ordinary course of business which are not delinquent or remain payable without penalty, (ii) encumbrances for Taxes and other assessments or governmental charges or levies not yet due and delinquent, and (iii) any other Liens that individually or in the aggregate do not result in a Company Material Adverse Effect and are not material to the value of any asset. "Company Proprietary Software" shall have the meaning stated in Section 3A.17(b). "Company Regulatory Agreement" shall have the meaning stated in Section 3A.12(h). "Company Technology Systems" shall have the meaning stated in Section 3A.18(a). "Confidentiality Agreement" shall mean the Confidentiality Agreement dated as of July, 26, 2004, between Parent and Purchaser, as it may be amended from time to time. "Controlled Group Liability" shall have the meaning stated in Section 6.5(f). "CS&Co." shall have the meaning set forth in Section 1.2. "Damages" shall have the meaning stated in Section 9.2(a). - 74 - "Disclosure Schedule" shall mean the document dated the date of this Agreement delivered by Sellers to Purchaser prior to the execution and delivery of this Agreement with references to the representations and warranties of Sellers in this Agreement. "Domain Names" shall have the meaning stated in Section 3.17(j). "Environmental Laws" shall have the meaning stated in Section 3.15. "Entity Assets" shall have the meaning stated in Section 3.14. "ERISA" shall have the meaning stated in Section 3.10(a). "Escrow Agreement" shall have the meaning stated in Section 9.2(b). "GAAP" means United States generally accepted accounting principles. "Governmental Entity" shall mean any court, administrative agency or commission or other governmental, prosecutorial or regulatory authority or instrumentality and any SRO. "Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Entity. "GP" shall mean CS Capital Markets & Co., a Delaware corporation. "HSR Act" shall have the meaning stated in Section 3.4. "Identified Employee" shall have the meaning stated in Section 6.6(a). "Indemnified Party" shall have the meaning stated in Section 9.4(a). "Indemnifying Party" shall have the meaning stated in Section 9.4(a). "Intellectual Property" shall mean all patents, trademarks, trade names, trade dress, service marks, other indicia of origin and all goodwill associated therewith and symbolized thereby, domain names, databases and other compilations of information, copyrights, mask works, net lists, technology, know-how, trade secrets, inventions, discoveries, invention disclosures, ideas, algorithms, processes, computer software programs and applications (in both source code and object code form and including data and related documentation), customer lists and supplier lists and tangible or intangible proprietary or confidential information or material, and registrations, applications, reissues, continuations, continuations-in-part, divisions, revisions, extensions, reexaminations, renewals, reversions and restorations in respect of the foregoing, owned, licensed by, or otherwise used by or held for use in the Business or the electronic program trading business conducted by CCM or any of its Subsidiaries. "Investment Advisers Act" shall mean the Investment Advisers Act of 1940, as amended. - 75 - "Investment Company Act" shall mean the Investment Company Act of 1940, as amended. "IRS" shall mean the Internal Revenue Service. "Knowledge" with respect to Sellers shall mean actual knowledge after due inquiry of any person with primary responsibility for the relevant matter. "Laws and Regulations" means all federal, state, local and foreign laws, statutes, codes, rules, regulations and ordinances, Governmental Orders and any rules and regulations of any SRO. "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Entity or any arbitrator or arbitration panel. "License Agreement" shall have the meaning stated in Section 1.5. "Lien" shall mean any lien, claim, charge, option, encumbrance, mortgage, pledge or security interest or other restrictions of any kind. "LP" shall mean Schwab Associates & Co., a Delaware corporation. "Management Reports" shall have the meaning stated in Section 3.5. "Material Contracts" shall have the meaning stated in Section 3.13(a). "NASD" shall mean the National Association of Securities Dealers, Inc. "New York Chosen Court" shall have the meaning stated in Section 11.9. "Noncompetition Agreement" shall have the meaning stated in Section 6.8. "Non-Retained Employees" shall have the meaning stated in Section 6.5(b). "NYSE" shall mean the New York Stock Exchange, Inc. "Options" shall have the meaning stated in Section 6.6(a). "Options Order Business Agreement" shall have the meaning stated in Section 1.2. "Order Handling Services Agreement" shall have the meaning stated in Section 1.2. "Parent" shall mean The Charles Schwab Corporation, a Delaware corporation. "Partnership Agreement" shall have the meaning stated in Section 3.1. - 76 - "Partnership Interests" shall have the meaning stated in the recitals. "Permitted Lien" shall mean any Lien consisting of (i) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or similar common Laws and Regulations or statutory liens or encumbrances arising in the ordinary course of business which are not delinquent or remain payable without penalty, (ii) encumbrances for Taxes and other assessments or governmental charges or levies not yet due and delinquent, and (iii) any other Liens that individually or in the aggregate do not result in a Business Material Adverse Effect and are not material to the value of any asset. "Perseus Agreement" shall have the meaning stated in Section 6.7(c). "Person" shall mean any individual, corporation, partnership, limited liability company, association, joint venture, trust, Governmental Entity or other entity or organization. "Proprietary Software" shall have the meaning stated in Section 3.17(b). "Purchase Price" shall have the meaning stated in Section 1.3. "Purchase Price Allocation" shall have the meaning stated in Section 1.4(a). "Purchaser" shall mean UBS Securities LLC, a Delaware limited liability company. "Purchaser II" shall mean UBS Americas Inc., a Delaware corporation. "Purchaser Material Adverse Effect" shall mean any effect that would prevent Purchaser or Purchaser II from consummating the transactions contemplated hereby. "Purchaser Indemnitees" shall have the meaning stated in Section 9.2(a). "Purchaser Regulatory Agreement" shall have the meaning stated in Section 4.6(d). "Purchaser Representatives" shall have the meaning stated in Section 6.2. "Restricted Shares" shall have the meaning stated in Section 6.6(a). "Retained Employee" shall have the meaning stated in Section 6.5(d). "Retained Trademark Applications" shall have the meaning stated in Section 6.15. "San Francisco Chosen Court" shall have the meaning stated in Section 11.9. "Saturn Sub" shall mean SoundView Technology Corporation, a Delaware corporation. "SEC" shall mean the United States Securities Exchange Commission. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. - 77 - "Seller Indemnitees" shall have the meaning stated in Section 9.3. "Sellers" shall mean Parent, GP, Saturn Sub and LP, collectively. "Service Level Schedule" shall have the meaning stated in Section 3.20(b). "SRO" shall mean any domestic or foreign securities, broker-dealer, investment adviser and insurance industry self-regulatory organization. "Subsidiary" shall mean any Person (I) of which another Person (a) owns, directly or indirectly, fifty percent (50%) or more of the outstanding voting securities or equity interests or (b) is a general partner or managing member or (II) securities or other ownership interests of which having by their terms the power to elect a majority of the board of directors of such Person or other persons performing similar functions are owned or controlled, directly or indirectly, by another Person. "Tail Policy" shall have the meaning stated in Section 3A.20. "Tax" or "Taxes" shall mean all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, value-added, stamp, documentation, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, and other taxes (including estimated taxes), charges, levies or like assessments together with all penalties and additions to tax and interest thereon. "Tax Returns" shall mean all federal, state, local or foreign Tax returns, Tax reports, and declarations of estimated Tax, including without limitation, consolidated income Tax returns. "Technology Systems" shall have the meaning stated in Section 3.18(a). "Transfer Taxes" shall have the meaning stated in Section 6.10(b). "Transition Services Agreement" shall have the meaning stated in Section 1.6. "Transition Services Employees" shall have the meaning stated in Section 1.6. "Treasury Regulations" shall mean regulations prescribed pursuant to the Code. "WARN Act" shall have the meaning stated in Section 6.5(b). Article XI General Provisions 11.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with - 78 - confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Sellers, to: The Charles Schwab Corporation 120 Kearny Street San Francisco, California 94108 Attention: Christopher V. Dodds Facsimile: 415-636-5877 with a copy to: The Charles Schwab Corporation 120 Kearny Street San Francisco, California 94108 Attention: Lorraine McDonough Facsimile: 415-636-9757 and to: Howard Rice Nemerovski Canady Falk & Rabkin, A Professional Corporation 3 Embarcadero Center, 7th Floor San Francisco, California 94111 Attention: Lawrence B. Rabkin Facsimile: 415-217-5910 (b) if to Purchaser or Purchaser II, to: UBS Securities LLC 299 Park Avenue - 28th Floor New York, New York 10171 Attention: F. Daniel Corkery Facsimile No.: 212-821-3915 with a copy to: Sullivan & Cromwell LLP 125 Broad Street New York, New York 10004 Attention: Alexandra D. Korry Matthew G. Hurd Facsimile No.: 212-558-3588 11.2 Interpretation. When a reference is made in this Agreement to Exhibits or Schedules, such reference shall be to an Exhibit or Schedule to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed - 79 - in each case to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement," "the date hereof," and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date set forth in the first paragraph of this Agreement. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When a reference is made to a contract or agreement in this Agreement it shall be deemed to include any oral or written contract or agreement. 11.3 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 11.4 Entire Agreement. This Agreement and the documents and instruments and other agreements specifically delivered pursuant hereto or contemporaneously herewith, including the Exhibits, the Schedules, including the Disclosure Schedule, constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, except for the Confidentiality Agreement, which shall continue in full force and effect, and shall survive any termination of this Agreement or the Closing, in accordance with its terms. No representations or warranties are being given by any party hereto other than the representations specifically set forth in this Agreement. 11.5 Assignment. Neither this Agreement nor any of the rights, interests or obligations shall be assigned or delegated by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties; provided that each of Purchaser and Purchaser II may assign or delegate any and all of its rights and obligations under this Agreement to one or more of its Affiliates if such assignment would not materially delay the parties' receipt of the regulatory approvals referred to in Section 3.4 or 4.3. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 11.6 Third Party Beneficiaries. This Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto and any Person to which any indemnification rights hereunder applies any rights or remedies hereunder. 11.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to such state's principles of conflicts of laws. 11.8 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any Laws and Regulations, holding or rule of construction - 80 - providing that ambiguities in an agreement or other document shall be construed against the party drafting such agreement or document. 11.9 Jurisdiction. Each Seller agrees that it shall bring any action, litigation, suit or proceeding in respect of any claim arising out of or related to this Agreement or the transactions contained in or contemplated by this Agreement and the Ancillary Agreements, exclusively in the United States District Court for the Southern District of New York (the "New York Chosen Court"), and solely in connection with claims arising under this Agreement or the transactions that are the subject of this Agreement or any of the Ancillary Agreements each party hereto (i) irrevocably submits to the jurisdiction of the New York Chosen Court, (ii) waives any objection to laying venue in any such action or proceeding in the New York Chosen Court, (iii) waives any objection that the New York Chosen Court is an inconvenient forum or do not have jurisdiction over any party hereto and (iv) agrees that service of process upon such party in any such action or proceeding shall be effective if notice is given in accordance with Section 11.1 of this Agreement. Each of Purchaser and Purchaser II agrees that it shall bring any action, litigation, suit or proceeding in respect of any claim arising out of or related to this Agreement or the transactions contained in or contemplated by this Agreement and the Ancillary Agreements, exclusively in the United States District Court for the Northern District of California, San Francisco Division (the "San Francisco Chosen Court"), and solely in connection with claims arising under this Agreement or the transactions that are the subject of this Agreement or any of the Ancillary Agreements each party hereto (i) irrevocably submits to the jurisdiction of the San Francisco Chosen Court, (ii) waives any objection to laying venue in any such action or proceeding in the San Francisco Chosen Court, and (iii) waives any objection that the San Francisco Chosen Court is an inconvenient forum or do not have jurisdiction over any party hereto. 11.10 Attorneys' Fees. The prevailing party in any action, litigation, suit or proceeding under Section 11.9 of this Agreement shall be entitled to receive its reasonable attorneys' fees and costs and expenses incurred in such action, litigation, suit or proceeding. 11.11 Waiver of Jury Trial. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT WHICH ANY PARTY MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY PROCEEDING, LITIGATION OR COUNTERCLAIM BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. IF THE SUBJECT MATTER OF ANY LAWSUIT IS ONE IN WHICH THE WAIVER OF JURY TRIAL IS PROHIBITED, NO PARTY TO THIS AGREEMENT SHALL PRESENT AS A NON-COMPULSORY COUNTERCLAIM IN ANY SUCH LAWSUIT ANY CLAIM BASED ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. FURTHERMORE, NO PARTY TO THIS AGREEMENT SHALL SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL CANNOT BE WAIVED. - 81 - 11.12 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void, invalid or unenforceable, the remainder of this Agreement shall continue in full force and effect and the application of such provision to other persons or circumstances shall be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such illegal, void, invalid or unenforceable provision of this Agreement with a legal, valid and enforceable provision that shall achieve, to the extent possible, the economic, business and other purposes of such illegal, void, invalid or unenforceable provision. - 82 - IN WITNESS WHEREOF, Parent, GP, LP, Purchaser and Purchaser II have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. Sellers: The Charles Schwab Corporation, a Delaware corporation By: /s/ Charles Goldman ------------------------------ Name: Charles Goldman ---------------------------- Its: Executive Vice President ----------------------------- CS Capital Markets & Co., a Delaware corporation By: /s/ Lawrence Leibowitz ------------------------------ Name: Lawrence Leibowitz ---------------------------- Its: Executive Vice President ----------------------------- Co-Chief Operating Officer ----------------------------- Schwab Associates & Co., a Delaware corporation By: /s/ Donald Rodich ------------------------------ Name: Donald Rodich ---------------------------- Its: President ----------------------------- Purchaser UBS Securities LLC, a Delaware limited liability company By: /s/ Daniel Coleman ------------------------------ Name: Daniel Coleman ---------------------------- Its: Managing Director, Equities ----------------------------- By: /s/ Nick B. Ogurtsov ------------------------------ Name: Nick Ogurtsov ---------------------------- Its: Managing Director, ----------------------------- UBS Investment Bank ----------------------------- Purchaser II UBS Americas Inc., a Delaware corporation By: /s/ Daniel Bibb Coleman ------------------------------ Name: Daniel Bibb Coleman ---------------------------- Its: Attorney-in-Fact ----------------------------- By: /s/ Nick B. Ogurtsov ------------------------------ Name: Nick B. Ogurtsov ---------------------------- Its: Attorney-in-Fact ----------------------------- Exhibit List Exhibit A Form of Order Handling Services Agreement Exhibit B Options Order Business Agreement Term Sheet TABLE OF CONTENTS Page Article I Purchase and Sale of CCM and the Company.....................................................1 1.1 Purchase and Sale............................................................................1 1.2 Order Handling Services Agreement............................................................2 1.3 Purchase Price...............................................................................2 1.4 Allocation of Purchase Price.................................................................2 1.5 License Agreement............................................................................3 1.6 Transition Services Agreement................................................................3 Article II The Closing..................................................................................3 2.1 Closing......................................................................................3 2.2 Execution and Delivery.......................................................................4 Article III Representations and Warranties of the Business...............................................4 3.1 Corporate Organization, Standing and Power...................................................4 3.2 Capitalization...............................................................................5 3.3 Authority; No Violation......................................................................5 3.4 Consents and Approvals.......................................................................6 3.5 Financial Statements.........................................................................6 3.6 Absence of Certain Changes or Events.........................................................7 3.7 Undisclosed Liabilities......................................................................8 3.8 Legal Proceedings............................................................................8 3.9 Taxes and Tax Returns........................................................................9 3.10 Employee Benefit Plans......................................................................10 3.11 Employee Matters............................................................................12 3.12 Compliance with Applicable Laws and Regulatory Matters......................................13 3.13 Material Contracts..........................................................................15 3.14 Assets......................................................................................17 3.15 Environmental Liability.....................................................................18 3.16 Insurance...................................................................................18 3.17 Intellectual Property.......................................................................18 3.18 Information Technology......................................................................22 3.19 Interests of Officers and Directors.........................................................23 3.20 Order Flow..................................................................................23 3.21 Broker's Fees...............................................................................23 3.22 Business Information........................................................................23 Article IIIA Representations and Warranties of the Company...............................................24 3A.1 Corporate Organization, Standing and Power..................................................24 3A.2 Capitalization..............................................................................24 3A.3 No Violation................................................................................25 3A.4 [Intentionally Omitted].....................................................................25 3A.5 [Intentionally Omitted].....................................................................25 3A.6 Absence of Certain Changes or Events........................................................25 3A.7 Undisclosed Liabilities.....................................................................27 3A.8 Legal Proceedings...........................................................................27 3A.9 Taxes and Tax Returns.......................................................................28 3A.10 Employee Benefit Plans......................................................................29 3A.11 Employee Matters............................................................................31 3A.12 Compliance with Applicable Laws and Regulatory Matters......................................32 3A.13 Material Contracts..........................................................................34 3A.14 [Intentionally Omitted].....................................................................36 3A.15 Environmental Liability.....................................................................36 3A.16 Insurance...................................................................................37 3A.17 Intellectual Property.......................................................................37 3A.18 Information Technology......................................................................41 3A.19 Interests of Officers and Directors.........................................................42 3A.20 Tail Policy.................................................................................42 Article IV Representations and Warranties of Purchaser and Purchaser II................................42 4.1 Corporate Organization, Standing and Power..................................................42 4.2 Authority; No Violation.....................................................................42 4.3 Consents and Approvals......................................................................43 4.4 Financing...................................................................................43 4.5 Legal Proceedings...........................................................................43 4.6 Compliance with Applicable Law and Regulatory Matters.......................................44 4.7 Broker's Fees...............................................................................44 4.8 Purchaser Information.......................................................................45 Article V Conduct Prior to the Closing Date...........................................................45 5.1 Conduct of the Business Prior to the Closing Date...........................................45 5.2 Conduct of the Business.....................................................................46 5.3 Acquisition Proposals.......................................................................49 Article VI Additional Agreements.......................................................................49 6.1 Regulatory Matters..........................................................................49 6.2 Access to Information.......................................................................50 6.3 Public Disclosure...........................................................................50 6.4 Reasonable Commercial Efforts and Further Assurances........................................50 6.5 Employees; Employee Benefit Matters.........................................................51 6.6 Outstanding Restricted Stock and Option Awards..............................................55 6.7 Restructuring...............................................................................56 6.8 Noncompetition Agreement....................................................................57 6.9 Tax Matters.................................................................................57 6.10 Other Tax Matters...........................................................................59 6.11 Jupiter.....................................................................................60 6.12 Direction and Officer Indemnification.......................................................60 6.13 Parent Loan.................................................................................61 6.14 Pre-Closing Intellectual Property Transfer..................................................61 6.15 Disposition of "Schwab" Element Trademark Applications......................................62 6.16 Books and Records...........................................................................62 Article VII Conditions Precedent........................................................................62 7.1 Conditions to Each Party's Obligation to Effect the Transactions Contemplated by this Agreement..............................................................62 7.2 Conditions to Purchaser's Obligation To Effect The Transactions Contemplated By This Agreement..............................................................63 7.3 Conditions to Sellers' Obligation To Effect The Transactions Contemplated By This Agreement..............................................................64 Article VIII Termination and Amendment...................................................................65 8.1 Termination.................................................................................65 8.2 Effect of Termination.......................................................................66 8.3 Expenses....................................................................................66 8.4 Amendment...................................................................................66 8.5 Extension; Waiver...........................................................................66 Article IX Indemnification.............................................................................67 9.1 Survival of Representations and Warranties and Agreements...................................67 9.2 Indemnification by Sellers..................................................................67 9.3 Indemnification by Purchaser................................................................68 9.4 Indemnification Procedure...................................................................68 9.5 Certain Offsets; Tax Treatment of Payments..................................................70 9.6 Exclusive Remedy............................................................................70 9.7 Coordination with Sections 6.9 and 6.10.....................................................70 Article X Definitions.................................................................................71 10.1 Certain Defined Terms.......................................................................71 Article XI General Provisions..........................................................................78 11.1 Notices.....................................................................................78 11.2 Interpretation..............................................................................79 11.3 Counterparts................................................................................80 11.4 Entire Agreement............................................................................80 11.5 Assignment..................................................................................80 11.6 Third Party Beneficiaries...................................................................80 11.7 Governing Law...............................................................................80 11.8 Rules of Construction.......................................................................80 11.9 Jurisdiction................................................................................81 11.10 Attorneys' Fees.............................................................................81 11.11 Waiver of Jury Trial........................................................................81 11.12 Severability................................................................................82
FIRST AMENDMENT TO PURCHASE AGREEMENT This First Amendment to Purchase Agreement (this "Amendment") is dated as of October 29, 2004, by and among The Charles Schwab Corporation, a Delaware corporation ("Parent"), CS Capital Markets & Co., a Delaware corporation ("GP"), Schwab Associates & Co., a Delaware corporation ("LP"), UBS Securities LLC, a Delaware limited liability company ("Purchaser"), and UBS americas Inc., a Delaware corporation ("Purchaser II" and, collectively with Parent, GP, LP and Purchaser, the "Parties"). RECITALS Whereas, the Parties are parties to that certain Purchase Agreement, dated as of August 31, 2004 (the "Purchase Agreement"), providing for, among other things, the purchase and sale of certain partnership interests in Schwab Capital Markets L.P., a New Jersey limited partnership, and all of the outstanding capital stock of SoundView Technology Corporation, a Delaware corporation; and Whereas, the Parties wish to amend the Purchase Agreement pursuant to Section 8.4 thereof, as further provided herein. Now Therefore, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties agree as follows: 1. Certain Terms. Capitalized terms used herein but not defined in this Amendment have the meanings given to such terms in the Purchase Agreement. 2. Certain Amendments. The Purchase Agreement is hereby amended ab initio as follows: (a) Section 6.5(b) of the Purchase Agreement is amended to delete the phrase "within two weeks of the date hereof" from the first sentence thereof and to insert the phrase "prior to 5:00 p.m., Pacific time, on September 20, 2004" in substitution therefor. (b) Section 6.5(l) of the Purchase Agreement is amended to delete the phrase "the fifteenth day following the date of this Agreement" therefrom and to insert the phrase "5:00 p.m., Pacific time, on September 20, 2004" in substitution therefor. (c) Section 6.5(k) of the Purchase Agreements is amended and restated as follows: "Sellers shall (i) cause all amounts credited to participant accounts, whether vested or unvested, under the Soundview Deferred Compensation Plan (the "Deferred Compensation Plan") to be paid in cash to each participant without the requirement of any further employment promptly after the termination of employment of such participant, and (ii) shall assume all liabilities associated with the Deferred Compensation Plan, in each case, other than for the Retained Emloyees. Within fourteen days following the Closing Date, Sellers shall pay to Purchaser an amount equal to the amount received by Seller upon distribution of the rabbi trust assets with respect to John Cronin. Following such payments, Sellers shall have no obligation with respect to the Deferred Compensation Plan with respect to the Retained Employees. Any amount owed under the Deferred Compensation Plan that exceeds the amount paid to Purchaser pursuant to the prior sentence shall be a Company Liability for all purposes of this Agreement." (d) Section 6.5(m) of the Purchase Agreement is amended to delete the phrase "On and following the fifteenth day following the date hereof" therefrom and to insert the phrase "Following 5:00 p.m., Pacific time, on September 20, 2004" in substitution therefor. (e) Section 6.7(a) of the Purchase Agreement is amended (i) to insert the phrase "provided, however, that Sellers shall not be obligated to endeavor to obtain releases from tenants and subtenants of Sellers or any of their Subsidiaries (including CCM, the Company and their respective Subsidiaries), but instead shall be obligated to endeavor to obtain estoppel certificates from such tenants and subtenants in substantially the form approved by Purchaser" at the end of the first sentence thereof, and (ii) to delete the phrase "and will indemnify Purchaser for any damages resulting from the failure to obtain such releases prior to Closing" from the last sentence thereof. (f) Section 6.7(b) of the Purchase Agreement is amended to insert the following sentences at the end thereof: "Notwithstanding the previous sentence, the parties acknowledge that following the Closing Sellers and their Affiliates may elect to perform, at their sole risk and expense, certain research-related services to certain research clients of the Business. Any Damages incurred or suffered by any Purchaser Indemnitees to the extent that they result or arise from Sellers' and their Affiliates' performance of such services following the Closing shall constitute Company Liabilities for all purposes of this Agreement." (g) Section 9.2(a) of the Purchase Agreement is amended to insert the phrase "; or (iii) any leases of real property and premises to which any of CCM, the Company or any of their respective Subsidiaries may be subject prior to the Closing Date, including but not limited to the leases and other agreements specified on Section 3.14 of the Disclosure Schedule" at the end of the first sentence thereof. (h) Section 7.2(i) of the Purchase Agreement is amended and restated as follows: "Sellers shall have received the material non-governmental consents that are listed on Section 3.4 of the Disclosure Schedule hereof, the failure of which to obtain would be material to CCM or the Company or Purchaser or Purchaser; provided, however, that it is expressly agreed that there is no obligation on the part of any party hereto to obtain the consents set forth on Section 7.2(i) of the Disclosure Schedule." 3. No Other Amendments. Except for the amendments specified in Section 2 of this Amendment, this Amendment shall not be deemed to effect any amendment, modification or waiver of any provision of the Purchase Agreement. 4. Certain Consents and Approvals. With reference to Section 2(e) of this Amendment, and Section 6.7(a) of the Purchase Agreement (as amended hereby), Purchasers - 2 - hereby confirm that the form of estoppel certificate furnished by Sellers to Purchasers' counsel on October 4, 2004 has been approved by Purchasers. 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without reference to such state's principles of conflicts of laws. 6. Counterparts. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to the other parties, it being understood that all parties need not sign the same counterpart. - 3 - IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. The Charles Schwab Corporation, a Delaware corporation By: /s/ Charles Goldman ---------------------------- Name: Charles Goldman -------------------------- Its: EVP --------------------------- CS Capital Markets & Co., a Delaware corporation By: /s/ David R. Martin ---------------------------- Name: David R. Martin -------------------------- Its: SVP --------------------------- Schwab Associates & Co., a Delaware corporation By: /s/ Donald Rodich ---------------------------- Name: Donald Rodich -------------------------- Its: President --------------------------- UBS Securities LLC, a Delaware limited liability company By: /s/ Daniel Coleman ---------------------------- Name: Daniel Coleman -------------------------- Its: Managing Director --------------------------- By: /s/ David Kelly ---------------------------- Name: David Kelly -------------------------- Its: Executive Director Legal & External Affairs --------------------------- UBS Americas Inc., a Delaware corporation By: /s/ Daniel Coleman ---------------------------- Name: Daniel Coleman -------------------------- Its: Attorney-in-fact --------------------------- By: /s/ David Kelly ---------------------------- Name: David Kelly -------------------------- Its: Executive Director Legal & External Affairs --------------------------- Exhibit A Equities Order Handling Agreement The Equities Order Handling Agreement, which was executed on October 29, 2004, has been filed as Exhibit 10.262 to the Company's Current Report on Form 10-Q for the period ended September 30, 2004. Exhibit B Options Order Handling Agreement Term Sheet ____________ Asterisk (**) Indicates information omitted pursuant to a confidential treatment request. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission. OPTIONS ORDER HANDLING AGREEMENT ("OOHA") Parties: UBS SECURITIES LLC, a Delaware Limited Liability Company ("UBS"), Schwab Capital Markets L.P., a New Jersey limited partnership ("SCM," and together with UBS, the "Company"), Charles Schwab & Co., Inc., a California corporation ("Schwab"), THE CHARLES SCHWAB CORPORATION, a Delaware corporation ("Parent") (each individually a "Party" and together the "Parties"). Term: Same as under the Equities Order Handling Agreement (the "EOHA"), to be entered into as of the date of the consummation of the transactions (the "Closing") contemplated by the Purchase Agreement, of even date herewith (the "Purchase Agreement"), between the parties hereto. Scope: 100% of Schwab's and its Affiliates' Order Flow in options traded on a national securities exchange ("Covered Orders") will be routed to the Company for execution, other than the following types of excluded orders: - options flow from CyberTrader, Inc. from types of accounts consistent with those in effect as of the Closing; - U.S. Trust orders from types of accounts consistent with those in effect today; - an amount of Options Flow from the SIM trading desk that does not exceed 5% of total the Options Flow from the SIM trading desk, measured on a number of contracts basis; and - SIM Prime Brokerage Orders (collectively, "Excluded Orders"). Order Routing Discretion: The Company shall have the right to route or preference options order flow to any exchange in its reasonable discretion and to execute options in any manner permitted by then-applicable laws and exchange rules (including any rules that may permit execution as principal) provided that such routing decisions and executions are consistent with best execution practices and are made by employing intelligent order routing technology, where appropriate, other than where the ultimate destination is specified by the customer. _____________ Asterisk (**) Indicates information omitted pursuant to a confidential treatment request. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.
(**) (**) Best Execution Committee: Schwab and the Company shall form an advisory committee which shall meet not less than quarterly for the purpose of reviewing the Company's performance of best execution standards. Execution Quality The Company shall provide or cause a third party to provide all necessary data for Schwab Reports: to generate 11Ac1-6 reports and such other reports as required by regulation or as reasonably required by Schwab for oversight purposes (to the extent consistent with those reports that are provided as of the date of the Purchase Agreement or as may be reasonably mutually agreed). Economics: (**) Types of Orders: "Premium Execution Order", "Direct Execution Order", "Directed Order", "Paid Order", "Locked or Crossed Order", "DNC Order", "Discretionary Paid Orders" shall have correlative meanings to the definitions of such terms as defined in EOHA and shall have similar treatment consistent with associated economic consequences. Block Orders: The Company shall have the right to charge a reasonable market-based commission for manual execution of Block Orders provided that the total number of manually executed contracts for Block Orders exceeds 5% of the total number of contracts. (**) (**) Initial Liquidated Terms are mutatis mutandis the same as under EOHA except that payment size will be $16.5 Damages and Subsequent million in the first 3 years and $1.375 million thereafter. Liquidated Damages: Change of Control: Terms are mutatis mutandis the same as under EOHA except that payment size will be $16.5 million in the first 3 years and $1.375 million thereafter. Partial Disposition of Terms are mutatis mutandis the same as under EOHA except that payment size will be pro Accounts: rata $16.5 million in the first 3 years and $1.375 million thereafter. Operation and Tech The Company will use commercially reasonable efforts to maintain or cause a third party to Service Levels: use its commercially reasonable efforts to maintain at least substantially comparable service levels as in effect prior to the date of the Purchase Agreement or such standards as become common industry practice. EQ Service Levels: (**) Unusual Market Policies and procedures shall be mutually agreed between UBS and Schwab for handling Conditions: locked, crossed, halted and fast markets, and similar unusual orders or situations requiring intervention. Abusive Practices: Schwab undertakes to investigate and make reasonable efforts to prevent abusive trading practices at the request of the Company (e.g., unreasonable order cancellation fees) including the right to cut-off from trading a specific account engaging in such abusive practices or to require reimbursement for out-of-pocket costs to third parties should such practices continue unabated following a reasonable notice period on a case by case basis. Clearly Erroneous: The Company will be entitled to reject any orders transmitted by Schwab or its Affiliates which are clearly erroneous, and will notify Schwab promptly of any such rejection. Representations and Mutatis mutandis the same as under Sections 5.1(a) and 5.1(b)(i) of the EOHA. Warranties: Termination: Schwab shall have the right to terminate this agreement in the event the Company notifies Schwab that it no longer intends to provide high quality options order routing services. Routing Providers: (**) Account Migration: Mutatis mutandis the same as under the EOHA. Dispute Resolution: Mutatis mutandis the same as under the EOHA. Unforeseen Circumstances: Mutatis mutandis the same as under the EOHA (**). (**) (**) Transitional Period: For the six months commencing upon the Closing, the Company and Schwab will cooperate to seek to provide training opportunities, migration strategy planning and service support to each other with respect to the functions of the "T4" trading ops team and such other operational areas as may be mutually agreed, including processes for settlement, clearing and order management and non-standard order treatment. Ability to Perform: Schwab shall transfer all necessary technology systems, intellectual property, and any other such assets as are currently required to operate SCM's options trading/order routing (**) and the options business of Schwab to which the unaudited statement of operating results of the Options Business of CS&Co. included in Section 3.5(d) of the Disclosure Schedule (as defined in the Purchase Agreement) relates (the "Options Business"). To the extent requested by the Company, Schwab will provide access to the Legacy system at no charge. Indemnification: Mutatis mutandis the same as under the EOHA. Employees: The Company may, at its option, seek to employ strategic employees of Schwab currently engaged in the Options Business. Following the Closing, none of Schwab or its Affiliates shall employ, retain or hire such strategic employees without the Company's written consent. Confidentiality: Mutatis mutandis the same as under the EOHA. Schwab will direct inquiries concerning the OOHA to the Company. Governing Law: Mutatis mutandis the same as under the EOHA. Other Provisions: To the extent other provisions of the EOHA are applicable but not expressly mentioned herein, they shall mutatis mutandis be incorporated into the OOHA (other than Schedules A, B, C, D, E and F and Attachment 1 thereto). Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the EOHA. As provided for by the terms of the Purchase Agreement, this OOHA is a binding contract between the parties, effective as of the Closing, unless expressly superseded by an instrument in writing signed by each such party.
IN WITNESS WHEREOF, each of the Parties, intending to be legally bound, has caused this OOHA to duly executed and delivered as of the date below. Dated: _____________________ The Charles Schwab Corporation By: ________________________________ Name: Title: Charles Schwab & Co., Inc. By: ________________________________ Name: Title: UBS Securities LLC By: ________________________________ Name: Title: Schwab Capital Markets L.P. By: ________________________________ Name: Title: EX-10 4 exh10_262.txt EXHIBIT 10.262 Exhibit 10.262 EQUITIES ORDER HANDLING AGREEMENT dated as of October 29, 2004 by and among UBS Securities LLC, Schwab Capital Markets L.P., Charles Schwab & Co., Inc., and The Charles Schwab Corporation __________ Asterisk (**) Indicates information omitted pursuant to a confidential treatment request. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission. Table of Contents Page ARTICLE I. DEFINITIONS.........................................................1 Section 1.1 Certain Definitions.................................1 Section 1.2 Additional Definitions..............................7 ARTICLE II. ORDER FLOW.........................................................9 Section 2.1. Direction and Routing of Orders.....................9 Section 2.2. Daily Settlement and Order Tracking................10 Section 2.3. Automated Settlement System and Help Desk..........11 Section 2.4. Execution Quality..................................11 Section 2.5. Customer Disclosure, Segregation and Responsibility.....................................12 Section 2.6. Order Transmission Procedures and Requirements.......................................13 ARTICLE III. PAYMENTS.........................................................13 Section 3.1. Order Handling Costs...............................13 Section 3.2. Reports............................................14 Section 3.3 Manner of Payments.................................14 Section 3.4 Interest on Late Payments..........................14 Section 3.5 Books of Account...................................14 ARTICLE IV. CONFIDENTIAL INFORMATION..........................................14 Section 4.1 Confidential Information...........................14 Section 4.2 Communications with Regulators.....................15 Section 4.3. Identification of Schwab Customers.................16 ARTICLE V. REPRESENTATIONS AND WARRANTIES; COVENANTS; LIMITATION ON LIABILITY.........................................16 Section 5.1. Representations and Warranties.....................16 Section 5.2. Limitation on Liability............................17 Section 5.3. Disclaimer Of Warranties...........................18 Section 5.4. Covenants..........................................18 Section 5.5 Liquidated Damages.................................19 Section 5.6 Non-Assumption Event...............................23 Section 5.7 No Penalty; Maximum Damages........................23 Section 5.8 Unforeseen Circumstances...........................24 Section 5.9 CyberTrader(R) Integration.........................24 ARTICLE VI. INDEMNIFICATION...................................................25 Section 6.1. Company Indemnification............................25 Section 6.2. Schwab Indemnification.............................25 - i - Section 6.3. Procedures Relating to Third Party Claims..........25 Section 6.4. Survival...........................................26 Section 6.5. Limitation on Recovery.............................26 Section 6.6. Exclusive Remedy...................................26 ARTICLE VII. SECURITY........................................................ 26 Section 7.1. In General.........................................26 Section 7.2. Security Breaches..................................26 Section 7.3. Storage of Customer Information....................27 ARTICLE VIII. TERM AND TERMINATION............................................27 Section 8.1. Term...............................................27 Section 8.2. Termination........................................27 Section 8.3. Effects of Termination on Accrued Rights...........29 Section 8.4. Continuation of Routing Service....................29 Section 8.5. Survival...........................................29 ARTICLE IX. MISCELLANEOUS.....................................................29 Section 9.1. Use of Names/Marks.................................29 Section 9.2. Entire Agreement...................................30 Section 9.3. Descriptive Headings; Certain Interpretations......30 Section 9.4. Notices............................................30 Section 9.5. Counterparts; Fax Signatures.......................32 Section 9.6. Benefits of Agreement..............................32 Section 9.7. Amendments and Waivers.............................32 Section 9.8. Assignment.........................................32 Section 9.9 Governing Law......................................32 Section 9.10. Dispute Resolution.................................32 Section 9.11 Registration and Filing of this Agreement..........33 Section 9.12. Force Majeure......................................33 Section 9.13. Waiver.............................................34 Section 9.14. Relationship of the Parties........................34 Section 9.15. Bona Fide Customers................................34 - ii - EQUITIES ORDER HANDLING AGREEMENT This Equities Order Handling Agreement, dated as of October 29, 2004 (this "Agreement"), by and among UBS Securities LLC, a Delaware Limited Liability Company ("UBS"), Schwab Capital Markets L.P., a New Jersey limited partnership ("SCM," and together with UBS, the "Company"), Charles Schwab & Co., Inc., a California corporation ("Schwab"), The Charles Schwab Corporation, a Delaware corporation ("Parent") (each individually a "Party" and together the "Parties"). Whereas, UBS and Parent have entered into that certain Purchase Agreement, dated as of August 31, 2004, as amended by the First Amendment thereto, dated as of even date herewith (the "Purchase Agreement"), by and among Parent, CS Capital Markets & Co., a Delaware corporation ("GP"), Schwab Associates & Co., a Delaware corporation ("LP"), UBS and UBS Americas Inc., a Delaware corporation, which provides for the sale of the Business (as defined in the Purchase Agreement) to the Company; and Whereas, Parent, GP, LP and the Company have agreed in the Purchase Agreement, as an inducement for UBS' agreement to enter into the Purchase Agreement, that Parent, Schwab and the Company would enter into this Agreement which sets forth the terms upon which Schwab and its Affiliates will route Orders to the Company and the Company will provide to Schwab routing and execution services for such Orders. Now, Therefore, in consideration of the premises and the mutual covenants and agreements contained herein and in the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1. Certain Definitions. In this Agreement, the following words and phrases shall have the following meanings: (a) "Adverse Reputational Event" shall mean, with respect to a Person, (i) a conviction of such Person for a felony or a plea of guilty or nolo contendere to a felony by such Person, which in either case is final and non-appealable, or a disqualification or bar imposed on such Person by the Securities and Exchange Commission or any SRO for misconduct that prohibits such Person from acting generally as a Broker-Dealer, if such disqualification or bar continues for more than 90 days or (ii) a plea or consent to the entry of an order by the Securities and Exchange Commission, a court of competent jurisdiction, an SRO or a state securities regulator that includes a finding that such Person engaged in fraud (with scienter) in the execution of customer orders as a market maker or order router. (b) "Affiliate" of a Person shall mean any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. (c) "After-Hours Order" shall mean an Order for execution after the 4 p.m. Eastern Time market close or prior to the 9:30 a.m. Eastern Time market open. (d) "Agency IOR" shall mean algorithmic logic that (i) is owned by, or licensed to, Schwab, (ii) is operated by Schwab and (iii) relies on real-time market data to route orders for execution on an agency basis to the best available market at the time of routing. (e) "Block Share Amount" shall mean, with respect to an Equity Security, such number of shares of such Equity Security as may be mutually reasonably agreed by Schwab and the Company based upon trading and liquidity considerations for such Equity Security. (f) "Broker-Dealer" shall mean a Person registered as a broker or dealer under the Securities Exchange Act. (g) "Change of Control" shall mean an event where: (i) with respect to Parent, (A) any other Person (including such other Person's Affiliates) or "group" (as such term is defined under Section 13(d) of the Securities Exchange Act) gains "control" (as such term is defined of Regulation 1-02 of Regulation S-X of the Securities Exchange Act) of or acquires a "controlling" position with respect to Parent (such Person or "group", a "Controlling Person"), whether pursuant to a merger, consolidation, reorganization, sale of assets or stock or similar transaction or series of related transactions, (B) Parent consummates a merger, consolidation, reorganization or similar transaction or series of related transactions, whether direct or indirect, with another Person, including such other Person's Affiliates (an "Acquiring Person"), in which fifty percent (50%) or more of the voting power of the outstanding voting securities of the combined company with respect to the election of directors following such transaction is held by Persons who were shareholders of the Acquiring Person prior to such transaction, or (C) the sale by Parent to any other Persons(s) (including such Person's Affiliates) (a "Purchasing Person") in one or more transactions properties or assets representing at least fifty percent (50%) of (i) Parent's total assets as reflected on its - 2 - most recent annual audited financial statement or (ii) Parent's operating income for its most recent fiscal year as reflected on its most recent annual audited financials statements; or (ii) with respect to Schwab, any transaction that would require the approval of the NASD under NASD Rule 1017 (without regard to exceptions in such rule relating to the NYSE) (any other party to such a transaction, a "1017 Person"). (h) "Confidential Information" shall mean all information disclosed in connection with, or arising out of a Party's obligations under, this Agreement including (i) technology and intellectual property, such as systems, source code, databases (including their design), hardware, software, programs, applications, engine protocols, routines, manuals, displays, designs, descriptions, procedures, formulas, discoveries, inventions, specifications, drawings, sketches, models, samples, codes, improvements, concepts, ideas and past, present and future research and development; (ii) any unpublished information concerning research activities and plans, marketing or sales plans, pricing or pricing strategies, operational techniques, strategic plans, and unpublished financial information, including information concerning revenues, profits and profit margins; (iii) this Agreement including its terms; and (iv) Customer Information. (i) "Covered Order" shall mean any Order other than an Excluded Order. (j) "Customer Information" shall mean (i) all information disclosed by or to the Company, on the one hand, to or by Schwab, on the other hand, in connection with this Agreement, which is identifiable to Schwab Customers or the Company's customer(s), including account numbers, or (ii) any information collected by the Company or Schwab through the routing and order handling services described herein, which identifies customer(s) individually or in the aggregate, including any data regarding Covered Orders, individually or in the aggregate. (k) "Direct Execution Order" shall mean any of the following Covered Orders: (i) a Directed Order, (ii) a Covered Order with special instructions as a result of which the Company is not permitted to participate on a principal basis (including an agency "not held" Order), (iii) a VWAP Order or (iv) any other category of Covered Order that Schwab and the Company mutually agree should be treated as a "Direct Execution Order". (l) (**) (m) "Directed Order" shall mean a Covered Order where the Schwab Customer or Registered Representative placing such Covered Order specifically instructs (through electronic, telephonic or other means) that such Covered Order be routed to a particular venue for execution (e.g., an Exchange, Nasdaq or a Broker-Dealer) or be routed pursuant to Agency IOR. (n) "Discretionary Paid Order" shall mean an Excluded Order that is routed to the Company for execution, other than a SI Prime Brokerage Order. - 3 - (o) "DNC Order" shall mean a Directed Order that is executed away from the Company, to the extent such Order is not a Directed Order as a result of a breach of Section 5.4(c) by Parent or the Company (in which case such Order shall be a "Directed Order" but not a "DNC Order"). (p) "DTCC" shall mean the Depository Trust and Clearing Corporation, a Delaware corporation, and its Subsidiaries, including National Securities Clearing Corporation. (q) (**) (r) "Equity Security" shall mean any of the types of equity securities for which SCM offers electronic order routing services as of the date of the Purchase Agreement and any other type of security mutually agreed by the Company or Schwab pursuant to Section 2.1(c). (s) "Exchange" shall mean any national securities exchange registered under Section 6 of the Securities Exchange Act. (t) "Excluded Order" shall mean: (i) any SI Prime Brokerage Order; or (ii) an Order placed by, for, or on behalf of (w) any "investment company" that is registered under the Investment Company Act of 1940, as amended, that is advised or managed by Schwab or any of its Affiliates, (x) accounts of CyberTrader, Inc. ("CyberTrader(R)") (including an Order for execution placed on the CyberTrader platform to the extent CyberTrader(R) is consolidated into Schwab and operated as a separately identifiable business unit or division of Schwab using the CyberTrader(R) platform) (y) an Order for a Schwab Customer serviced by the SI Business using the CyberTrader(R) platform or (z) US Trust Corporation and its Subsidiaries that in each of (i) and (ii), is consistent with the types of Orders placed by such Persons as of the date of the Purchase Agreement. (u) "Execution Quality Service Levels" shall mean the service levels set forth on Schedule A (which is attached hereto and incorporated herein by reference), as may be amended by the Parties in accordance with Section 2.4(a)(ii). (v) "Governmental Entity" shall mean any court, administrative agency or commission or other governmental, prosecutorial or regulatory authority or instrumentality or SRO. (w) "Insolvency Event" shall mean any of the following: (i) a court or Governmental Entity having jurisdiction shall have entered a decree or order for relief in respect of a Party in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have appointed a receiver, liquidator, trustee (or similar official) for a Party or for any substantial part of its or their property or ordered the winding up or liquidation of its affairs, or (ii) there shall have been commenced against a Party an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or any case, proceeding or other action for the appointment of a receiver, liquidator, trustee (or similar official) for a Party or for any substantial part of its or their property or for the winding up or liquidation of its or their affairs, and such involuntary case or - 4 - other case, proceeding or other action shall remain undismissed or undischarged for a period of sixty (60) consecutive calendar days of filing or (iii) a Party shall have commenced a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consented to the entry of an order for relief in an involuntary case under any such law, or consented to the appointment or taking possession by a receiver, liquidator, trustee (or similar official) for a Party or for any substantial part of its or their property or make any general assignment for the benefit of creditors. (x) "Legal Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Entity or any arbitrator or arbitration panel. (y) "Legal Requirements" shall mean any present or future national, state, local or similar laws (whether under statute, rule, regulation or otherwise); requirements of regulatory agencies (including any requirement imposed by the Securities and Exchange Commission or any self-regulatory organization of which a Party is a member); federal and state privacy, confidentiality, consumer protection, advertising, electronic mail and data security laws and regulations, whether in effect now or in the future; and requirements under permits, orders, decrees or directives that are binding. (z) "Locked or Crossed Orders" shall mean any Premium Execution Order executed by the Company at a time when the national best bid for such security is equal to or greater than the national best offer. (aa) "Nasdaq" shall mean The Nasdaq Stock Market, Inc. (bb) "Non-Nasdaq OTC Security" shall mean an Equity Security that is (i) quoted and settled in U.S. dollars, (ii) not listed on an Exchange and (iii) not quoted on Nasdaq. (cc) "NYSE" shall mean the New York Stock Exchange, Inc. (dd) "Operations and Technology Service Levels" shall mean the service levels set forth on Schedule B (which is attached hereto and incorporated herein by reference), as may be amended by the Parties in accordance with Section 2.4(b)(ii). (ee) "Order" shall mean an instruction to buy or sell (including to sell short) Equity Securities listed on an Exchange, quoted on Nasdaq or that are non-Nasdaq OTC Securities that is placed with Schwab or an Affiliate of Schwab by, for or on behalf of a Schwab Customer. (ff) "Paid Order" shall mean an Order that (i) is not a Directed Order and is (w) executed in a single-price auction at the market open or the market close (x) executed by the Company in stocks listed on an Exchange or quoted on Nasdaq on behalf of CyberTrader(R),(y) an After-Hours Order or(z) a Locked or Crossed Order, provided, however, that "Paid Orders" that are Locked or Crossed Orders shall include only that number of shares of - 5 - Locked or Crossed Orders in any calendar month that exceeds (1) the Locked or Crossed Percentage multiplied by (2) the aggregate number of shares represented by all Premium Execution Orders during such calendar month, (ii) (**) or (iii) such other types of Orders as may be reasonably mutually agreed by the Company and Schwab with regard to whether the Company incurs fees in executing such Orders and whether there is an opportunity for the Company to execute such Order as principal. (gg) "Person" shall mean any individual, corporation, partnership, limited liability company, association, joint venture, trust, Governmental Entity or other entity or organization. (hh) "Premium Execution Order" shall mean any Covered Order that is not a Direct Execution Order. (ii) "Registered Representative" shall mean a registered representative of a Broker-Dealer. (jj) "Schwab Customer" shall mean a customer or client of Schwab or an Affiliate of Schwab, including any investment advisor with accounts custodied at Schwab. (kk) "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, including the rules and regulations thereunder, as amended from time to time. (ll) "Service Level Agreements" shall mean the Execution Quality Service Levels and the Operations and Technology Service Levels. (mm) "SI Business" shall mean the provision of execution, custody and/or related services for accounts of independent investment advisers and accounts that such advisors manage on behalf of their individual and institutional clients, including Schwab's Services to Investment Manager's business, to the extent conducted in a manner consistent with the manner in which such business in conducted as of the date of the Purchase Agreement. (nn) "SI Prime Brokerage Order" shall mean Orders from advisors serviced by the SI Business (e.g., a step-out order), which are executed through brokers other than Schwab on a prime brokerage basis, to the extent conducted in a manner consistent with the manner in which such business in conducted as of the date of the Purchase Agreement. (oo) "SRO" shall mean any domestic securities, Broker-Dealer, investment advisor or insurance industry self-regulatory organization. (pp) "Subsidiary" shall mean any Person (a) of which another Person (i) owns, directly or indirectly, fifty percent (50%) or more of the outstanding voting securities or equity interests or (ii) is a general partner or managing member or (b) securities or other ownership interests of which having by their terms the power to elect a majority of the board of directors of such Person or other persons performing similar functions are owned or controlled, directly or indirectly, by another Person. - 6 - (qq) (**) (rr) "VWAP Order" shall mean an Order whose price is determined based on the actual executed price with a target price equal to the volume weighted average price for an Equity Security over a certain trading day. Section 1.2. Additional Definitions. In addition, the following defined terms have the meaning set forth in the indicated Section: Term Location Acquiring Person Section 1.1(g)(i)(B) Acquisition Section 5.5(c)(i) Acquisition Percentage Section 5.5(c)(vi)(A) Acquisition Recapture Amount Section 5.5(c)(vi)(B) (**) (**) Agreement Preamble Breaching Party Section 8.2(c) Change of Service Level Notice Schedule A.VI. Company Preamble Company Execution Channel Section 5.4(c)(i)(B) Company Indemnified Parties Section 6.2 Controlling Person Section 1.1(g)(i)(A) CPR Section 9.10(b) Cumulative Net Subject Volume Section 5.5(c)(vi)(C) Cure Period Section 8.2(a) CyberTrader(R) Section 1.1(t) Daily Settlement Section 2.2(a) (**) (**) Disclosing Party Section 4.1(a) Disposition Section 5.5(c)(i) Disposition Liquidated Damages Payment Section 5.5(c)(iii)(C) Dispute Committee Section 9.10(a) Disputes Section 9.10(a) (**) (**) DSO Section 2.3(c) End Date Section 8.4 Execution Quality Committee Section 2.4(a)(iii) (**) (**) (**) (**) Force Majeure Section 9.12 GP Recitals Indemnification Notice Section 6.3 Indemnified Parties Section 6.2 Indemnifying Party Section 6.3 Initial Liquidated Damages Section 5.5(a) Initial Liquidated Damages Period Section 5.5(a) Initial Term Section 8.1 - 7 - Term Location Liquidated Damages Benchmark Section 5.5(a) Locked or Crossed Percentage Schedule E-3 Losses Section 6.1 LP Recitals Material Industry Shift Section 5.8(a) Material Legal Shift Section 5.8(a) Net Disposition Percentage Section 5.5(c)(vi)(D) Non-Assumption Event Section 5.6 (**) (**) Other Parties Section 9.12 Parent Preamble Parties Preamble Party Preamble Payment Event Section 5.8(b) Purchase Agreement Recitals Purchasing Person Section 1.1(g)(i)(C) Receiving Party Section 4.1(a) Renewal Term Section 8.1 Schwab Preamble Schwab Cure Period Section 8.2(b) Schwab Indemnified Parties Section 6.1 SCM Preamble SCM Order Detail Section 5.1(b)(i) (**) (**) Security Breach Section 7.2 Subject Volume Section 5.5(c)(i) Subsequent Liquidated Damages Section 5.5(b) Subsequent Liquidated Damages Period Section 5.5(b) 1017 Person Section 1.1(g)(ii) Term Section 8.1 Terminating Party Section 8.2(c) Termination Date Schedule A.VI (**) (**) Third Party Claim Section 6.3 Trade Dispute Section 2.3(c) UBS Preamble Unamortized Liquidated Damages Amount Section 5.5(c)(vi)(E) - 8 - ARTICLE II. ORDER FLOW Section 2.1. Direction and Routing of Orders. Parent and Schwab shall, and shall cause their Affiliates to, route all Covered Orders to the Company for order handling as follows: (a) Premium Execution Orders. (i) The Company shall provide order handling services for each Premium Execution Order routed to the Company as follows: (1) For a Premium Execution Order of an Equity Security that is traded on an Exchange or on Nasdaq and for which the Order size does not exceed the Block Share Amount for such Equity Security, such Premium Execution Order shall be executed by the Company pursuant to a proprietary intelligent routing and trading technology that uses available real-time market data to identify the best available price in the national market and execute such Order as principal or agent in each case in accordance with Section 2.4(a) (Execution Quality Service Levels), it being understood that the Company may execute such Order as principal or agent; and (2) For all other Premium Execution Orders (including Orders for Equity Securities that are Non-Nasdaq OTC Securities or for which the Order size equals or exceeds the Block Share Amount for such Equity Security) the Company shall have the right, but not the obligation, to route such Order pursuant to a proprietary intelligent routing and trading technology that uses available real-time market data to identify the best available price in the national market and execute such Order as principal or agent, in any case in accordance with Section 2.4 (Execution Quality Service Levels), it being understood that the Company shall, in its sole discretion, determine whether to execute such Premium Execution Orders either as principal or by routing the Order to another market center as riskless principal or agent. (ii) All Premium Execution Orders shall be executed by the Company on a principal, riskless principal or agency basis without commission or commission equivalent. (b) Direct Execution Orders. (i) The Company shall, in its sole discretion, determine to execute Direct Execution Orders either as principal or by acting as riskless principal or agent, including, where applicable, determining the market center for execution of such Direct Execution Orders, in any case in accordance with Section 2.4(a) (Execution Quality Service Levels); provided, however, if any such Direct Execution Order is a Directed Order, the Company shall execute such Directed Order at the venue for execution specified by such Directed Order. - 9 - (ii) Subject to Section 3.1(c), all such Direct Execution Orders shall be executed by the Company on a principal, riskless principal or agency basis without commission or commission equivalent. (c) Orders and Securities Types. The Company shall provide order handling services for those types of Covered Orders and types of securities that are handled by SCM as of the date of the Purchase Agreement and for such other types of orders and types of securities as the Parties may mutually agree from time to time, it being acknowledged that the Company shall not be required to provide order handling services for any other types of Covered orders or types of securities except as expressly set forth in this sentence. (d) Back-Up Connectivity. Schwab may maintain back-up connectivity for trading of Equity Securities to an Exchange, Nasdaq or another Broker-Dealer for contingency purposes, in which case Schwab shall be permitted to route to such Exchange, Nasdaq or other Broker-Dealer the minimum number of Orders for Equity Securities needed to maintain such connectivity (**). The composition of Equity Securities for such back-up routing shall be a neutral sample representative of the broad cross section of all Equity Securities. (e) The Company covenants and agrees to provide to Schwab such information as it requires to prepare and publish its disclosures required by Rule 11Ac1-6 of the Securities Exchange Act with respect to the routing of Covered Orders to the Company, it being understood that the Company does not, as of the date of this Agreement, have full system capability to execute securities trades in an agency capacity. Further, the Company and Schwab shall cooperate to design their respective Order routing and reporting processes such that the venues where Covered Orders (or portions thereof) are ultimately executed can be identified and reported on Schwab's required disclosures pursuant to Rule 11Ac1-6 of the Securities Exchange Act consistent with Legal Requirements. (f) The Company shall maintain a good-till-cancelled Order book for open Orders that remain in effect until executed or cancelled. (g) This Section 2.1 shall not be deemed to require Schwab to route any DNC Order to the Company. (h) The Company may agree to provide routing services to Schwab for, and Schwab may agree to route to the Company, any Discretionary Paid Order or type of Discretionary Paid Order, upon mutually agreed fees. Section 2.2. Daily Settlement and Order Tracking. (a) On an end of trading day basis, in connection with orders executed by the Company as principal or riskless principal, the Company agrees to submit to DTCC for clearance a QSR file locking in trades on a net aggregated basis (the "Daily Settlement"). (b) In connection with Covered Orders routed by the Company to an Exchange of which Schwab is not a member, the Company agrees to execute and submit for clearance all such orders in its own name, and subsequently submit to DTCC a file substituting Schwab for the Company for clearance (i.e., "flipping the positions") on an end of day basis. - 10 - (c) Each Party shall pay any fees charged to it by DTCC in connection with the Daily Settlement or "flip." Section 2.3. Automated Settlement System and Help Desk. (a) Each of the Company and Schwab shall develop its own Order and execution tracking system for automated reconciliation of Orders and executions thereof and shall cooperate to ensure such systems are interoperable for purposes of effecting Daily Settlement. Such system shall allow each of the Company and Schwab to effect the Daily Settlement through electronic reconciliation of Orders and executions thereof. (b) The Company shall maintain and staff a help desk to assist Schwab with resolving any problems or concerns related to Orders or Daily Settlement to the extent specified in the Operational and Technical Service Levels. (c) The Company and Schwab shall each designate in writing to the other one or more officers who have responsibility to settle any disputes relating to the Daily Settlement and the placement or execution of Orders (each, a "DSO"). In the event of any dispute relating to the placement or execution of an Order (a "Trade Dispute"), the Company shall cause a Company DSO, and Schwab shall cause a Schwab DSO, to use their respective good faith efforts to resolve a Trade Dispute. A Company DSO and a Schwab DSO may agree to a resolution of such Trade Dispute that will be binding on the Company and Schwab. The Company or Schwab may, respectively, at any time or from time to time, remove, replace or appoint an additional DSO to represent it by written notice to the other, provided, however, that any resolution of a Trade Dispute made by either a Company DSO or a Schwab DSO prior to his or her removal or replacement shall be binding on the Company or Schwab, respectively, regardless of such removal or replacement. Section 2.4. Execution Quality. (a) Execution Quality Service Levels. (i) The Company shall use reasonable diligence to identify the best available market for Orders to fulfill the Execution Quality Service Levels set forth in Schedule A as may be modified pursuant to Section 2.4(a)(ii). (ii) The Company and Schwab may mutually agree in writing on changes to the Execution Quality Service Levels; provided, however, that any such agreement shall, if applicable, include an allocation of the direct or indirect costs of such revised Execution Quality Service Levels between the Company and Schwab, it being understood that where such changes are required for competitive reasons, negotiations will be conducted with a view to Schwab bearing the majority of such costs, and where such changes are required due to changes in Legal Requirements (including as a consequence of changes in industry practice), negotiations will be conducted with a view to the Company bearing the majority of such costs. (iii) In addition to the execution quality and order routing review processes maintained by each of Schwab and the Company, the Company and Schwab shall establish an advisory committee (the "Execution Quality Committee") to provide a forum - 11 - for discussion regarding routing and execution practices and resolution of disputes with respect to Covered Orders and to discuss such matters relating to this Agreement as they from time to time agree. The Execution Quality Committee shall meet (in person or telephonically) on a not less than quarterly basis at a time and place mutually agreed to by the Company and Schwab. Initially the Execution Quality Committee shall be comprised of three (3) representatives of the Company and three (3) representatives of Schwab, which representatives shall be employees or officers of the such Parties or of such Parties' Affiliates and may be replaced from time to time by each of the respective Parties by giving notice to the other Party. In no event will the Execution Quality Committee have the power to bind any Party (including the power to amend or otherwise alter the terms of this Agreement). (iv) Schwab shall assess routing and execution in accordance with the methodology set forth in Schedule A in conformance with its duty of best execution. (b) Operations and Technology Service Levels. (i) The Company and Schwab shall each use their respective commercially reasonable efforts to fulfill the Operations and Technology Service Levels set forth in Schedule B. (ii) Either Schwab or the Company may propose reasonable changes to the Operations and Technology Service Levels, and the other Party shall consider such proposals in good faith. Any amendment to the Operations and Technology Service Levels must be mutually agreed in writing by Schwab and the Company provided, however, that neither the Company nor Schwab shall unreasonably withhold agreement to any change reasonably proposed by the other if such proposed change does not impose a greater than de minimis direct or indirect cost (including opportunity cost) or administrative or other burden on the other Party's or any of such other Party's Affiliates. Section 2.5. Customer Disclosure, Segregation and Responsibility. (a) The Parties shall not publish or make any communication or take any other action that would reasonably lead a Schwab Customer to conclude that such Schwab Customer is a customer of the Company or any of its Affiliates. (b) As between Schwab and the Company, when Schwab or an Affiliate routes an Order to the Company, (i) the Order shall be originated by, and for the account of, a Schwab Customer or other account holder of Schwab; (ii) for purposes of all Legal Requirements (except as otherwise expressly provided therein), the accounts for which Orders are transmitted are "customers" of Schwab or an Affiliate thereof and not of the Company; and (iii) Schwab shall be solely responsible for all obligations relating to the opening and maintenance of customer accounts, including compliance with "know your customer" and anti-money laundering requirements. - 12 - Section 2.6. Order Transmission Procedures and Requirements. (a) Schwab shall transmit Orders to the Company using existing data formats, transmission protocols and methods, except as otherwise mutually agreed in writing by Schwab and the Company. (b) Schwab shall be solely responsible for all acts and omissions of persons transmitting Orders on its behalf and shall be bound by the terms of all Orders transmitted to the Company. (c) Schwab acknowledges that it is its responsibility to ensure that any Order transmitted to the Company complies with all Legal Requirements (including short sale rules under the Securities Exchange Act and applicable self regulatory rules) and policies or interpretations thereof. Schwab shall be responsible for properly designating any short sale as "short" and for obtaining a "locate" or affirmative determination of securities for delivery prior to transmitting any Order. (d) Except to the extent expressly provided for by the Transition Services Agreement (as defined in the Purchase Agreement), Schwab shall be solely responsible for the cost of hardware, software communications equipment and communications lines, including any data lines or internet access necessary to maintain connectivity to the Company's systems for receipt of Orders. The Company shall be solely responsible for the cost of hardware, software, communications equipment and communications lines, including any data lines or internet access necessary to operate the Order routing and executions system for Orders received by the Company and to maintain connectivity to Exchanges and other market centers. ARTICLE III. PAYMENTS Section 3.1. Order Handling Costs. (a) Premium Execution Orders. Other than with respect to any Premium Execution Order that is a Paid Order, the Company shall execute all Premium Execution Orders without commission or commission equivalent, regardless of whether the Company executes such Premium Execution Orders as principal, riskless principal or agent. (b) Schwab shall reimburse the Company for fees related to execution of Paid Orders as set forth on Schedule C, as the same may be amended by the Company and Schwab from time to time. (c) Payment for Direct Execution Orders. (**) (d) Reporting. Subject to Article IV, the Company shall provide to Schwab, on the one hand, or Schwab shall provide to the Company, on the other hand, such data as Schwab or the Company, as the case may be, reasonably requests to confirm the calculations - 13 - with respect to Premium Execution Orders, Direct Execution Orders, DNC Orders and Paid Orders pursuant to the provisions of this Agreement. Section 3.2. Reports. The Company shall use its commercially reasonable efforts to provide to Schwab such reports, data or data access as set forth in the Service Level Agreements. Section 3.3. Manner of Payments. Each of Schwab and the Company shall invoice the other for any amount due within thirty (30) days of each calendar month's end; provided, however, that the failure of Schwab or the Company to invoice the other in a timely manner shall not relieve the invoiced Party of liability for payment except to the extent the invoiced Party is materially prejudiced by such delay. All sums due to any Party under this Article III shall be paid on or prior to the tenth day following delivery of an invoice for such amounts to the other, and shall be paid in U.S. Dollars by bank wire transfer in immediately available funds to such bank account(s) as such Party shall designate from time to time by giving notice to the other Party. Section 3.4. Interest on Late Payments. If any Party shall fail to make a timely payment pursuant to this Article III, such late payment shall bear interest, to the greatest extent permitted by applicable law, at the prime rate (as published in the New York edition of the Wall Street Journal or a comparable publication if not reported in the New York edition of the Wall Street Journal for the date the payment was due), effective for the first date on which payment was delinquent and calculated on the number of days such payment is overdue. Section 3.5. Books of Account. Each of the Company and Schwab shall maintain true and complete books of account containing an accurate record of all data necessary for reports due hereunder and for the proper computation of payments due from it or charges made by it under this Agreement. ARTICLE IV. CONFIDENTIAL INFORMATION Section 4.1. Confidential Information. (a) In furtherance of this Agreement, Schwab may disclose Confidential Information, including Customer Information, to the Company, and the Company and its Affiliates may disclose Confidential Information to Schwab. Confidential Information will be deemed confidential and proprietary to the Party disclosing the Confidential Information (the "Disclosing Party"), regardless of whether such information was disclosed intentionally or unintentionally or marked as "confidential" or "proprietary." Confidential Information, including permitted copies, shall be deemed to be the exclusive property of the Disclosing Party. The Disclosing Party's disclosure of Confidential Information will not constitute an express or implied grant to the Party receiving the Confidential Information (the "Receiving Party") of any - 14 - rights to or under the Disclosing Party's patents, patent applications, copyrights, trade secrets, trademarks or other intellectual property rights. (b) The Receiving Party covenants that it shall not use the Confidential Information, including Customer Information, for any purpose other than in performance of this Agreement or with respect to the Company's operations and shall not disclose the same to any other Person other than to such of its Affiliates, employees, agents, advisers, representatives, consultants and counsel who have a need to know such Confidential Information as it relates to the purpose or subject matter of this Agreement. Each Party shall bear responsibility for a breach of confidentiality obligations contained in this Article IV by its Affiliates, employees, agents, representatives or consultants. The Receiving Party shall be entitled to retain copies of Confidential Information to the extent required to comply with applicable Legal Requirements or to the extent consistent with the Receiving Party's standard internal record retention policies. Upon termination of this Agreement, or earlier if so requested in writing by the Disclosing Company, except as permitted in the previous sentence, and except with respect to email, the Receiving Party shall return or destroy all Confidential Information and any documents, paper, tapes or other media or material which may contain (or such portions of the foregoing containing) Confidential Information in its possession. (c) Confidential Information shall not include any information or material, or any element thereof, to the extent that any such information or material, or any element thereof: (i) is in the public domain at the time of disclosure hereunder or subsequently comes within the public domain other than in violation of this Agreement or any other confidentiality obligation that the party is aware of; (ii) has been or is hereafter rightfully obtained by the Receiving Party from a third Person without restriction on disclosure and without a breach of duty of confidentiality to the Disclosing Party; (iii) has been independently developed by the Receiving Party without using the Confidential Information of the Disclosing Party; or (iv) is required to be disclosed in connection with a Legal Proceeding or pursuant to applicable Legal Requirements, provided that the Receiving Party shall provide prior notice of such disclosure to the extent practicable. Section 4.2. Communications with Regulators. Any Party may disclose the existence or terms of this Agreement and the identity of the other Parties thereto to the Securities and Exchange Commission and any SRO of which it is a member, to which it has applied for membership or to which it is otherwise subject to jurisdiction, provided that such Party shall have used its commercially reasonable efforts to seek, to the greatest extent possible, any confidential treatment that may be available. - 15 - Section 4.3. Identification of Schwab Customers. (a) Unless the Company consents in writing, Schwab shall not provide the Company with any information that would reveal the identity of the underlying Schwab Customer except to the extent required to resolve a Trade Dispute or in connection with a Legal Proceeding; provided, however, that Schwab shall provide for each Order (i) a unique descriptor code (that may be a coded or scrambled account number) allowing recognition of the Schwab Customer placing such Order in a manner that does not reveal any information relating to the identity of such Schwab Customer and (ii) a category descriptor that allows the Company to determine what class of account and account range is assigned to such Schwab Customer; provided, however, to the extent that Schwab does not, as of the date of the Purchase Agreement, provide the information specified in clause (ii) to SCM, Schwab shall, to the extent reasonably practicable, use its commercially reasonable efforts to provide such information specified in clause (ii) to the Company following the date hereof. (b) If the Company receives any Customer Information of Schwab, or Schwab receives any Customer Information of the Company, it shall not use such Customer Information to target or solicit customers of the other (including investment advisors with accounts custodied at Schwab), as such, on behalf of itself or any third party. Neither the Company, on the one hand, nor Schwab, on the other hand, shall sell, distribute, share, rent or otherwise transfer any Customer Information of the other except for distribution, sharing or transferring to its Affiliates, employees, agents, advisers, representatives, consultants or counsel thereof who have a need to know such Customer Information as it relates to the purpose or subject matter of this Agreement. Nothing contained herein shall preclude either the Company or Schwab or any of their respective Affiliates from providing services to any Person who independently contacts the Company or Schwab or any of their respective Affiliates, as the case may be, or who is responding to a general solicitation not targeted at any specific Person, or who is contacted by the Company or Schwab or any of their respective Affiliates based on information independently derived by such Person and/or its Affiliates without the use of any Customer Information. ARTICLE V. REPRESENTATIONS AND WARRANTIES; COVENANTS; LIMITATION ON LIABILITY Section 5.1. Representations and Warranties. (a) Each Party acknowledges that the Parties have entered into this Agreement in reliance upon the representations and warranties made in the Purchase Agreement. (b) Parent and Schwab jointly and severally represent and warrant as follows: - 16 - (i) Schedule H sets forth a true and complete description of Orders routed by SCM for the eight months ended August 31, 2004 specifying, for each such month, (i) the numbers of shares and executed orders of Equity Securities handled by SCM in respect of (x) Orders for Equity Securities routed from Schwab and Affiliates of Schwab (other than CyberTrader(R)), on the one hand, and nonaffiliates of Schwab and CyberTrader(R), on the other hand), and (ii) for each such Order source category, the number of shares handled in respect of (v) Direct Execution Orders, (w) Premium Execution Orders, (x) DNC Orders, (y) Orders that meet the criteria set forth in the definition of "Paid Orders" herein and (z) Locked or Crossed Orders (the "SCM Order Detail"). The SCM Order Detail does not include or reflect any orders that meet the criteria set forth in the definition of Excluded Orders. Since June 30, 2004, (i) there has occurred no material diminution in the amount of Order flow of Equity Securities routed to SCM or in the composition of SCM's Equity Securities flow (measured on a volume of shares routed basis), subject to any (x) seasonal variation of Orders flow that does not materially vary from ordinary variations due to seasonality experienced over the preceding three (3) years and (y) diminutions in Order flow occurring due to market conditions, to the extent any such diminution due to market conditions does not disproportionately affect SCM relative to other entities engaged in similar businesses to the Business (as defined in the Purchase Agreement) and (ii) no material correspondent customer has advised SCM or any of its Affiliates of an intention to reduce the amount or composition of Order flow routed to SCM. (ii) The Execution Quality Service Levels and the Operations and Technology Service Levels set forth a true and complete summary of SCM's current execution quality service levels and operations and technology service levels as of the date of the Purchase Agreement; provided, however, that in the case of Equity Securities listed on an Exchange, Schedule F sets forth a true and complete summary of SCM's execution quality service levels as of the date of the Purchase Agreement. (iii) Since July 31, 2003, SCM has at all times substantially met or exceeded the service levels specified in the Operations and Technology Service Levels. (iv) Since July 31, 2003, SCM has at all times substantially met or exceeded the service levels specified in the Execution Quality Service Levels for all securities quoted on Nasdaq. With respect to securities listed on an Exchange, Schwab and the Company will agree at closing on interim Execution Quality Service Levels to be applied for an initial six-month period in lieu of those in Schedule A that are consistent with SCM's execution quality service levels for Equity Securities listed on an Exchange as in effect as of the date of the Purchase Agreement. Thereafter, the Execution Quality Service Levels in Schedule A will apply unless Schwab and the Company reasonably agree otherwise. Section 5.2. Limitation on Liability. Notwithstanding anything in this Agreement to the contrary, in no event shall any Party be liable to any other Party for, and each Party shall procure that none of its Affiliates shall make any claim against any other Party (or any of its Affiliates) for, any lost profits, diminution in value, loss of business, loss of contracts, diminished goodwill, diminished reputation, or consequential, indirect, incidental, special or punitive damages arising under or in connection with this Agreement, whether under Article VI or otherwise. This Section 5.2 shall not be construed to limit a Party's right to indemnification for payments required to be made by it to third parties in respect of damages (of any kind or type, - 17 - including, but not limited to, direct or consequential) for third party claims which are subject to indemnification under Article VI. Section 5.3. Disclaimer Of Warranties. EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN THIS AGREEMENT AND THE PURCHASE AGREEMENT, NO PARTY MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, REGARDING THIS AGREEMENT, THE PERFORMANCE OF ITS OBLIGATIONS OR THE PRODUCTS OR SERVICES THAT IT PROVIDES HEREUNDER. IN PARTICULAR, EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH IN THIS AGREEMENT AND THE PURCHASE AGREEMENT, EACH PARTY EXPRESSLY AND SPECIFICALLY DISCLAIMS AND WAIVES ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF TITLE, MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE. Section 5.4. Covenants. (a) Each of the Parties hereby agrees that during the Term, it shall not, and shall ensure that its Affiliates shall not, enter into any agreement with a third party that will limit its ability to perform hereunder. (b) Each of the Parties hereby agrees that it shall provide such information and cooperation as may be reasonably requested of it by another party in connection with, customer complaints and inquiries, and arbitrations and Legal Proceedings brought against such Person by a Third Party that arises out of or relates to Covered Orders, unless the sharing of such information or cooperation would be reasonably likely to void any legal privilege. (c) (i) Parent and Schwab shall not, and shall cause their Affiliates not to, take any actions that are intended, designed or that would reasonably be expected to circumvent the terms or intention of this Agreement, including: (A) transferring or reclassifying accounts; and (B) employing policies, practices or procedures intended, designed or that would reasonably be expected, to discourage the use of execution channels that rely on Company routing and execution services ("Company Execution Channels"), including reducing the prominence, visibility or accessibility of Company Execution Channel. (ii) (**) (iii) (**) (d) Schwab shall provide to the Company the reports described in Section 5.1(b)(i) for each quarter following the date hereof. (e) Schwab agrees to cooperate with Company to investigate, address and prevent activity on the part of Schwab customers or Schwab personnel that is inconsistent - 18 - with the terms of this Agreement, including activity intended to take inappropriate advantage of Company services or circumvent any limitation or requirements under this Agreement (e.g., to break up large order into small ones). Section 5.5. Liquidated Damages. (a) Initial Liquidated Damages. If, during any twelve (12) month period ending on the calendar month's end falling on or immediately after the first, second or third anniversary of the date of this Agreement (each, an "Initial Liquidated Damages Period"), Schwab routes to the Company for order handling less than 95% of the total Premium Execution Orders placed by, for or on behalf of Schwab Customers during such twelve (12) month period (measured by the total dollar volume of shares represented by such Premium Execution Orders), excluding any Non-Nasdaq OTC Orders that were routed to Broker-Dealers other than the Company for purposes of maintaining Schwab's back-up connectivity to the extent permitted by Section 2.1(d) (the "Liquidated Damages Benchmark"), then Parent shall, within fifteen (15) days following the end of such Initial Liquidated Damages Period, deliver to the Company a notice stating that the Liquidated Damages Benchmark has not been met during such Initial Liquidated Damages Period. Within one hundred twenty (120) days of UBS' receipt of such notice, UBS, in its sole discretion, may elect to send a notice to Parent requiring that Parent pay to the Company, not later than sixty (60) days following Parent's receipt of UBS' notice, the sum of $58,500,000 (the "Initial Liquidated Damages"), in which case Parent shall pay to the Company the Initial Liquidated Damages within such sixty (60) day period. Upon payment of Initial Liquidated Damages by Parent to the Company as provided in this Section 5.5, this Agreement shall terminate in accordance with Section 8.2(i). For purposes of this Section 5.5(a), any Covered Order that is executed away from the Company as a result of a breach of Section 5.4(c) by Parent or Schwab shall be included in the calculation of the total Premium Execution Orders placed by, for or on behalf of Schwab Customers during such twelve (12) month period. (b) Continuing Liquidated Damages. If, during any twelve (12) month period ending on a calendar month's end that falls on or immediately after the fourth, fifth, sixth, seventh or eighth anniversary of the date of this Agreement (each such twelve (12) month period, a "Subsequent Liquidated Damages Period"), Schwab routes to the Company for order handling less than the Liquidated Damages Benchmark, then Parent shall pay to the Company, not later than sixty (60) days following the end of such Subsequent Liquidated Damages Period $4,875,000 (each such payment, "Subsequent Liquidated Damages"). Subsequent Liquidated Damages shall be payable in respect of each Subsequent Liquidated Damages Period in respect of which the Liquidated Damages Benchmark is not met. The maximum amount payable by Parent to Company under this clause (ii) shall not exceed $24,375,000. For purposes of this Section 5.5(b), any Covered Order that is executed away from the Company as a result of a breach of Section 5.4(c) by Parent or Schwab shall be included in the calculation of the total Premium Execution Orders placed by, for or on behalf of Schwab Customers during such twelve (12) month period. (c) Liquidated Damages upon Disposition of Accounts. (i) For each sale or disposition of accounts by Schwab or an Affiliate of Schwab (other than disposition of individual accounts made in the ordinary course of - 19 - business consistent with past practice) or acquisition or purchase of accounts from a third party by Schwab (each, an "Acquisition" or "Disposition", as the case may be), Schwab shall propose to the Company an annualized dollar trading volume of Covered Orders attributable to the accounts being acquired/purchased or sold/disposed (the "Subject Volume" which, in the case of Acquisitions, shall be Schwab's good faith best estimate based on information available to Schwab at the time of such Acquisition), and shall furnish the Company with such data as is necessary for the Company to evaluate Schwab's proposal, including historical trading data for such accounts and the purchase or sale price. If Schwab and the Company do not agree on the Subject Volume, the Subject Volume shall be determined by the procedures set forth in Section 9.10. (ii) The parties shall maintain a current record of the Cumulative Net Subject Volume. (iii) If, after giving effect to any Disposition, the Cumulative Net Subject Volume is less than zero, the following procedures shall apply. (A) Schwab shall calculate the Net Disposition Percentage and notify the Company in writing of the Net Disposition Percentage, including the method of its calculation and the supporting data. (B) If the Net Disposition Percentage is less than 5%, no further action is required to be taken by either party. (C) If the Net Disposition Percentage is equal to or greater than 5%, then Schwab shall pay to the Company, not later than sixty (60) days following the completion of such transaction, an amount equal to the Unamortized Liquidated Damages Amount multiplied by the Net Disposition Percentage (each such payment, a "Disposition Liquidated Damages Payment"). (iv) If, within six months after the date of a Disposition requiring Schwab to make a Disposition Liquidated Damages Payment, Schwab or an Affiliate completes an Acquisition, and the Acquisition Percentage is equal to or greater than 5%, then the Company shall pay to Schwab, not later than sixty (60) days following the completion of such transaction, the Acquisition Recapture Amount. If any Disposition Liquidated Damages Payment is due from Schwab to the Company, the Company at its election may offset its payment obligation in respect of the Acquisition Recapture Amount against the amounts due from Schwab in lieu of making payment. (v) In no event shall the sum of all Acquisition Recapture Amounts payable by the Company to Schwab exceed the sum of all Disposition Liquidated Damages Payments payable by Schwab to the Company. (vi) For purposes of this section 5.5(c), the following terms shall have the indicated meanings: - 20 - (A) "Acquisition Percentage" shall mean the Subject Volume of an Acquisition expressed as a percentage of the total dollar trading volume of all Covered Orders attributable to accounts carried by Schwab and Affiliates during the 12 calendar months preceding the prior Disposition that gave rise to a Disposition Liquidated Damages Payment (i.e., the denominator for this percentage is the same as the denominator for determining the related Net Disposition Percentage); provided, however, that, if the Subject Volume of an Acquisition is not substantially equivalent in the type and quality of orderflow to the Subject Volume of Dispositions (for example, and without limitation, it includes a lower percentage of Premium Execution Orders or the type of investors entering Premium Execution Orders differs sufficiently to result in a noticeable difference in the quality of Premium Execution Orders), the parties will agree upon a lower percentage as the Acquisition Percentage intended to give effect to the variation in type and quality of orderflow. (B) "Acquisition Recapture Amount" shall mean the amount determined by: (1) dividing the Acquisition Percentage by the Net Disposition Percentage as calculated with respect to the last preceding Disposition; if the result of the division is larger than 1, the result shall be deemed to be 1; (2) multiplying the number obtained in clause (1) by the amount of the Disposition Liquidated Damages Payment; and (3) subtracting from the product obtained in clause (2) an amount equal to the product of the Disposition Liquidated Damages Payment multiplied by a fraction, the numerator of which is the number of months elapsed between the Disposition and the subsequent Acquisition, and the denominator of which is 36 (if the Acquisition occurs during the 36 months following the execution of this Agreement), or 60 (if Acquisition occurs during the 37th month following the execution of this Agreement or thereafter). (C) "Cumulative Net Subject Volume" shall mean the sum of the Subject Volume of all Acquisitions since the date of this Agreement, reduced by the sum of the Subject Volume of all Dispositions since the date of this Agreement, provided that (i) after any Disposition that creates an obligation to make a Disposition Liquidated Damages Payment under clause (c)(iii) above, the Cumulative Net - 21 - Subject Volume shall be reset to zero after the calculations called for by clause (c)(iii) have been made, and (ii) the Cumulative Net Subject Volume shall not be increased as a result of any Acquisition that creates an obligation to pay an Acquisition Recapture Amount. (D) "Net Disposition Percentage" shall mean the absolute value of the Cumulative Net Subject Volume expressed as a percentage of the total dollar trading volume of all Covered Orders attributable to accounts carried by Schwab and Affiliates during the 12 calendar months preceding a Disposition. (E) "Unamortized Liquidated Damages Amount" shall mean (i) during the 36 months following the execution of this Agreement, the sum of $58,500,000 (1) reduced by any amounts that have previously been paid by Schwab pursuant to this Section 5.5(c) as a result of a Disposition and (2) increased by any Acquisition Recapture Amounts that have previously been paid by the Company pursuant to this Section 5.5(c); and (ii) at any time after the thirty-sixth month following the execution of this Agreement, (A) the lesser of (x) the Unamortized Liquidated Damages Amount at the end of the thirty-sixth month following the execution of this Agreement (giving effect to any amounts payable under this provision within 60 days thereafter) and (y) the amount set forth in the following table, in either case (B) (1) reduced by any amounts paid pursuant to this Section 5.5(c) after the thirty-sixth month following the execution of this Agreement or (2) increased by any Acquisition Recapture Amounts that have previously been paid by the Company pursuant to Section 5.5(c) after the thirty-sixth month following the execution of this Agreement (other than any amounts payable under this provision within 60 days after the end of such thirty-sixth month): - -------------------------------------------------------------------------------- Months after date of Agreement Amount Under Clause (E)(ii)(y) - -------------------------------------------------------------------------------- 37-48 (4th year) $ 24,375,000 49-60 (5th year) 19,500,000 61-72 (6th year) 14,625,000 73-84 (7th year) 9,750,000 85-96 (8th year) 4,875,000 - 22 - Section 5.6. Liquidated Damages Upon Non-Assumption Event. If (i) Parent or Schwab announces it has entered into one or more definitive agreements pursuant to which a Change of Control could occur, and, within thirty (30) days of such announcement, Parent and Schwab (and any of their respective successors) and any other party to such definitive agreements that would be a 1017 Person, Controlling Person, Acquiring Person or Purchasing Person if the transactions contemplated by such definitive agreement(s) were to be consummated, does not jointly deliver to the Company a notice in writing that they will cause Parent's and Schwab's (and any of their respective successors') continued performance of its covenants under this Agreement; or (ii) a Change of Control occurs and, within five (5) business days thereof, Parent and Schwab (and any of their respective successors) and any 1017 Person, Controlling Person, Acquiring Person or Purchasing Person, as applicable, does not submit to the Company an instrument in writing binding all of them to cause the continued compliance with the terms of, and performance of covenants under, this Agreement by Parent and Schwab (and any of their respective successors); ((i) or (ii) being a "Non-Assumption Event"), the Company may, in its sole discretion, elect to deliver to Parent a notice stating that a Non-Assumption Event has occurred, in which case, (A) if such Non-Assumption Event occurs during an Initial Liquidated Damages Period, Parent shall pay to the Company, not later than ten (10) days following the delivery of such notice, the sum of $58,500,000, and (B) if such Non-Assumption Event occurs during a Subsequent Liquidated Damages Period, then Parent shall pay to the Company, not later than ten (10) days following the delivery of such notice, an amount as determined in accordance with the following table: - -------------------------------------------------------------------------------- If a Non-Assumption Event occurs Parent shall pay the Company during the 12-month period ending on: the following amount: - -------------------------------------------------------------------------------- October 29, 2008 (4th anniversary) $ 24,375,000 October 29, 2009 (5th anniversary) 19,500,000 October 29, 2010 (6th anniversary) 14,625,000 October 29, 2011 (7th anniversary) 9,750,000 October 29, 2012 (8th anniversary) 4,875,000 Section 5.7. No Penalty; Maximum Damages. (a) The Parties agree that the Company's actual damages in the event of the occurrence of any of the types of situations set forth in Section 5.5 or Section 5.6 would be extremely difficult or impracticable to determine. After negotiation, the Parties have agreed that, considering all the circumstances existing on the date of this Agreement, the amounts of the payments set forth in the above sections represent a reasonable estimation of the damages that the Company would incur if any such events were to occur. None of the payments set forth in Section 5.5 or Section 5.6 are intended as a penalty. Each of the Parties agrees to the accuracy of the statements made in this paragraph, the reasonableness of the amount of liquidated damages agreed upon, and the fact that each Party was represented by counsel who explained, at the time this Agreement was made, the consequences of the foregoing provisions. - 23 - (b) The remedies set forth under Sections 5.5 and 5.6 shall be cumulative; provided, however, in no event shall Parent be liable to the Company for more than $58,500,000 in the aggregate from one or more of its obligations under Sections 5.5 and 5.6. Section 5.8. Unforeseen Circumstances. (a) Subject to Section 5.8(b), in the event that either UBS or Schwab reasonably concludes that (a)(i) there has been a fundamental and material industry-wide structural change in pricing (e.g., a general industry-wide shift to a commission paid basis for order handling services) or execution (a "Material Industry Shift") or (ii) Legal Requirements prohibit or materially restrict or materially limit the routing or execution of Covered Orders or any other term of this Agreement (including the ability of the Company to execute Covered Orders as principal) (a "Material Legal Shift"), since the date of the Purchase Agreement then UBS or Schwab, as the case may be, shall send written notice to the other setting forth such conclusion, and stating the reasons therefor, and the proposed amendments or modifications to this Agreement that it believes are required (e.g., in the case of a general industry-wide shift to a commission paid basis for order handling services, the payment by Schwab of commissions in connection with orders routed to the Company), and requesting that the Dispute Committee enters into negotiations regarding such changes. Promptly following delivery of such notice, UBS and Schwab shall cause the Dispute Committee to negotiate in good faith and to agree to such amendments and modifications to this Agreement as may be necessary to mitigate to the extent possible such Material Industry Shift or Material Legal Event. If UBS and Schwab fail to reach agreement, then such failure to agree shall be deemed a dispute between the Company and UBS and shall be resolved in accordance with the procedures set forth in Section 9.10. (b) The provisions of Section 5.8(a) shall be subject to the liquidated damages provisions set forth in Section 5.5 and Section 5.6. To the extent an event has occurred that could cause a payment of Initial Liquidated Damages, Subsequent Liquidated Damages, all or a portion of the Unamortized Liquidated Damages Amount or an amount in connection with a Non-Assumption Event, as the case may be, to become due and payable (each, a "Payment Event"), the amount payable by Parent to the Company in respect of such Payment Event shall be due and payable in all circumstances, notwithstanding the provisions of Section 5.8(a), and regardless of whether a Material Industry Shift or Material Legal Shift is or is not the cause of such Payment Event. Section 5.9. CyberTrader(R) Integration. In the event that Schwab and CyberTrader(R) are integrated, the Company shall have the right to request reports from time to time as to trading activity by Schwab Customers, broken down by categories of order flow (e.g., volume, trades, channels, number of accounts in each category) in order to determine whether there has been substantial migration of account types from those generating Covered Orders to those generating Excluded Orders. If the Company believes that such a substantial migration has occurred or is occurring, the Company and Schwab will negotiate in good faith to determine a basis on which to reclassify certain of the Excluded Orders as DNC Orders. - 24 - ARTICLE VI. INDEMNIFICATION Section 6.1. Company Indemnification. The Company hereby agrees to indemnify, defend and hold harmless Schwab and its Affiliates, directors, officers, general partners, managers, members, employees and other agents and representatives (the "Schwab Indemnified Parties") from and against any and all claims for liabilities, judgments, claims, settlements, losses, reasonable fees (including attorneys' fees, fees and disbursements of experts, and arbitration and court fees and costs), liens, taxes, penalties, obligations, expenses and any required payments made to third parties (collectively, "Losses") incurred or suffered by any Schwab Indemnified Party arising from, by reason of or in connection with (i) any dishonest, fraudulent, grossly negligent or criminal act or omission on the part of the Company's officers, directors, employees or agents or (ii) without limiting clause (i), any breach of any covenant (other than those set forth in Section 2.4, except to the extent an express remedy is provided for by the terms of Schedule A or Schedule B) made by the Company pursuant to this Agreement. Section 6.2. Schwab Indemnification. Parent and Schwab jointly and severally agree to indemnify, defend and hold harmless the Company and its Affiliates, directors, officers, general partners, managers, members, employees and other agents and representatives (the "Company Indemnified Parties" and together with the Schwab Indemnified Parties, the "Indemnified Parties") from and against any and all claims for Losses incurred or suffered by any such person or entity arising from, by reason of or in connection with (i) any dishonest, fraudulent, grossly negligent or criminal act or omission on the part of Schwab's or its Affiliates' officers, directors, partners, employees or agents, (ii) all investigations, claims and damages arising out of the acts and trading activities of Schwab Customers or any Legal Proceeding brought against the Company or its Affiliates by a Schwab Customer, other than as a result of a dishonest, fraudulent, grossly negligent or criminal act or omission on the part of the Company's officers, directors, employees or agents or (iii) any breach of the representations and warranties set forth in Section 5.1(b) or of any covenant made by Parent or Schwab pursuant to this Agreement. This Section 6.2 shall not limit any obligations the Company may have to Schwab under the express remedies provided in Schedule A and Schedule B. Section 6.3. Procedures Relating to Third Party Claims. An Indemnified Party shall give reasonably prompt notice to the Party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim or assessment, or the commencement of any action, suit or proceeding, by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim") and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but no failure to give such notice shall relieve the Indemnifying Party of any liability hereunder (except to the extent the Indemnifying Party has been actually prejudiced thereby). The Indemnifying Party shall have the right, exercisable by written notice (the "Indemnification Notice") to the Indemnified Party within thirty (30) days of receipt of notice from the Indemnified Party of commencement of or assertion of any Third Party Claim, to assume the defense of such Third Party Claim using counsel of its choice, and the Indemnified Party may participate in such defense at the Indemnified Party's expense, which shall include counsel of its own choice. If the Indemnifying - 25 - Party elects not to defend the Indemnified Party against such Third Party Claim, whether by failure of the Indemnifying Party to provide the Indemnification Notice or otherwise, or the Indemnified Party provides a written legal opinion to the Indemnifying Party that under applicable standards of professional responsibility a conflict will arise in the event both the Indemnified Party and the Indemnifying Party are represented by the same counsel with respect to the Third Party Claim, then the Indemnified Party, without waiving any rights against the Indemnified Party, may employ counsel of its own choice and at the expense of the Indemnifying Party. The Indemnifying Party may not settle any matter (in whole or in part) without the consent in writing of the Indemnified Party (which shall not be unreasonably withheld), unless such settlement does not involve any relief other than the payment of monetary damages, includes a complete and unconditional release of the Indemnified Party, does not admit liability on the part of or attribute fault to any Party or its Affiliates, and contains a provision requiring confidentiality with respect to the facts and circumstances of the dispute and of the existence and amount of the settlement. The Indemnified Party shall make its employees available and furnish such information regarding itself or the claim in question as the Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and Legal Proceeding resulting therefrom. Section 6.4. Survival. The provisions of this Article VI shall survive the expiration or termination of this Agreement. Section 6.5. Limitation on Recovery. The Parties acknowledge that this Article VI is modified by Section 5.2, in accordance with its terms. Section 6.6. Exclusive Remedy. This Article VI shall provide the exclusive remedy for any of the matters addressed herein or other claims arising out of this Agreement, other than for fraud and other than for the remedies of specific performance, injunctive relief or other non-monetary equitable remedies. ARTICLE VII. SECURITY Section 7.1. In General. The Company and Schwab shall each maintain and enforce safety and physical security procedures with respect to access to and maintenance of Customer Information that are in accordance with industry acceptable information security practices. Without limiting the generality of the foregoing, each of the Company and Schwab shall secure and defend its location and equipment against "hackers" and others who may seek, without authorization, to modify its systems or access the information found therein in accordance with industry acceptable information security practices, using any combination of access lists, unique user identifiers and credentials, authentication procedures, and/or other safeguards as it reasonably believes are appropriate. Section 7.2. Security Breaches. Each of the Company and Schwab shall use its commercially reasonable efforts in accordance with industry acceptable information security - 26 - practices to monitor its systems for Security Breaches. For purposes of this Section 7.2, a "Security Breach" shall mean an event that may lead to unauthorized disclosure, access, corruption, or destruction of Customer Information, including an insider accessing information inappropriately, an outsider penetrating or attempting to penetrate security controls, and a virus (or other piece of malware or destructive software). Each of the Company and Schwab shall report to the other promptly any Security Breach of its systems of which it becomes aware relating to the other Party's systems or Confidential Information and shall use its commercially reasonable efforts in accordance with industry acceptable information security practices to remedy such Security Breach in a timely manner. Section 7.3. Storage of Customer Information. Each of the Company and Schwab shall use its commercially reasonable efforts to implement and follow, a plan to store Customer Information in accordance with industry acceptable information security practices, which may include the following: (A) Properly configured firewalls; (B) Unique user identifiers and credentials; (C) Creation and review of audit trails; (D) Physical security of servers and backup media; and (E) Network encryption for any remote access. ARTICLE VIII. TERM AND TERMINATION Section 8.1. Term. Unless earlier terminated pursuant to Section 8.2, this Agreement shall expire on October 31, 2012 (the "Initial Term"); provided, however, that this Agreement shall automatically be extended for successive terms of twelve months (each, a "Renewal Term," and together with the Initial Term, the "Term"), unless either Schwab or the Company provides written notice to the other of termination at least six (6) months prior to the expiration of the Initial Term or the applicable Renewal Term to the extent such termination is in accordance with the provisions of this Agreement. Section 8.2. Termination. This Agreement may (or, in the case of Section 8.2(i) only, will) be terminated in the following circumstances: (a) Material Breach by the Company. By Schwab, in the event that the Company commits a material breach of this Agreement (other than a breach of payment obligations under this Agreement or a breach of Section 2.4), and (i) the breach is incurable or (ii) the Company fails to cure such breach within ninety (90) days of receiving a notice of default from Schwab (or such longer period as Schwab may reasonably agree if said breach is incapable of cure within such ninety (90) days) (the "Cure Period"), by giving a notice of termination - 27 - to the Company within thirty (30) days of first becoming aware of such breach (if such breach is incurable) or in the thirty (30) day period commencing at the end of the Cure Period, with termination of this Agreement to become effective upon delivery of the notice. (b) Material Breach by Schwab. By the Company, in the event that Schwab commits a material breach of this Agreement (other than a breach of payment obligations under this Agreement) and (i) the breach is incurable or (ii) Schwab fails to cure such breach within ninety (90) days of receiving a notice of default from the Company (or such longer period as the Company may reasonably agree if said breach is incapable of cure within such ninety (90) days) (the "Schwab Cure Period"), by giving a notice of termination to Schwab within thirty (30) days of first becoming aware of such breach (if such breach is incurable) or in the thirty (30) day period commencing upon of the end of the Schwab Cure Period, with termination of this Agreement to become effective upon delivery of the notice. (c) Material Breach of Payment Obligations. By either the Company or Schwab (the "Terminating Party") in the event that the other (the "Breaching Party") is in material breach of a payment obligation under this Agreement, the Terminating Party has provided written notice to the Breaching Party specifying such material breach, the Breaching Party does not in good faith dispute whether the amounts alleged to be unpaid are due and payable pursuant to this Agreement and the Breaching Party fails to cure such breach within ninety (90) days of receiving written notice of such breach from the Terminating Party, by the Terminating Party giving a notice of termination to the Breaching Party within ten (10) days of the end of such Cure Period, with termination of this Agreement to become effective upon delivery of the notice. (d) Company Insolvency. By Schwab, in the event the Company experiences an Insolvency Event, by giving notice to the Company, with termination of this Agreement to become effective upon delivery of the notice. (e) Parent or Schwab Insolvency. By the Company, in the event Parent or Schwab experiences an Insolvency Event, by giving notice to Parent and Schwab, with termination of this Agreement to become effective upon delivery of the notice. (f) Material Misconduct. By either the Company or Schwab, if the other has suffered an Adverse Reputational Event that has or would be reasonably likely to have a material adverse effect on (i) the financial condition, properties, prospects, business or results of operations of the Party seeking to effect such termination or (ii) the reputation, brand, goodwill or image of the Party seeking to effect such termination. (g) Change of Control of the Company. By Schwab, in the event that UBS disposes of more than 50% of the assets of the Order routing and execution business for Covered Orders (i) to a Person (other than an Affiliate of UBS) that is a direct competitor of Schwab (including with respect to commission structure) or (ii) to a Person (other than an Affiliate of UBS) that is not of sound financial standing and business reputation and, as a result, such disposition would have a material adverse effect on Parent and Schwab. - 28 - (h) Service Levels. By Schwab, under the circumstances described in Schedule A. (i) Payments. Automatically, in the event an Initial Liquidated Damages Payment has been made. Section 8.3. Effects of Termination on Accrued Rights. Termination of this Agreement shall be without prejudice to: (A) The rights of the Parties to any payments due under this Agreement to the date of termination; (B) Any remedies which either Party may then have arising out of or relating to this Agreement; and (C) Either Party's right to obtain performance of any obligations provided for in this Agreement which survive termination by their express terms. Section 8.4. Continuation of Routing Service. Upon termination pursuant to Section 8.2 (other than termination pursuant to Section 8.2(d) (Company Insolvency), Section 8.2(e) (Schwab Insolvency) or Section 8.2(f) (Material Misconduct)); Schwab may elect, by written notice to the Company, to have the Company provide (in which case the Company shall provide) usual and customary routing and execution services from the date of termination to a date specified in such notice (the "End Date"), which End Date shall in no event be later than six (6) months after the date of termination, upon usual and customary fees prevailing in the industry. Section 8.5. Survival. The following provisions shall survive termination of this Agreement: Article IV (Confidential Information), Section 5.3 (Disclaimer of Warranties), Article VI (Indemnification), Section 8.3 (Effects of Termination on Accrued Rights), Section 8.4 (Continuation of Routing Service), this Section 8.5 (Survival) and Article IX (Miscellaneous). All other provisions of this Agreement shall terminate effective upon the notice of termination. ARTICLE IX. MISCELLANEOUS Section 9.1. Use of Names/Marks. No Party shall acquire the right to use, and shall not use, without the other Party's prior written consent, the names, trade names, trademarks, service marks, artwork, designs, or copyrighted materials, of the other Party, its related or subsidiary companies, parent, employees, directors, shareholders, assigns, successors or licensees: (a) in any advertising, publicity, press release, client list, presentation or promotion; (b) to express or to imply any endorsement of the other Party or the other Party's services; or (c) other than as expressly permitted in accordance with this Agreement. Further, no Party shall - 29 - use, without the other Parties' prior written consent, the terms or existence of this Agreement: (a) in any advertising, publicity, press release, client list, presentation or promotion; (b) to express or to imply any endorsement of any other Party or such other Party's services; or (c) other than as expressly permitted in accordance with this Agreement. Section 9.2. Entire Agreement. This Agreement and the Schedules hereto and the Purchase Agreement contain the entire agreement among the Parties with respect to the transactions contemplated by this Agreement and supersede all prior agreements or understandings among the Parties. Section 9.3. Descriptive Headings; Certain Interpretations. (a) Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Agreement. (b) Except as otherwise expressly provided in this Agreement, the following rules of interpretation apply to this Agreement: (i) "or" and "any" are not exclusive and "include" and "including" are not limiting; (ii) a reference to a law includes any amendment or modification to such law and any rules or regulations issued thereunder and (iii) a reference to a person or entity includes its permitted successors and assigns. (c) Unless the context of this Agreement otherwise requires, (i) words of one gender include the other gender, (ii) words using the singular or plural number also include the plural or singular number, respectively, (iii) the terms "hereof," "herein," "hereby," and derivative or similar words refer to this entire Agreement and (iv) the terms "Article" and "Section" refer to the specified Article and Section of this Agreement. Whenever this Agreement refers to a number of days, unless otherwise specified, such number shall refer to calendar days. References to this "Agreement" shall mean this Agreement and any annexes, exhibits, schedules or attachments hereto. References to the "date of the Purchase Agreement" shall mean August 31, 2004. (d) The Parties agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore no rule of construction providing that ambiguities in an agreement or other document shall be construed against the party drafting such agreement or document shall apply to this Agreement. Section 9.4. Notices. All notices, requests and other communications to any party hereunder shall be in writing and sufficient if delivered personally, sent by telecopy (with telephone confirmation of receipt or followed by overnight delivery service) or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to UBS, SCM or the Company: UBS Securities LLC 677 Washington Boulevard Stamford, CT 06901 Attention: Nick Ogurtsov Telecopy: (203) 719-0287 - 30 - with copies to: UBS Securities LLC 677 Washington Boulevard Stamford, CT 06901 Attention: Legal Department - Equities Section Telecopy: (203) 719-5627 and Sullivan & Cromwell LLP 125 Broad Street New York, NY 10004-2498 Attention: Alexandra D. Korry Frederick Wertheim Telecopy: (212) 558-3588 If to Schwab or Parent: The Charles Schwab Corporation 440 S. LaSalle, Suite 1200 Chicago, IL 60605 Attention: Tony McCormick Telecopy: (312) 385-6820 with copies to: The Charles Schwab Corporation 101 Montgomery Street San Francisco, CA 94104 Attention: Lorraine McDonough Telecopy: (415) 636-9757 The Charles Schwab Corporation 101 Montgomery Street San Francisco, CA 94104 Attention: Mark Tellini Telecopy: (415) 667-3596 Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation Three Embarcadero, 7th Floor San Francisco, CA 94111-5910 Attention: Lawrence B. Rabkin, Esq. Telecopy: (415) 217-5910 or to such other address or telecopy number as the Party to whom notice is to be given may have furnished to the other Parties in writing in accordance herewith. Each such notice, request or communication shall be effective when received or, if given by mail, when delivered at the address specified in this Section 9.4. - 31 - Section 9.5. Counterparts; Fax Signatures. This Agreement may be executed by telecopy and in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. Any signature page delivered by a telecopy machine shall be binding to the same extent as an original signature page, with regard to this Agreement or any amendment hereto. A Party who delivers such a signature page agrees to later deliver an original counterpart to the other Party upon request. Section 9.6. Benefits of Agreement. Subject to Section 9.8, all of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the Parties hereto and their permitted successors and assigns. This Agreement is for the sole benefit of the Parties hereto and not for the benefit of any third party. Section 9.7. Amendments and Waivers. No modification, amendment or waiver of any provision of, or consent required by, this Agreement, nor any consent to any departure herefrom, shall be effective unless it is in writing and signed by UBS and Schwab. Such modification, amendment, waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 9.8. Assignment. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by the Parties hereto without the prior written consent of the other Parties; provided, however, that either the Company or Schwab may assign its rights hereunder to an Affiliate, but no such assignment shall relieve the assigning party of its obligations or liabilities hereunder; and provided, further, that SCM may assign all or a portion of its rights and obligations hereunder to UBS at any time. Any instrument purporting to make an assignment in violation of this Section 9.8 shall be void ab initio. Section 9.9. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS TO BE ENTERED INTO AND ENTIRELY PERFORMED WITHIN SUCH STATE. Section 9.10. Dispute Resolution. (a) The Parties shall use commercially reasonable efforts to resolve amicably all disputes, claims or controversies relating to, arising out of, or in connection with this Agreement, including any question regarding its formation, existence, validity, enforceability, performance, interpretation, breach, or termination ("Disputes"). In order to facilitate the resolution of Disputes, each of Schwab and the Company shall establish a committee to consider and resolve any Dispute (the "Dispute Committee") arising under this Agreement. The Dispute Committee shall be comprised of two (2) senior executives of the Company and two (2) senior executives of Schwab. If either the Company or Schwab gives written notice to the other that a Dispute has arisen and the Dispute Committee is unable within fifteen (15) days of such written notice to resolve the Dispute, then either Party may submit the Dispute to non-binding mediation in accordance with Section 9.10(b). All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. - 32 - (b) If the Parties are unable to resolve the Dispute within fifteen (15) days of the disputing Party's notice in accordance with Section 9.10(a), then either Party may submit the Dispute to non-binding mediation under the then-current Center for Public Resources ("CPR") Mediation Procedure. Unless otherwise agreed, the Parties will select a mediator from the CPR Panels of Distinguished Neutrals. (c) Any Dispute which remains unresolved forty-five (45) days after appointment of a mediator (or seventy-five (75) days after the notice of the Dispute given pursuant to Section 9.10, whichever occurs first) shall be finally resolved by (i) if arbitration is required to be undertaken by the Parties hereto by an applicable rule of an SRO to which each of the Company and Schwab is a member, by binding arbitration, which shall be conducted before and under the rules of the NYSE then in effect, unless some other rules are chosen by mutual consent of the Parties or applicable Legal Requirements require arbitration to be conducted in accordance with the rules of another exchange or SRO or (ii) in the event arbitration is not so required, in accordance with Sections 11.9, 11.10 and 11.11 of the Purchase Agreement. Any arbitration shall be conducted before three arbitrators, all of whom shall be from the securities industry, and the decision of the arbitrators shall be binding and non-appealable, and the prevailing Party may enforce such decision in any court of competent jurisdiction. If such an arbitration is conducted, the Parties shall cooperate with each other in causing the arbitration to be held in as efficient and expeditious a manner as practicable and, in this connection, use commercially reasonable efforts to furnish such documents and make available such persons within their control as the arbitrators may request. All proceedings and decisions of any arbitrators shall be maintained in confidence, to the extent legally permissible, and shall not be made public by any Party or the arbitrators without the prior written consent of all Parties to the arbitration, except as may be required by applicable Legal Requirements. Notwithstanding anything herein to the contrary, any of the Parties may seek a temporary restraining order or a preliminary injunction from any court of competent jurisdiction in order to prevent immediate and irreparable injury, loss or damage. Section 9.11. Registration and Filing of this Agreement. To the extent, if any, that any Party concludes in good faith that it is required by applicable Legal Requirements to file or register this Agreement or a notification thereof with any governmental or self-regulatory authority, including the U.S. Securities and Exchange Commission, such Party shall inform the other Parties thereof and the Parties shall cooperate with one another each at its own expense in such filing or notification and shall execute all documents reasonably required in connection therewith. In such filing or registration, the Parties shall request confidential treatment of sensitive provisions of this Agreement, to the extent permitted by applicable Legal Requirements. The Parties shall promptly inform one another as to the activities or inquiries of any such governmental authority relating to this Agreement, and shall cooperate to respond to any request for further information therefrom on a timely basis. Section 9.12. Force Majeure. Without limiting any right that any Party may have under Section 8.2, the occurrence of an event which materially interferes with the ability of a Party to perform its obligations or duties hereunder which is not within the reasonable control of the Party affected and not due to malfeasance ("Force Majeure"), including, but not limited to, an injunction, order or other action by a governmental authority, fire, accident, labor difficulty, strike, riot, civil commotion, act of God or change in law, shall not excuse such Party from the - 33 - performance of its obligations or duties under this Agreement, but shall merely suspend such performance during the continuation of Force Majeure. The Party prevented from performing its obligations or duties because of Force Majeure shall promptly notify the other Parties hereto (the "Other Parties") of the occurrence and particulars of such Force Majeure and shall provide the Other Parties, from time to time, with its best estimate of the duration of such Force Majeure and with notice of the termination thereof. The Party so affected shall use reasonable efforts to avoid or remove such causes of nonperformance. Upon termination of Force Majeure, the performance of any suspended obligation or duty shall promptly recommence. If a Force Majeure event occurs that materially interferes with the Company's ability to route Orders for execution, Schwab may elect to route any Covered Orders that would otherwise be required to be routed to the Company pursuant to Section 2.1 to a Broker-Dealer or execution venue other than the Company during the term of the Force Majeure event. Section 9.13. Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. No waiver by any Party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by law or otherwise afforded, will be cumulative and not alternative. Section 9.14. Relationship of the Parties. Nothing in this Agreement shall constitute the Company as an employee, or general representative of Schwab. This Agreement shall not constitute any Party as the legal representative of any other Party, nor shall any Party have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against, or in the name of or on behalf of, any other Party. This Agreement shall not constitute, create or in any way be interpreted as a joint venture, partnership or formal business organization of any kind. Section 9.15. Bona Fide Customers. Parent and Schwab agree that, without the Company's written consent, they shall not, and shall cause their Affiliates not to, sell or otherwise make available the routing services for Covered Orders contemplated by this Agreement to third parties except to third parties that are bona fide brokerage customers of Schwab or its Affiliates. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK - 34 - In Witness Whereof, each of the Parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. Charles Schwab & Co., Inc. By: /s/ Charles Goldman --------------------------- Name: Charles Goldman Title: EVP UBS Securites LLC By: /s/ Daniel Coleman ---------------------------- Name: Daniel Coleman Title: Managing Director By: /s/ David Kelly ---------------------------- Name: David Kelly Title: Executive Director Legal & External Affairs Schwab Capital Markets, L.P. By: /s/ Lawrence Leibowitz ---------------------------- Name: Lawrence Leibowitz Title: Senior Managing Director The Charles Schwab Corporation By: /s/ Christopher V. Dodds ---------------------------- Name: Christopher V. Dodds Title: EVP Schedule A Execution Quality Service Levels (**) - Ten (10) pages have been omitted. A-1 Schedule B Operations and Technology Service Levels (**) - Seven (7) pages have been omitted. B-1 Schedule C Fee Schedule Related to Paid Orders (**) - One (1) page has been omitted. C-1 Schedule D Execution Guaranty (**) - Fourteen (14) pages have been omitted. D-1 Schedule E Rates (**) - One (1) page has been omitted. E-1 Schedule F SCM Execution Quality Service Levels for Exchange-listed Equity Securities (**) - Two (2) pages have been omitted. F-1 Schedule G Alternate Rate (**) - One (1) page has been omitted. G-1 Schedule H SCM Order Detail (**) - Fourteen (14) pages have been omitted. H-1 EX-10 5 exh10_263.txt EXHIBIT 10.263 Exhibit 10.263 SEPARATION AGREEMENT, GENERAL RELEASE AND WAIVER OF CLAIMS This Separation Agreement, General Release and Waiver of Claims ("Agreement") is entered into by and between David S. Pottruck ("Mr. Pottruck"), on the one hand, and The Charles Schwab Corporation and Charles Schwab & Co., Inc., their respective affiliates and the predecessors, successors and assigns of each of the foregoing (collectively "Schwab" or the "Company"), on the other hand, dated as of August 2, 2004 (the "Execution Date") and effective upon the expiration of the Revocation Period described in Paragraph 27(g), below ("Effective Date"). Together, Mr. Pottruck and the Company shall be referred to herein as "the Parties." RECITALS WHEREAS, Mr. Pottruck was requested by the Board of Directors of The Charles Schwab Corporation to step down from his position as Chief Executive Officer, whereupon he did so effective July 20, 2004. WHEREAS, the Parties now desire to definitively resolve, fully and finally, all differences, disputes and claims Mr. Pottruck might have against the Company and anyone connected with it through and including the Execution Date, including, but not limited to, those arising out of or relating to Mr. Pottruck's employment relationship with Schwab and the termination thereof. NOW, THEREFORE, in consideration of the mutual covenants set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company and Mr. Pottruck hereby agree as follows: AGREEMENT 1. Resignation of Positions. Mr. Pottruck is deemed to have resigned as a Schwab Officer, from any and all Schwab directorships he holds, and from the Executive Committee effective as of July 20, 2004. Mr. Pottruck acknowledges and agrees that with the exception of his accrued vacation, he has received all wages due to him for services rendered as a result of his employment as Chief Executive Officer with, and services as an officer and director of, the Company up to and including July 20, 2004. 2. Consideration. Subject to and upon satisfaction by Mr. Pottruck of the terms and conditions set forth in this Agreement, Schwab agrees to provide Mr. Pottruck the following consideration: (i) Schwab will continue to employ Mr. Pottruck, which it is not otherwise obligated to do, subject to the terms and conditions of this Agreement. Mr. Pottruck's employment with Schwab will end on the earlier of: 1) January 31, 2007; 2) the date Mr. Pottruck becomes employed by another employer, becomes an independent contractor, consultant, or a sole proprietor of a business, or acts as an officer, director, or partner in another public or privately held company (except as otherwise expressly provided in Paragraphs 8 and 9, below, with respect to approved outside business activity consistent with continued Schwab employment); or 3) on a date resulting from a violation by Mr. Pottruck of his obligations under Paragraphs 8 or 9 below. The date Mr. Pottruck's employment ends will be his Termination Date. Mr. Pottruck shall perform such duties as are reasonably assigned to him by Charles Schwab and shall report solely to Mr. Schwab regarding those duties. Except as specifically provided herein to the contrary, Mr. Pottruck agrees to comply with all Company policies (including but not limited to human resources, information security, compliance, the Code of Business Conduct, and all Compliance policies on outside business activities), up through and including his Termination Date; (ii) Schwab will pay Mr. Pottruck a monthly salary of eighty-three thousand three hundred thirty-three dollars and thirty-three cents ($83,333.33), less usual and customary taxes, withholding, and authorized deductions, in accordance with its usual payroll practices for the period commencing on August 1, 2004 and ending on September 30, 2004. Commencing on October 1, 2004 and ending on the Termination Date, Schwab will pay Mr. Pottruck a monthly salary of one-hundred thirty-five thousand seven hundred fourteen dollars and twenty-eight cents ($135,714.28), less usual and customary taxes, withholding and authorized deductions, in accordance with its usual payroll practices; (iii)On and following the Effective Date, Mr. Pottruck will continue to be eligible for all regular employee insured benefits (including life insurance, the executive medical plan, vision, and dental and excluding Short and Long Term Disability, except as otherwise required by law) on the same terms and conditions as the other plan participants in accordance with the terms of each plan through the Termination Date except to the extent the Termination Date is beyond twenty-four (24) months, the continuation of life insurance will cease after twenty-four (24) months; (iv) Schwab will pay Mr. Pottruck a lump sum payment of six million two hundred thousand dollars ($6,200,000.00), payable as soon as practicable after the Effective Date, less usual and customary taxes, withholding, and authorized deductions; (v) Schwab will allow Mr. Pottruck to continue to vest in the 365,498 Performance Shares awarded by the Performance Shares Award Agreement dated March 14, 2003 in accordance with the terms of the applicable plan documents and award agreement; provided that, subject to Paragraph 8, Schwab will cause all such Performance Shares to be fully vested without restriction as of Mr. Pottruck's Termination Date, and delivered to him as soon as practicable after the Termination Date and after Mr. Pottruck has made arrangements satisfactory to Schwab for the - 2 - satisfaction of any withholding tax obligations that arise by reason of the vesting of such Performance Shares; (vi) Schwab will allow Mr. Pottruck to continue to vest in (a) 1,405,839 shares of Schwab Common Stock ("Schwab Stock") under the Nonqualified Stock Option Agreement dated May 9, 2003 and (b) 11,261 shares of Schwab Stock under the Incentive Stock Option Agreement dated May 9, 2003 in accordance with the terms and conditions of the applicable plan documents and option agreements; provided that, subject to Paragraph 8, Schwab will cause all such stock options to be fully vested and exercisable as of Mr. Pottruck's Termination Date; (vii)Schwab will allow Mr. Pottruck to continue to vest in 1,500,000 units awarded by the LTIP Award Agreement granted as of January 1, 2003 in accordance with the terms of the applicable plan document and award agreement, subject to Paragraph 8; and (viii)Schwab will provide appropriate office space that is agreeable to both parties provided, however, that if such space is located in a current Schwab location, Mr. Pottruck will be provided the use of the space for up to twenty-eight (28) months from the date of occupancy or until his Termination Date, whichever is earlier but if such space is not located in a current Schwab location and is leased from an outside source, Mr. Pottruck will have the use of the space for up to twelve (12) months from the date of occupancy or until his Termination date, whichever is earlier. Schwab will also provide one senior-level secretarial assistant and Executive Technology Group (ETG) support for twelve (12) months or until the Termination Date, whichever is earlier. 3. No Other Employee Benefits. Mr. Pottruck is not eligible for any other benefits or payments not specifically provided for in this Agreement. Upon reaching the Termination Date, in accordance with federal and state regulations, Mr. Pottruck will be offered the opportunity to continue receiving certain insured group benefit coverage, such as medical benefits, for a period of time not to exceed eighteen (18) additional months, provided Mr. Pottruck pays the appropriate premiums for the coverage and returns the necessary paperwork. Mr. Pottruck will not be eligible to accrue vacation or floating holidays after July 20, 2004. Schwab will pay Mr. Pottruck all accrued but unused vacation and floating holidays accrued through July 20, 2004 on the next regularly scheduled payday following the Effective Date. 4. Waiver of Benefits under The Charles Schwab Severance Pay Plan. Mr. Pottruck acknowledges and agrees that the consideration described in Paragraph 2, above, is in lieu of and a substitute for any severance benefits he may have been eligible to receive under The Charles Schwab Corporation's Severance Pay Plan or under any other severance or termination pay or benefits for which he may be eligible from the Company or any affiliates or subsidiaries. Mr. Pottruck expressly agrees that he waives - 3 - any such rights or benefits in exchange for the rights and benefits provided under this Agreement. 5. Retirement Savings and Investment Plan. Mr. Pottruck's active participation in The SchwabPlan Retirement Savings & Investment Plan shall cease as of September 30, 2004. Mr. Pottruck will not receive matching contributions or any discretionary profit sharing for 2004. Mr. Pottruck's vested interest in Company contributions (other than matching contributions, which are automatically fully vested) will be determined based on his service through the Termination Date. 6. The Charles Schwab Corporation Stock Incentive Plans. Notwithstanding anything to the contrary in this Agreement, Mr. Pottruck agrees and acknowledges that (i) the nonqualified stock option agreement dated May 11, 1998 for 3,111,093 shares of Schwab Stock with an exercise price of $7.708 per share is hereby amended to provide that the options under such agreement will expire and will be exercisable no later than the date that is two (2) years after the Effective Date; and (ii) the incentive stock option agreement dated May 11, 1998 for 38,907 shares of Schwab Stock with an exercise price of $7.708 is hereby amended to provide that the options under such agreement will expire and will be exercisable no later than the date that is three (3) months after the Effective Date. Under the provisions of The Charles Schwab Corporation Stock Incentive Plans, Mr. Pottruck retains the right to exercise vested options for a specific period of time after his Termination Date. Except as provided in Paragraph 2(vi), any stock options that are not vested as of his Termination Date or as a result of his Termination Date are immediately canceled. (For clarity, as an example, this means that if a stock option plan provides for accelerated vesting upon an employee's termination by virtue of being age fifty (50) and having at least seven (7) years of service with the Company, then such a provision shall not be overridden by this Agreement, except as provided in Paragraph 8). The applicable Stock Option Agreement(s) and Plan documents govern the vesting and exercising of stock options. Except as provided in Paragraph 2(v), any performance shares that are not vested as of Mr. Pottruck's Termination Date or as a result of his Termination Date are immediately forfeited. The LTIP Award Agreement and Plan document govern the vesting of LTIP units. Any LTIP units that are not vested as of Mr. Pottruck's Termination Date or as a result of his Termination Date are immediately forfeited. 7. Tax Treatment. Mr. Pottruck understands and agrees that Schwab is providing no tax or legal advice, and makes no representations regarding tax obligations or consequences, if any, related to any part of this Agreement. Mr. Pottruck further agrees that he will be responsible for his tax obligations or consequences that may arise from this Agreement (including without limitation the accelerated vesting of performance shares under Section 2), and he shall not seek any indemnification from Schwab in this regard. Mr. Pottruck further agrees to indemnify and hold Schwab harmless from any claims, demands, deficiencies, levies, assessments, executions, judgments, penalties, taxes, attorneys' fees or recoveries by any governmental entity against Schwab for any failure by Mr. Pottruck to pay his taxes due and owing, if any, as a result of any payments under this Agreement. - 4 - 8. Early Termination Date. Mr. Pottruck understands and agrees that, except as permitted under Paragraph 9, if he accepts a position as an employee, acts as an independent contractor, consultant or sole proprietor, or acts as an officer, director, or partner in another public or privately held company at any time prior to January 31, 2007, he will notify Carrie Dwyer, EVP Corporate Oversight (or her designee), at (415) 636-5488 immediately. If Mr. Pottruck accepts any such position or otherwise begins to act in any such capacity with a company or entity that is not a Competitor Business ("Competitor Business" is defined for purposes of this Agreement on Exhibit A to this Agreement) then, except as otherwise provided in Paragraph 9, below, Mr. Pottruck's Termination Date will be deemed to be the next business day following his acceptance of and commencement of service in such position and he will receive a lump sum payment for the unpaid portion of the remainder of any payments due under Paragraph 2 (ii) and (iv), less usual and customary taxes, withholding and authorized deduction. (For avoidance of doubt, Mr. Pottruck will not be eligible for any further continued benefits pursuant to Paragraph 2(iii) or any further continued vesting pursuant to Paragraph 6 as of the new Termination Date, except as may be provided in the applicable plan or agreement, and resulting from the Termination Date.) The mere formation of a business entity in which Mr. Pottruck is a sole proprietor, member, shareholder, or employee will not, in and of itself, accelerate the Termination Date; however, Mr. Pottruck remains subject to the notification provisions of this Paragraph 8 and the provisions of Paragraph 9 with respect to any such business entity. If Mr. Pottruck accepts any such position or otherwise begins to act in any capacity with a Competitor Business at any time prior to January 31, 2007 without the written authorization of Carrie Dwyer (or her designee), his Termination Date will be deemed to be the next business day following his acceptance of such position, all remaining payments, benefits and continued vesting of performance shares and stock options under this Agreement shall cease immediately and all performance shares described in Paragraph 2(v), stock options described in Paragraph 2(vi) and LTIP units described in Paragraph 2(vii) that have not vested as of his Termination Date will be forfeited and cancelled as if Mr. Pottruck had been terminated for cause under the terms of the applicable performance share and stock option agreements. (For avoidance of doubt, Mr. Pottruck will not receive any payments for the unpaid portion of the remainder of the payments under paragraph 2(ii) or (iv), his eligibility for any further benefits and vesting will cease as of the new Termination Date, any unvested performance shares, stock options, and LTIP units will be immediately canceled, and Mr. Pottruck shall not be entitled to any additional vesting as set forth in any retirement or any other provision under the applicable award agreements.) If Mr. Pottruck undertakes any activities in violation of this Paragraph 8, Paragraph 9, or this Agreement, his Termination Date will be accelerated immediately and all payments and benefits from the Company to Mr. Pottruck under this Agreement shall cease as of the new Termination Date and all such performance shares, stock options, and LTIP units that have not vested as of his Termination Date will be forfeited and cancelled as if Mr. Pottruck had been terminated for cause under the terms of the applicable agreements. 9. Outside Business Activity. Notwithstanding the preceding Paragraph 8, Mr. Pottruck acknowledges while he is employed by the Company pursuant to the terms of this Agreement, he must continue to seek pre-approval from the Company for any - 5 - outside business activities he may wish to undertake with other groups, organizations, companies, associations, etc., (non-profit or otherwise), in accordance with the Company's Compliance policies, regardless of whether he would receive compensation for the activity. For any type of proposed outside business activity, Mr. Pottruck agrees to inform Carrie Dwyer, EVP Corporate Oversight (or her designee), in advance, of the scope of the business activity, the time commitment, and his anticipated compensation, if any, for that activity. Outside business activity for purposes of this Paragraph 9 includes participation as a member of the Board of Directors of, or services as a consultant to, an outside organization and speaking engagements for any outside organization. Mr. Pottruck acknowledges and agrees that during the time he is employed by the Company pursuant to the terms of this Agreement, he shall not serve as a member of the Board of Directors of, or provide any services as a consultant to, any financial services firms that currently compete, or have announced their intention to compete, directly and materially with the Company. Schwab agrees that it will not unreasonably withhold its approval for Mr. Pottruck to participate on the Board of Directors of, provide services as a consultant to, or give speeches to non-profits and non-financial services firms, or financial services firms that do not currently directly compete with the Company. 10. No Filings. Mr. Pottruck represents that as of the Execution Date, he has not filed any action, claim, charge, or complaint against Schwab or any other Releasee identified in Paragraph 12 below, with any local, state, or federal agency, self-regulatory organization ("SRO"), or court and that he will not make such a filing at any time hereafter based upon any events or omissions occurring prior to and up to the Execution Date. In the event that any agency or court assumes jurisdiction of any lawsuit, claim, charge or complaint, or purports to bring any legal or regulatory proceedings against Schwab or any other Releasee identified in Paragraph 12 below on Mr. Pottruck's behalf, he promptly will request that the agency, SRO, or court withdraw from or dismiss the lawsuit, claim, charge, or complaint with prejudice. 11. Covenant Not to Sue. Mr. Pottruck covenants that he will not file, participate in, or instigate the filing of any lawsuits, complaints or charges by himself or by any other person or party in any state or federal court or any proceedings before any local, state, or federal agency, or SRO, except as required by law, claiming that Schwab or any other Releasee identified in Paragraph 12 below has violated any law or obligation based upon events or omissions occurring prior to and including the effective date of this Agreement. Notwithstanding the provisions of this Paragraph, nothing in this Agreement shall be construed to preclude Mr. Pottruck from timely filing a complaint with the U.S. Equal Employment Opportunities Commission ("EEOC") or assisting any investigation conducted by the EEOC to the extent that such rights are not subject to waiver. In the event Mr. Pottruck breaches the covenant contained in this Paragraph 11, Mr. Pottruck agrees that he will indemnify Schwab and any other Releasee identified in Paragraph 12 below for all damages, fees, costs and expenses, including legal fees, incurred by Schwab or any other Releasee identified in Paragraph 12 below, in defending, participating in, or investigating any matter or proceeding covered by this Paragraph 11. - 6 - 12. Complete Release by Mr. Pottruck. Mr. Pottruck - for himself and for his heirs, representatives, attorneys, executors, administrators, successors, and assigns - releases Schwab, and all of its affiliates, subsidiaries, divisions, parent corporations, and stockholders, officers, directors, partners, servants, agents, employees, representatives, attorneys, employee welfare and retirement plans and the respective plan administrators and fiduciaries, past, present, and future, all persons acting under, by, through, or in concert with any of them, and each of them (all of whom are hereinafter referred to as "Releasees"), from any and all actions, causes of action, grievances, obligations, costs, expenses, damages, losses, claims, liabilities, suits, debts, demands, and benefits (including attorneys' fees and costs actually incurred), of whatever character, in law or in equity, known or unknown, suspected or unsuspected, matured or unmatured, of any kind or nature whatsoever, based on any act, omission, event, occurrence, or nonoccurrence from the beginning of time up to and including the Execution Date of this Agreement, including but not limited to any claims or causes of action arising out of or in any way relating to Mr. Pottruck's employment relationship with Schwab or any other Releasee. This release of claims includes, but is not limited to, claims for breach of any implied or express contract or covenant; claims for promissory estoppel; claims of entitlement to any pay (other than the payments promised in Paragraph 2); claims of wrongful denial of insurance and employee benefits, or any claims for wrongful termination, public policy violations, defamation, invasion of privacy, fraud, misrepresentation, unfair business practices, emotional distress or other common law or tort matters; claims of harassment, retaliation or discrimination under federal, state, or local law; claims based on any federal, state or other governmental statute, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act, as amended, the Age Discrimination in Employment Act, the Older Worker Benefit Protection Act, the Labor Management Relations Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the California Fair Employment and Housing Act, the California Labor Code, the California Government Code, and the Employee Retirement Income Security Act. It is expressly understood by Mr. Pottruck that among the various rights and claims being waived by Mr. Pottruck in this Agreement are those for age discrimination arising under the Age Discrimination in Employment Act of 1967 (29 U.S.C. sec. 621, et seq.), as amended. 13. Release of Unknown Claims. In order to make this release effective as to unknown, unsuspected or concealed claims, Mr. Pottruck expressly waives the benefits of Section 1542 of the California Civil Code, which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. In making this waiver, Mr. Pottruck acknowledges that he may hereafter discover facts in addition to or different from those which he now believes to be true with respect to the subject matter released herein, but agrees that he has taken that possibility - 7 - into account in reaching this Agreement and that, notwithstanding the discovery or existence of any such additional or different facts, Mr. Pottruck fully, finally, and forever settles and releases any and all such claims. 14. Successors. This Agreement shall be binding upon the Parties, and their heirs, representatives, executors, administrators, successors, insurers, and assigns, and shall inure to the administrators, predecessors, successors, and assignees of each of the Parties. In the event of Mr. Pottruck's death, the benefits payable to Mr. Pottruck under this Agreement shall inure to the benefit of his heirs, successors, and assigns. 15. Indemnification. Nothing in this Agreement (including the release contained herein) shall be construed to limit Mr. Pottruck's right to indemnification or contribution pursuant to Delaware or California law or the Company's bylaws arising from actions actually or allegedly taken in the scope of his employment with the Company. 16. Release by Schwab. In consideration of this Agreement, Schwab, its former and current officers, directors, employees, representatives, attorney, subsidiaries, insurers, predecessor, affiliates, and successors hereby release and discharge Mr. Pottruck from any and all claims, liabilities, or obligations of every kind and nature, whether now known or unknown, suspected or unsuspected, arising out of or in connection with or relating to Mr. Pottruck's employment with Schwab, provided, however, that Schwab, its former and current officers, directors, employees, representatives, attorneys, subsidiaries, insurers, predecessor, affiliates, and successors do not release Mr. Pottruck from any misconduct other than ordinary negligence in the performance of his duties at Schwab, nor any loan, mortgage, or other personal obligation incurred with Schwab or any affiliated institution. 17. No Attorney's Fees and Costs. The Parties will bear their own respective costs and fees, including attorney's fees incurred in connection with the negotiation and execution of this Agreement, except that Mr. Pottruck will be reimbursed for his attorneys' fees reasonably incurred in the negotiation and execution of this Agreement in an amount not to exceed $75,000, subject to review and approval by Carrie Dwyer (or her designee) of all appropriately documented invoices for the claimed attorneys' fees. 18. Non-Disparagement and Cooperation. 18.1 Non-Disparagement. Mr. Pottruck shall not make any oral or written statement which (a) is disparaging to the Company, or to the past or present directors, officers or employees of the Company, or any Releasee as defined above, or (b) is calculated to, or which foreseeably will, disrupt, disparage, damage, impair or otherwise interfere with the business or reputation of the Company, its past or present directors, officers or employees, or any Releasee as defined above, or (c) will disrupt, impair or otherwise interfere with the - 8 - Company's relationships with its employees, customers, agents, representatives or vendors (individually and collectively "disparaging statements"). Mr. Pottruck also agrees that he will direct his immediate family members and representatives not to make any disparaging statements. Mr. Pottruck further agrees to refrain from acting as a source (attributable or otherwise) or engaging in any formal or informal dialogue with the press or media regarding his experiences with or at Schwab that in any way injure or are detrimental to Schwab, or its past or present directors, officers or employees of the Company, or any Releasee as defined above, or regarding any information Mr. Pottruck may have acquired (first hand or otherwise) concerning Schwab operations, marketing or advertising strategies or plans, financial performance, recruitment or retention strategies, or internal policies and procedures or any other Schwab information (including but not limited to Schwab services, products, or offerings referenced in this Agreement). Nothing herein shall preclude Mr. Pottruck from cooperating with a governmental or SRO, in an investigation initiated by such agency, or testifying in a court of law if compelled by legal process to testify as a witness in a lawsuit in which Schwab or any Releasee is a defendant. 18.2 Cooperation. Mr. Pottruck agrees not to encourage or assist in any litigation against Schwab or any Releasee or provide testimony in any matter in which Schwab or any Releasee has an interest unless he is required by law to do so. Mr. Pottruck agrees to cooperate fully with any Releasee, and any corporate affiliate of any Releasee, specifically including any attorney retained by any of the Releasees, in connection with any pending or future litigation or investigatory matter (including but not limited to any Schwab investigation into Compliance or other policy violations) in which and to the extent Schwab reasonably deems his cooperation to be necessary. Mr. Pottruck acknowledges and agrees that such cooperation may include, but shall in no way be limited to, Mr. Pottruck being available for an interview with any of the Releasees, or any attorney or agent retained by any of the Releasees, providing to any of the Releasees any documents in his possession or under his control relating to the litigation or investigatory matter, and providing truthful sworn statements in connection with the litigation or investigatory matter. Mr. Pottruck agrees to appear and give truthful testimony as a witness in any judicial, administrative, quasi-governmental, or investigatory proceeding as requested by Schwab. He also agrees, upon request by Schwab, to provide information to Schwab that he learned during the course of his employment relationship with Schwab. If Mr. Pottruck is served with process concerning any matter in which Schwab or any Releasee has an interest, he agrees to immediately notify Schwab. Schwab will reimburse Mr. Pottruck for reasonable travel expenses in accordance with the travel policies then in effect. This reimbursement is for Mr. Pottruck's convenience. Schwab confirms its expectation that Mr. Pottruck will provide truthful information in accordance with this paragraph. 18.3 Non-Disparagement by Schwab. The current members of Schwab's Board of Directors and each current member of Schwab's Executive Committee will not make any oral or written statement to the press - 9 - or media or to any persons not employed by the Company that is disparaging to Mr. Pottruck. Nothing herein shall preclude each current member of the Board of Directors and each current Executive Committee member from making disclosures as are necessary to Schwab's insurance carrier or cooperating with a governmental or SRO, in an investigation initiated by such agency, or testifying in a court of law if compelled by legal process to testify as a witness in a lawsuit. 19. Confidential Information. Mr. Pottruck acknowledges that by reason of his employment as Chief Executive Officer with the Company (and, before attaining that position, as a senior executive with the Company), he had access to and did receive knowledge of Schwab's trade secrets and proprietary and confidential information ("Confidential Information"). Mr. Pottruck acknowledges and affirms his obligations to maintain the confidentiality of Confidential Information and not to use it or to disclose it to any third party in the future. Mr. Pottruck understands and agrees that the term "Confidential Information" includes, but is not limited to, customer identity, customer account, personal or business information, customer lists, lead information, employee information (employment, personal, financial or account information), employee lists, know-how, computer hardware or software configuration or design, research and development, product designs, plans and/or methods (whether currently in use or in development), source codes, future developments, costs, profits, account valuation, pricing and pricing structure, technical, marketing, business, financial, or other information that constitute trade secret information, or information not available to competitors of the Company, the use or disclosure of which might reasonably be construed to be contrary to the interests of the Company. Mr. Pottruck also agrees that Confidential Information is a valuable and unique asset that Schwab actively protects and that unauthorized use and/or disclosure of Confidential Information could cause immediate and irreparable harm to Schwab. 20. Non-Solicitation of Employees. Mr. Pottruck agrees that any attempt on his part to induce any employee, consultant or contractor to leave his/her assignment or employment with any Schwab entity, or any other effort by Mr. Pottruck to interfere in those relationships will be harmful and damaging to the Schwab entity. Therefore Mr. Pottruck will not, at any time up to and including January 31, 2007, in any way (directly or indirectly), on his own behalf or on behalf of any other person or entity solicit or attempt to solicit or induce (which shall include, but is not limited to, contact or communication in any manner for the purpose of soliciting or inducing) any employee, vendor or independent contractor of, or consultant to a Schwab entity to leave his or her employment or assignment. Nothing in this paragraph is intended to prevent Mr. Pottruck from discussing possible employment or assignments with any employee, consultant, or independent contractor who contacts him directly of his or her own volition without Mr. Pottruck's solicitation or attempted solicitation of him or her. 21. Non-Solicitation of Customers. Mr. Pottruck acknowledges that his position as Chief Executive Officer with the Company (and, before attaining that position, as a senior executive with the Company) has been special, unique, and intellectual in character, has placed him in a position of particular confidence and trust - 10 - with Schwab customers, and has given him unique access to confidential and proprietary information concerning, among other things, Schwab's business and customers. Accordingly, Mr. Pottruck will not, at any time up to and including January 31, 2007, directly or indirectly, either for himself or for any other person or entity, (i) make known to any person, firm, or corporation the names or addresses of or any information pertaining to the Company's customers (including any person or entity who during the twelve (12) months prior to such time was a customer of any Schwab affiliate or subsidiary) or (ii) solicit or attempt to solicit (which shall include, but is not limited to, contact or communication in any manner for the purpose of soliciting or inducing) any of the Company's customers in an attempt to divert, transfer, or otherwise take away business or prospective business from Schwab, including without limitation those on whom he called or whom he solicited or with whom he became acquainted while engaged as an employee with the Company. 22. Injunctive Relief. Mr. Pottruck acknowledges and agrees that the restrictions contained in Paragraphs 18, 19, 20, and 21 are material inducements to the Company's willingness to enter into this Agreement and necessary to protect the good will, trade secrets, and confidential and proprietary information of the Company. Mr. Pottruck further acknowledges that the restrictions contained in these Paragraphs are reasonable in scope and duration, will not prevent him from earning a livelihood during the applicable period of restriction, are necessary to protect the legitimate interests of the Company, and that any breach by Mr. Pottruck of any provision contained in Paragraphs 18, 19, 20, and 21 will result in immediate irreparable injury to the Company for which a remedy at law will be inadequate. Accordingly, Mr. Pottruck acknowledges that the Company shall be entitled to seek permanent injunctive relief against him in the event of any breach or threatened breach by Mr. Pottruck of the provisions of Paragraphs 18, 19, 20, or 21 in addition to any other remedy that may be available to the Company, whether at law or in equity. The provisions of Paragraphs 18, 19, 20, or 21 shall remain unmodified and in full force and effect following the Termination Date. It is the intention of the Parties to this Agreement that the covenants and restrictions set forth in Paragraphs 18, 19, 20, and 21 be given the broadest interpretation permitted by law. 23. Return of Confidential and Proprietary Information. Mr. Pottruck acknowledges that he has returned to Schwab any and all property, files, materials, records, manuals, written communications, or other items (including hard copy and electronic documents, disks, and files) that he received, obtained and/or created as part of his employment (excluding information Mr. Pottruck received about insured benefits) or that are in his possession or control belonging to Schwab or any of the Releasees, including but not limited to company sponsored credit cards or calling cards, pagers, computer software or hardware, keys, and identity badges. Mr. Pottruck agrees that in the event he later locates any such document, he will return it to Schwab immediately. The Parties agree to mutually cooperate in the Company's retention and protection of any material that may be necessary in the event of future circumstances that require reference to such materials. - 11 - 24. Breach of Agreement. If Mr. Pottruck undertakes any activities in violation of Paragraphs 8, 9, 18, 19, 20, or 21 or otherwise breaches any of his obligations under this Agreement, his Termination Date will be accelerated immediately and all payments and other benefits conferred under this Agreement (with the exception of unused vacation and floating holidays as set forth in Paragraph 3) shall cease; provided, however, that such breach by Mr. Pottruck and/or cessation of payments and benefits by the Company will not affect the validity or enforceability of the Parties' commitments under this Agreement (including but not limited to Mr. Pottruck's general release and waiver of claims contained herein). 25. Corporate Approvals. The Company represents that it has obtained all necessary Corporate approvals in order to enter this Agreement. 26. Licenses. Within thirty (30) days of Mr. Pottruck's Termination Date, a Form U-5 will be filed with the Central Registration Depository terminating his registration. Mr. Pottruck agrees that prior to Schwab's filing a Form U-5 terminating his registration, he will ensure compliance with all continuing education requirements for the licenses he holds. Additionally, Mr. Pottruck agrees that to the extent he maintains brokerage accounts at financial services firms other than the Company, he will identify the outside accounts and arrange for the submission of duplicate statements and trade confirmations for all outside accounts to the Chief Compliance Officer, Charles Schwab & Co., Inc., 101 Montgomery Street, SF101MNT-23-239, San Francisco, CA 94104. In the event Mr. Pottruck fails to meet the continuing education requirements, ensure that duplicate statements and trade confirmations are provided to Schwab, or violates any Company policy, the Company will immediately file a Form U-5 terminating his registration. 27. Agreement is Knowing and Voluntary. Mr. Pottruck understands and agrees that he: a. has had 21 days within which to consider this Agreement before executing it; b. has carefully read and fully understands all of the provisions of this Agreement; c. is, through this Agreement, releasing Schwab and the other Releasees from any and all claims he may have against Schwab and the other Releasees, as stated herein, that have arisen up to the date of execution of this Agreement; d. knowingly and voluntarily agrees to all of the terms set forth in this Agreement; e. knowingly and voluntarily intends to be legally bound by the same; - 12 - f. was advised, and hereby is advised in writing, to consider the terms of this Agreement and consult with an attorney of his choice prior to executing this Agreement; and g. has seven (7) days after signing this Agreement to revoke it; the Agreement will not become effective or enforceable until the seven-day revocation period has passed. Revocation can be made by delivering written notice of revocation to Carrie Dwyer, EVP Corporate Oversight, Charles Schwab & Co., Inc., 101 Montgomery Street, SF120KNY-29-119, San Francisco, CA 94104. For this revocation to be effective, written notice must be received by Carrie Dwyer no later than the close of business on the seventh (7th) calendar day after Mr. Pottruck signs this Agreement. If Mr. Pottruck revokes this Agreement, it shall not be effective or enforceable and Mr. Pottruck will not receive the benefits provided herein. 28. Full and Independent Knowledge. The Parties represent that they have discussed thoroughly all aspects of this Agreement with their respective attorneys, fully understand all of the provisions of the Agreement, and are voluntarily entering into this Agreement. 29. No Representations. The Parties acknowledge that, except as expressly set forth herein, no representations of any kind or character have been made to induce the execution of this Agreement. 30. Ownership of Claims. Mr. Pottruck represents that he has not transferred or assigned, or purported to transfer or assign, any claim released by this Agreement. Mr. Pottruck further agrees to indemnify and hold harmless each and all of the Releasees against any and all claims based upon, arising out of, or in any way connected with any such actual or purported transfer or assignment. 31. Non-Admission of Liability. Neither Party, by entering into and fulfilling this Agreement, admits to any wrongdoing or liability and each Party denies all allegations of wrongdoing. 32. Other Representations. Mr. Pottruck represents that he has no pending claim for any work-related injury, and that his is not aware of any existing injury that would give rise to such a claim, whether under applicable worker's compensation laws or otherwise. 33. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of California applicable to contracts made and to be performed entirely within California. - 13 - 34. Arbitration. Except with respect to judicial injunctive relief as provided in Paragraph 22 above, any dispute or breach arising out of the interpretation or performance of this Agreement shall be settled by arbitration before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association in San Francisco, California, to be administered by the American Arbitration Association or JAMS/Endispute, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. With the exception of initial forum fees, the Company shall bear all costs imposed by the American Arbitration Association or JAMS/Endispute to administer the arbitration including arbitrator's fees. The parties shall be allowed to conduct such discovery as permitted by the Commercial Arbitration Rules of the American Arbitration Association or by the arbitrator. At the conclusion of arbitration, the arbitrator shall issue an award in writing setting forth the basis for the award. The decision of the arbitrator shall be final and conclusive, and the Parties waive the right to trial de novo or appeal. Further, the prevailing party shall be entitled to recover its reasonable costs and attorney's fees. Excepted from this Paragraph is a complaint with the EEOC, including a challenge to the validity of this Agreement under the law, to the extent such an exception is required by law. 35. Waiver. The failure of any Party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 36. Miscellaneous. a. Both parties have participated in the drafting of this Agreement. The language of all parts in this Agreement shall be construed as a whole, according to its fair meaning, and not strictly for or against either party. b. Should any provision in this Agreement be declared or determined to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby, and the illegal or invalid part, term, or provision shall be deemed not to be part of this Agreement, and all remaining provisions shall remain valid and enforceable. c. This Agreement sets forth the entire agreement between the Parties and fully supersedes any and all prior agreements and understandings, written or otherwise, between the Parties pertaining to the subject matter of this Agreement. d. The headings used herein are for reference only and shall not affect the construction of this Agreement. 37. Counterparts. This Agreement may be executed in one or more counterparts, by facsimile or original signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. - 14 - 38. Notification. Notice to be given under this Agreement to Schwab shall be to Carrie Dwyer, EVP Corporate Oversight, Charles Schwab & Co., Inc., 101 Montgomery Street, SF 120KNY-29-119, San Francisco, CA 94104 and to Mr. Pottruck shall be to Paul Escobosa, Coblentz, Patch, Duffy & Bass, LLP, One Ferry Building, Suite 200, San Francisco, CA 94111-4213. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES THE RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. DAVID S. POTTRUCK CHARLES SCHWAB & CO., INC. /s/ David S. Pottruck By: /s/ Christopher V. Dodds - -------------------------------- -------------------------------- Its: EVP - Chief Financial Officer ------------------------------- Date: August 2, 2004 Date: August 3, 2004 --------------------------- ------------------------------ Approved as to Form and Content: THE CHARLES SCHWAB CORPORATION /s/ Paul Escobosa By: /s/ Christopher V. Dodds - -------------------------------- -------------------------------- Paul Escobosa Its: EVP - Chief Financial Officer Attorney for David S. Pottruck ------------------------------- Date: August 3, 2004 ------------------------------ By: /s/ Carrie E. Dwyer -------------------------------- Its: EVP, General Counsel and Secretary ------------------------------- Date: August 3, 2004 ------------------------------ - 15 - EXHIBIT A - COMPETITOR BUSINESSES Except as otherwise agreed to in writing by an authorized representative of the Company, a Competitor Business will be defined as follows: 1) E*Trade Financial Corporation; E*Trade Financial Corporate Services, Inc.; E*Trade Access, Inc.; E*Trade Brokerage Holdings, Inc.; TD Waterhouse Investor Services, Inc.; Ameritrade Online Holdings Corporation; Ameritrade Advisory Services; Fidelity Brokerage Services, LLC; Fidelity Investments Institutional Services Company, Inc.; 2) any other company that is a financial institution regulated or registered by the federal banking regulators, the Securities Exchange Commission, the Commodity Futures Trading Commission, the National Association of Securities Dealers, or any equivalent state law that allows individuals or institutions to place or process orders for securities and/or other financial instruments (including, but not limited to banking functions and instruments) through any medium now known or later developed; or 3) any business that is determined in Schwab's sole and reasonable discretion to be competitive with the business activities of the Company or its affiliates or subsidiaries. - 16 - EX-12 6 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 Nine Months Ended September 30, September 30, 2004 2003 2004 2003 -------- -------- -------- -------- Earnings from continuing operations before taxes on earnings $ 72 $ 196 $ 485 $ 484 Fixed charges Interest expense: Deposits from banking clients 24 23 74 69 Brokerage client cash balances 29 14 59 62 Long-term debt 8 8 24 27 Short-term borrowings 6 4 11 10 Other 5 5 9 14 - ------------------------------------------------------------------------------------------------------------------------------------ Total 72 54 177 182 Interest portion of rental expense 20 22 62 65 - ------------------------------------------------------------------------------------------------------------------------------------ Total fixed charges (A) 92 76 239 247 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations before taxes on earnings and fixed charges (B) $ 164 $ 272 $ 724 $ 731 ==================================================================================================================================== Ratio of earnings to fixed charges (B) / (A) (1) 1.8 3.6 3.0 3.0 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of earnings to fixed charges excluding brokerage client interest expense (2) 2.1 4.2 3.7 3.6 - ------------------------------------------------------------------------------------------------------------------------------------ (1) The ratio of earnings to fixed charges is calculated in accordance with SEC requirements. For such purposes, "earnings" consist of earnings from continuing operations before taxes on earnings 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) 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-31 7 exh31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles R. Schwab, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Charles Schwab Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ Charles R. Schwab --------------------- ------------------------------------ Charles R. Schwab Chairman and Chief Executive Officer EX-31 8 exh31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christopher V. Dodds, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Charles Schwab Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ Christopher V. Dodds ----------------------- -------------------------------- Christopher V. Dodds Executive Vice President and Chief Financial Officer EX-32 9 exh32_1.txt EXHIBIT 32.1 Exhibit 32.1 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 quarter ended September 30, 2004 (the Report), I, Charles R. Schwab, Chairman and 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: November 8, 2004 - -------------------------------------- --------------------- Charles R. Schwab Chairman and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 10 exh32_2.txt EXHIBIT 32.2 Exhibit 32.2 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 quarter ended September 30, 2004 (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: November 8, 2004 - ----------------------------- --------------------- Christopher V. Dodds Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----