-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PfMHywP+oiMsHWq4qG0R2A8mCdU+PKLGop2Q6X2hS6xm1nEdZZR6IaErtHdbZptm 3jy8rM2bgJ3cJAl8OF7F/w== 0000316709-94-000010.txt : 19941116 0000316709-94-000010.hdr.sgml : 19941116 ACCESSION NUMBER: 0000316709-94-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB CHARLES CORP CENTRAL INDEX KEY: 0000316709 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94559344 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 10-Q FOR QTR 9/30/94 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, 1994 Commission file number 1-9700 THE CHARLES SCHWAB CORPORATION (Exact name of Registrant as specified in its charter) Delaware 94-3025021 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 101 Montgomery Street, San Francisco, CA 94104 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 627-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 57,324,826 shares of $.01 par value Common Stock Outstanding on November 7, 1994 THE CHARLES SCHWAB CORPORATION Quarterly Report on Form 10-Q For the Quarter Ended September 30, 1994 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 4-5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-15 Part II - Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15-16 Signature 17 Part 1 - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ---- ---- ---- ---- Revenues Commissions $121,574 $131,510 $414,008 $410,618 Principal transactions 34,180 42,688 124,645 122,505 Interest revenue, net of interest expense (1) 42,127 31,124 118,114 85,630 Mutual fund service fees 41,365 25,835 113,810 69,531 Other 8,843 7,575 23,611 19,191 - ------------------------------------------------------------------------------------------------- Total 248,089 238,732 794,188 707,475 - ------------------------------------------------------------------------------------------------- Expenses Excluding Interest Compensation and benefits 103,506 97,519 331,140 286,351 Communications 25,639 24,040 81,819 69,026 Occupancy and equipment 22,185 20,271 64,895 55,410 Depreciation and amortization 14,080 11,332 40,472 31,564 Commissions, clearance and floor brokerage 11,385 10,176 35,080 31,335 Advertising and market development 7,346 11,269 28,184 31,019 Professional services 4,388 6,114 15,056 12,916 Other 7,966 10,340 29,185 28,819 - ------------------------------------------------------------------------------------------------- Total 196,495 191,061 625,831 546,440 - ------------------------------------------------------------------------------------------------- Income before taxes on income and extraordinary charge 51,594 47,671 168,357 161,035 Taxes on income 20,399 18,812 66,813 65,181 - ------------------------------------------------------------------------------------------------- Income before extraordinary charge 31,195 28,859 101,544 95,854 Extraordinary charge - early retirement of debt 6,700 6,700 - ------------------------------------------------------------------------------------------------- Net Income $ 31,195 $ 22,159 $101,544 $ 89,154 ================================================================================================= Weighted average number of common and common equivalent shares outstanding 58,072 59,663 58,407 59,318 ================================================================================================= Earnings per Common Equivalent Share: Income before extraordinary charge $ .54 $ .48 $ 1.74 $ 1.61 Extraordinary charge - early retirement of debt .11 .11 - ------------------------------------------------------------------------------------------------- Net Income $ .54 $ .37 $ 1.74 $ 1.50 ================================================================================================= Dividends Declared per Common Share $ .07 $ .05 $ .21 $ .14 ================================================================================================= (1) Interest revenue is presented net of interest expense. Interest expense for the three months ended September 30, 1994 and 1993 was $54,598 and $32,864, respectively. Interest expense for the nine months ended September 30, 1994 and 1993 was $132,928 and $98,694, respectively. See Notes to Condensed Consolidated Financial Statements.
- 1 - THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except share data)
September 30, December 31, 1994 1993 ---- ---- (Unaudited) ----------- Assets Cash and equivalents (including resale agreements of $160,000 in 1994 and $120,000 in 1993) $ 403,266 $ 279,828 Cash and investments required to be segregated under Federal or other regulations (including resale agreements of $3,865,035 in 1994 and $3,267,440 in 1993) 3,982,247 3,676,319 Receivable from brokers, dealers and clearing organizations 92,767 71,616 Receivable from customers (less allowance for doubtful accounts of $2,731 in 1994 and $2,229 in 1993) 2,792,747 2,553,255 Equipment, office facilities and property (less accumulated depreciation and amortization of $171,072 in 1994 and $143,339 in 1993) 135,985 136,440 Customer lists (less accumulated amortization of $138,035 in 1994 and $130,434 in 1993) 29,687 37,114 Other assets 128,086 141,945 - ---------------------------------------------------------------------------------------------------- Total $7,564,785 $6,896,517 ==================================================================================================== Liabilities and Stockholders' Equity Drafts payable $ 111,462 $ 123,384 Payable to brokers, dealers and clearing organizations 416,476 303,981 Payable to customers 6,203,084 5,745,783 Accrued expenses 185,207 158,866 Long-term and subordinated borrowings 206,494 185,330 - ---------------------------------------------------------------------------------------------------- Total liabilities 7,122,723 6,517,344 - ---------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock--10,000,000 shares authorized; $.01 par value per share; none issued Common stock--200,000,000 shares authorized; $.01 par value per share; 59,486,680 shares in 1994 and 1993 595 595 Additional paid-in capital 162,022 161,052 Retained earnings 343,334 253,692 Treasury stock--2,564,446 shares in 1994 and 1,649,478 shares in 1993, at cost (52,218) (23,153) Note receivable from Profit Sharing Plan (1,467) (13,013) Unearned ESOP Shares (10,204) - ---------------------------------------------------------------------------------------------------- Stockholders' equity 442,062 379,173 - ---------------------------------------------------------------------------------------------------- Total $7,564,785 $6,896,517 ==================================================================================================== See Notes to Condensed Consolidated Financial Statements.
- 2 - THE CHARLES SCHWAB CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 1994 1993 ---- ---- Cash flows from operating activities Net income $ 101,544 $ 89,154 Noncash items included in net income: Depreciation and amortization 40,472 31,564 Deferred income taxes 8,372 (4,536) Other 2,662 113 Extraordinary charge - early retirement of debt 11,205 Change in accrued expenses 27,578 35,860 Change in other assets 5,013 (3,674) - -------------------------------------------------------------------------------------------------- Net cash provided before change in customer-related balances 185,641 159,686 - -------------------------------------------------------------------------------------------------- Change in customer-related balances: Payable to customers 457,301 245,351 Receivable from customers (239,994) (420,911) Drafts payable (11,922) (12,449) Payable to brokers, dealers and clearing organizations 112,495 136,328 Receivable from brokers, dealers and clearing organizations (21,151) (23,399) Cash and investments required to be segregated under Federal or other regulations (305,928) 41,846 - -------------------------------------------------------------------------------------------------- Net change in customer-related balances (9,199) (33,234) - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 176,442 126,452 - -------------------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of equipment, office facilities and property - net (26,547) (53,735) Other (1,898) - -------------------------------------------------------------------------------------------------- Net cash used by investing activities (28,445) (53,735) - -------------------------------------------------------------------------------------------------- Cash flows from financing activities Purchase of treasury stock (34,329) Dividends paid (12,026) (8,055) Issuance of long-term borrowings 20,000 122,000 Repayment of long-term and subordinated borrowings (679) (128,021) Other 2,475 2,167 - -------------------------------------------------------------------------------------------------- Net cash used by financing activities (24,559) (11,909) - -------------------------------------------------------------------------------------------------- Increase in cash and equivalents 123,438 60,808 Cash and equivalents at beginning of period 279,828 204,290 - -------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $ 403,266 $ 265,098 ================================================================================================== See Notes to Condensed Consolidated Financial Statements.
- 3 - THE CHARLES SCHWAB CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The accompanying unaudited condensed consolidated financial statements include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively the Company), including Charles Schwab & Co., Inc. (Schwab) and Mayer & Schweitzer, Inc. (M&S). These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. All adjustments were of a normal recurring nature. All material intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1993 Annual Report to Stockholders that are incorporated by reference in the Company's 1993 Annual Report on Form 10-K, and included in the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1994 and June 30, 1994. Revenues are presented net of interest expense. Certain 1993 revenues and expenses have been reclassified to conform to the 1994 presentation. Common Stock Repurchases During the first nine months of 1994, the Company repurchased and recorded as treasury stock a total of 1,275,000 shares of its common stock for $34 million. Contingent Liabilities In January 1992, the Company filed a petition in U.S. Tax Court refuting a claim for additional Federal income tax asserted by the Internal Revenue Service (IRS) in December 1991. The asserted additional tax of $28 million, excluding interest, arises from the IRS' audit of the tax periods ended March 31, 1988 and December 31, 1988. Substantially all the asserted additional tax relates to deductions claimed by the Company for depreciation and amortization of tangible and intangible assets received in the Company's 1987 acquisition of Schwab. The contested issues extend to the Company's taxable years ended December 31, 1989 through 1993. Of the $28 million additional tax asserted by the IRS against the Company, approximately $11 million relates to deductions derived from the amortization of customer lists. In April 1993, the U.S. Supreme Court ruled in Newark Morning Ledger Co. v. U.S. that in appropriate circumstances a taxpayer may amortize the cost of certain intangible assets (such as customer lists) over the useful life of such assets. While the Supreme Court's decision in Newark Morning Ledger confirms the Company's ability to amortize for tax purposes certain of its intangible assets, issues involving the valuation of these intangible assets remain unresolved in the Company's case with the IRS. Management believes that these matters will be resolved without a material adverse effect on the Company's financial position or results of operations. M&S has been named as a defendant and/or one of several representatives of an alleged defendant class consisting of market makers in Nasdaq securities in twenty six class actions, twenty five of which were filed in Federal District Court between May 27, 1994 and August 10, 1994. Each class action purports to be brought on behalf of certain purchasers and sellers of Nasdaq securities for varying periods back to 1989 through the date of the complaints. The complaints generally allege an illegal combination and conspiracy among the defendant market makers to fix and maintain the spreads between the bid and ask prices of Nasdaq securities. None of the complaints sets forth any specific conduct by M&S and none requests any specific amount of damages, although all request that the actual damages be trebled where permitted by statute. The cases have been consolidated and transferred for all pretrial purposes to Federal District Court in the Southern District of New York. The ultimate outcome of these actions cannot currently be determined. In the normal course of its margin lending activities, Schwab is contingently liable to the Options Clearing Corporation for the margin requirement of customer margin securities transactions. Such margin requirement is secured by a pledge of customers' margin securities. This contingent liability was $86 million at September 30, 1994. - 4 - Regulatory Requirements Schwab and M&S are subject to the SEC's Uniform Net Capital Rule and each computes net capital under the alternative method permitted by this Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from customer transactions or a minimum dollar amount, which is based on the type of business conducted by the broker-dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. At September 30, 1994, Schwab's net capital was $348 million (12% of aggregate debit balances), which was $291 million in excess of its minimum required net capital and $204 million in excess of 5% of aggregate debit balances. At September 30, 1994, M&S' net capital was $7 million (161% of aggregate debit balances), which was $6 million in excess of its minimum required net capital. In accordance with the requirements of SEC Rule 15c3-3, Schwab had a portion of its cash and investments segregated for the exclusive benefit of customers at September 30, 1994. Under Rule 15c3-3, M&S had no cash reserve requirement at September 30, 1994. Cash Flow Information Certain investing and financing activities of the Company affect its financial position but do not affect cash flows. The following table summarizes those transactions (in thousands):
Nine Months Ended September 30, 1994 1993 ---- ---- Equipment, office facilities and property financed $1,843 $1,490 ====== ====== Common stock issued to Profit Sharing Plan for a note receivable $15,000 ======= Unsettled issuance of long-term borrowing $10,000 ======= Termination of capital lease obligation $1,348 ====== Transfer of par value on stock issued on three-for-two stock dividend $198 ====
Certain additional information regarding the cash flows of the Company follows (in thousands): Nine Months Ended September 30, 1994 1993 ---- ---- Income taxes paid $ 52,434 $ 73,282 ======== ======== Interest paid: Customers $117,682 $ 85,266 Long-term and subordinated borrowings 11,037 12,790 Other 4,924 3,045 -------- -------- Total interest paid $133,643 $101,101 ======== ======== Subsequent Event During October of 1994, CSC prepaid its $35 million Senior Term Loan and terminated the related interest rate exchange arrangement that was used to convert the loan's variable interest rate to a fixed rate. The Senior Term Loan was prepaid using working capital funds. - 5 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide brokerage and related investment services to 2.9 million active(a) accounts, with assets entrusted to the Company totaling $117 billion at September 30, 1994. With a network of 205 branch offices, the Company's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is physically represented in 46 states, the Commonwealth of Puerto Rico and the United Kingdom. Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to institutional clients and broker-dealers. The Company's business, like that of other securities brokerage firms, is directly affected by fluctuations in volumes and price levels in securities markets, which are in turn affected by many national and international economic and political factors that cannot be predicted. Transaction-based revenues, primarily commission and principal transaction revenues, represent the majority of the Company's revenues. In the short term, most of the Company's expenses do not vary directly with fluctuations in securities trading volume and do not increase or decrease quickly, which could result in the Company experiencing increased profitability with rapid increases in revenue, or reduced profitability (or losses) in the event of a material reduction in revenues. Due to the factors discussed above, the results of any interim period are not necessarily indicative of results for a full year, and it is not unusual for the Company to experience significant variations in quarterly revenue growth. In addition, these factors may subject the Company's future earnings and common stock price to significant volatility. Three Months Ended September 30, 1994 Compared To Three Months Ended September 30, 1993 Summary Net income for the third quarter of 1994 totaled $31 million or $.54 per share compared with third quarter 1993 net income of $22 million or $.37 per share. The third quarter of 1993 included an $.11 per share charge for the early retirement of the Company's Junior and Senior Subordinated Debentures. Third quarter 1994 revenues were $248 million, up 4% from $239 million for the third quarter of 1993, primarily due to increases in mutual fund service fees and net interest revenue, largely offset by decreases in commission revenues and principal transaction revenue. Mutual fund service fees increased $16 million, or 60% due to growth in fund balances. Net interest revenue increased $11 million, or 35% mainly due to increases in customer cash balances and margin loans to customers. Commission revenues decreased $10 million, or 8% due to a decrease in average commission per trade. Principal transaction revenue decreased $9 million, or 20% due to a decline in average revenue per principal transaction. Assets in customer accounts totaled $117 billion at September 30, 1994, $30 billion, or 34%, more than a year ago primarily resulting from increases in customer assets in Schwab's Mutual Fund Marketplace (registered trademark) of $11 billion and increases in customers' equity securities of $8 billion. Customer assets in cash and money market mutual funds at September 30, 1994 increased 40% over the year ago level to $26 billion. The number of total active customer accounts increased 21% from the year-ago level to 2.9 million at September 30, 1994. Total operating expenses excluding interest during the third quarter of 1994 were $196 million, (a) Accounts with balances or activity within the preceding twelve months. - 6 - up 3% from the third quarter of 1993. The higher expenses primarily related to additional staff and office facilities to support the Company's expansion. During the third quarter of 1994, the Company opened one new branch office. The profit margin for the third quarter of 1994 was 13%, up from 9% for the third quarter of 1993. The increase in profit margin is mainly due to the extraordinary charge taken in the third quarter of 1993 for the prepayment of the Company's Senior and Junior Subordinated Debentures. The annualized return on stockholders' equity for the third quarter of 1994 was 30%, up from 28% for the third quarter of 1993, also reflecting the impact of the extraordinary charge on net income for the third quarter of 1993. During the third quarter of 1994, the Company experienced declines in customer trading activity relative to that of the first and second quarters of 1994. Average daily customer trading volume for the first, second and third quarters of 1994 was 52,000 trades, 46,200 trades, and 41,900 trades, respectively. In response to these declines, the Company instituted reductions in certain staffing and other expenses relating to customer service capacity. The Company continues to evaluate cost reduction measures that could be undertaken without reducing customer service capacity to levels that are inconsistent with expected customer trading activity. However, such cost reduction measures are unlikely to offset completely the impact of lower customer trading volume on profit margins. During the third quarter of 1994, Schwab commenced operation of three specialists posts on the Pacific Stock Exchange. These posts make markets in over 160 common stocks. The Company expects to continue to expand its capacity to provide directly principal execution services to customers. Commissions Schwab executes commission transactions for customers on an agency basis. Commission revenues totaled $122 million for the third quarter of 1994, down 8% from the third quarter of 1993. Retail agency commissions, which include commissions relating to retail customer accounts handled by financial advisors, constituted approximately 96% of total commissions. Remaining commissions represent business done with institutional customers. Commissions earned on retail agency trades totaled $116 million on an average daily retail agency trade level of 25,800 trades in the third quarter of 1994, compared with commission revenue of $127 million on an average daily retail agency trade level of 26,100 for the comparable period in 1993. The following table shows a comparison of certain factors that influence retail agency commission revenues:
- ---------------------------------------------------------------------- Three Months Ended September 30, Percent 1994 1993 Change - ---------------------------------------------------------------------- Number of customer accounts that traded during the quarter (in thousands) 559 539 4% Average number of retail agency transactions per account that traded 2.95 3.10 (5) Total number of retail agency transactions (in thousands) 1,651 1,670 (1) Average commission per retail agency transaction $70.52 $76.04 (7) Total retail agency commission revenues (in millions) $ 116 $ 127 (9) ===================================================================== Note: The above table excludes customer transactions in Schwab's Mutual Fund OneSource (trademark) service.
Although the number of accounts that traded during the quarter increased by 4%, the total number of retail agency transactions executed by Schwab decreased 1% from the third quarter of 1993 due to a 5% decline in the average number of retail agency transactions per account. Schwab added 145,400 new customer accounts during the third quarter of 1994, compared to 162,900 new accounts during the third quarter of 1993. - 7 - Average commission per retail agency trade has declined from the year-ago level as the proportion of trades in lower commission per trade products, such as mutual funds, has increased. This is primarily the result of Schwab's success in attracting customer mutual fund business, as well as strong price competition, particularly with respect to customer equity securities transactions, which yield a higher average commission per trade. Principal Transactions During the third quarter of 1994, principal transaction revenues decreased $9 million, or 20%, from the comparable period in 1993 to $34 million. This decrease is due to a lower average revenue per principal transaction in the third quarter of 1994. A portion of this decrease is attributable to the impact of the July 11, 1994 National Association of Securities Dealers Interpretation to its Rules of Fair Practice governing the execution of limit orders accepted from certain types of customers. M&S has extended the benefits of the Interpretation to substantially all retail customer limit orders in Nasdaq securities received from broker-dealers for which it executes such orders. As a market maker in Nasdaq securities, M&S generally executes customer orders as principal. Factors that influence revenues from principal transactions include the volume of orders and shares executed, and market price volatility. Substantially all Nasdaq security trades originated by the customers of Schwab are directed to M&S. Interest Revenue, Net of Interest Expense Interest revenue net of interest expense increased $11 million, or 35%, to $42 million from the prior year's third quarter as shown in the following table (in millions):
- --------------------------------------------------------- Three Months Ended September 30, 1994 1993 - --------------------------------------------------------- Interest Revenue Investments, customer-related $46 $28 Margin loans to customers 49 34 Other 2 2 - --------------------------------------------------------- Total 97 64 - --------------------------------------------------------- Interest Expense Customer cash balances 49 28 Long-term and subordinated borrowings 3 3 Other 3 2 - --------------------------------------------------------- Total 55 33 - --------------------------------------------------------- Interest Revenue, Net of Interest Expense $42 $31 =========================================================
Customer-related average daily balances, interest rates, and average net interest margin for the third quarters of 1994 and 1993 are - 8 - summarized in the following table (dollars in millions):
- ------------------------------------------------------------------ Three Months Ended September 30, 1994 1993 - ------------------------------------------------------------------ Earning Assets (customer-related): Investments: Average balance outstanding $3,919 $3,426 Average interest rate 4.60% 3.20% Margin loans to customers: Average balance outstanding $2,777 $2,285 Average interest rate 6.95% 5.99% Average yield on earning assets 5.58% 4.31% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $5,484 $4,707 Average interest rate 3.53% 2.38% Other interest-bearing sources: Average balance outstanding $ 385 $ 323 Average interest rate 3.16% 4.19% Average noninterest-bearing portion $ 827 $ 681 Average interest rate on funding sources 3.08% 2.20% Summary: Average yield on earning assets 5.58% 4.31% Average interest rate on funding sources 3.08% 2.20% - ------------------------------------------------------------------ Average net interest margin 2.50% 2.11% ==================================================================
Interest revenue from customer-related investments increased $18 million due to a 14% increase in average balances outstanding, and a 140 basis point increase in the average interest rate earned on such investments. Interest earned on margin loans to customers increased $15 million as average margin balances increased 22% and the average interest rate earned on such balances increased 96 basis points. Interest expense on customer cash balances increased $21 million due to a 17% increase in average balances outstanding, and a 115 basis point increase in average interest rates paid on these balances. The average net interest margin pertaining to customer-related earning assets and related funding sources increased 39 basis points over that of 1993's third quarter to 2.50%. This is primarily due to larger increases in average interest rates with respect to earning assets compared to average interest rates on funding sources. Mutual Fund Service Fees Mutual fund service fees increased $16 million, or 60%, to $41 million in the third quarter of 1994 from the comparable period in 1993. The increase is primarily attributable to significant increases in customers' Schwab money market fund balances and balances in funds purchased through Schwab's Mutual Fund OneSource (trademark) service. Most of these fees are earned for transfer agent and investment management services provided to proprietary money market mutual funds and for record keeping and shareholder services provided to funds in the Mutual Fund OneSource service. Schwab's proprietary funds, collectively referred to as the SchwabFunds (registered trademark), include money market funds, bond funds and equity index funds. Customer assets invested in the SchwabFunds averaged $21 billion during the third quarter of 1994 compared to $14 billion during the third quarter of 1993, a 48% increase. During the third quarter of 1994, mutual fund trades placed through the Mutual Fund OneSource service averaged 13,100 per day, including 1,200 trades per day in SchwabFunds. Since trades handled through the Mutual Fund OneSource service do not generate commission revenue, they are not included in agency trade totals. Customer mutual fund assets purchased through the Mutual Fund OneSource service, excluding SchwabFunds, totaled $13 billion at September 30, 1994, up 110% from a year ago. Expenses Excluding Interest Total operating expenses excluding interest for the third quarter of 1994 were $196 million, up 3% over the third quarter of 1993. Compensation and benefits expense for the third quarter of 1994 increased $6 million, or 6%, to $104 million reflecting an increase in employees over the comparable prior-year period level. Employees, - 9 - including full-time, part-time, and temporary employees and persons employed on a contract basis, totaled approximately 6,000 at September 30, 1994 compared to approximately 5,700 at September 30, 1993. Advertising and market development expense decreased $4 million, or 35%, to $7 million from the prior year's third quarter as the Company reduced spending on network and cable television advertising and printed marketing materials. Due to their immaterial nature, the fluctuations in certain revenue and expense line items were not discussed in this section. Nine Months Ended September 30, 1994 Compared To Nine Months Ended September 30, 1993 Summary Net income for the first nine months of 1994 totaled $102 million or $1.74 per share compared with net income of $89 million or $1.50 per share for the first nine months of 1993. Revenues were $794 million, up 12% from $707 million for the first nine months of 1993, primarily due to increases in mutual fund service fees and net interest revenue. Mutual fund service fees increased $44 million, or 64% due to growth in fund balances. Net interest revenue increased $32 million, or 38% due to growth in customer cash balances and margin loans to customers. Total operating expenses excluding interest during the first nine months of 1994 were $626 million, up 15% from the first nine months of 1993. The higher expenses primarily related to additional staff and office facilities to support the Company's expansion and to higher volume-related expenses such as communications expense. These higher volume-related expenses resulted from an increase in total Company trading volume, which includes trades handled through Schwab's Mutual Fund OneSource (trademark) service. In the first nine months of 1994, total Company trading volume was 8.8 million trades, up 31% from the first nine months of 1993. During the first nine months of 1994, the Company opened seven new branch offices and a customer telephone service center. The Company's profit margin for the first nine months of 1994 was 13%, unchanged from the first nine months of 1993. The annualized return on stockholders' equity for the first nine months of 1994 was 32%, down from 37% for the first nine months of 1993, reflecting the Company's higher equity base in the first nine months of 1994. Commissions Commission revenues totaled $414 million for the first nine months of 1994, up 1% from the first nine months of 1993. Retail agency commissions, which include commissions relating to retail customer accounts handled by financial advisors, constituted approximately 96% of total commissions. Remaining commissions represent business done with institutional customers. Commissions earned on retail agency trades totaled $397 million on an average daily retail agency trade level of 29,100 trades in the first nine months of 1994, compared with commission revenue of $396 million on an average daily retail agency trade level of 27,600 for the comparable period in 1993. The following table shows a comparison of certain factors that influence retail agency commission revenues: - 10 -
- ------------------------------------------------------------------ Nine Months Ended September 30, Percent 1994 1993 Change - ------------------------------------------------------------------ Number of customer accounts that traded during the period (in thousands) 1,163 1,049 11% Average number of retail agency transactions per account that traded 4.73 4.98 (5) Total number of retail agency transactions (in thousands) 5,506 5,219 5 Average commission per retail agency transaction $72.08 $75.85 (5) Total retail agency commission revenues (in millions) $ 397 $ 396 --- ================================================================== Note: The above table excludes customer transactions in Schwab's Mutual Fund OneSource (trademark) service.
The total number of retail agency transactions executed by Schwab increased 5% from the first nine months of 1993 as Schwab's customer base continued to grow. An 11% increase in accounts that traded during the period was partially offset by a 5% decrease in the average number of transactions per account. A 5% decline in average commission per retail agency trade substantially offset the impact of the increase in total trades on commission revenues. Schwab added 589,700 new customer accounts during the first nine months of 1994, compared to 520,700 new accounts during the first nine months of 1993. Interest Revenue, Net of Interest Expense Interest revenue net of interest expense increased $32 million, or 38%, to $118 million from the prior year's first nine months as shown in the following table (in millions):
- ---------------------------------------------------------- Nine Months Ended September 30, 1994 1993 - ---------------------------------------------------------- Interest Revenue Investments, customer-related $115 $ 84 Margin loans to customers 130 96 Other 6 4 - ---------------------------------------------------------- Total 251 184 - ---------------------------------------------------------- Interest Expense Customer cash balances 118 85 Long-term and subordinated borrowings 9 10 Other 6 3 - ---------------------------------------------------------- Total 133 98 - ---------------------------------------------------------- Interest Revenue, Net of Interest Expense $118 $ 86 ==========================================================
When investing cash required to be segregated, the Company must adhere to SEC regulations that restrict investments to those in U.S. government securities, participation certificates and mortgage-backed securities guaranteed by the Government National Mortgage Association, certificates of deposit issued by U.S. banks and thrifts, and repurchase agreements collateralized by qualified securities. Company policies for credit quality and maximum maturity requirements are more restrictive than the SEC regulations. Investment information for the first nine months of 1994 and 1993 is as follows: - 11 -
- --------------------------------------------------------- Nine Months Ended September 30, 1994 1993 - --------------------------------------------------------- Investment composition (in billions at period end): Resale agreements $3.9 $3.1 U.S. Treasuries --- .1 Certificates of deposit .2 .3 Average maturity of investments (in days): During the nine-month period 56 68 At period end 50 69 =========================================================
Customer-related average daily balances, interest rates, and average net interest margin for the first nine months of 1994 and 1993 are summarized in the following table (dollars in millions):
- ------------------------------------------------------------------ Nine Months Ended September 30, 1994 1993 - ------------------------------------------------------------------ Earning Assets (customer-related): Investments: Average balance outstanding $3,929 $3,438 Average interest rate 3.91% 3.26% Margin loans to customers: Average balance outstanding $2,704 $2,132 Average interest rate 6.44% 5.99% Average yield on earning assets 4.94% 4.30% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $5,413 $4,628 Average interest rate 2.92% 2.46% Other interest-bearing sources: Average balance outstanding $ 351 $ 283 Average interest rate 2.80% 4.37% Average noninterest-bearing portion $ 869 $ 659 Average interest rate on funding sources 2.53% 2.27% Summary: Average yield on earning assets 4.94% 4.30% Average interest rate on funding sources 2.53% 2.27% - ------------------------------------------------------------------- Average net interest margin 2.41% 2.03% ===================================================================
Interest revenue from customer-related investments increased $31 million due to a 14% increase in average balances outstanding, and a 65 basis point increase in the average interest rate earned on such investments. Interest earned on margin loans to customers increased $34 million as average margin balances increased 27% and the average interest rate earned on such balances increased 45 basis points. Interest expense on customer cash balances increased $33 million due to a 17% increase in average balances outstanding, and a 46 basis point increase in average interest rates paid on these balances. The average net interest margin pertaining to customer-related earning assets and related funding sources increased 38 basis points over that of 1993's first nine months to 2.41%. This is primarily due to greater increases in average interest rates with respect to earning assets compared to funding sources. Mutual Fund Service Fees and Expenses Excluding Interest Explanations for fluctuations in mutual fund service fees and expenses excluding interest presented in the three-month results generally explain fluctuations in those revenues and expenses between the nine-month periods except for the fluctuation in communications expense, which is explained below. Communications expense for the first nine months of 1994 increased $13 million, or 19%, to $82 million primarily due to higher customer trading and call activity. Total trades for the first nine months of 1994 were 8.8 million, up 31% from the same period in 1993. Income Taxes The Company's effective income tax rate for the first nine months of 1994 was 39.7% compared to 40.5% for the comparable period in 1993. In January 1992, the Company filed a petition in U.S. Tax Court refuting a claim for additional - 12 - Federal income tax asserted by the Internal Revenue Service (IRS) in December 1991. The asserted additional tax of $28 million, excluding interest, arises from the IRS' audit of the tax periods ended March 31, 1988 and December 31, 1988. Substantially all the asserted additional tax relates to the deductions claimed by the Company for depreciation and amortization of tangible and intangible assets received in the Company's 1987 acquisition of Schwab. The issues being contested in the Tax Court by the Company with respect to the periods audited by the IRS extend to the Company's tax years ended December 31, 1989 through 1993. Of the $28 million additional tax asserted by the IRS against the Company, approximately $11 million relates to deductions derived from the amortization of customer lists. In April 1993, the U. S. Supreme Court ruled in Newark Morning Ledger Co. v. U.S. that in appropriate circumstances a taxpayer may amortize the cost of certain intangible assets (such as customer lists) over the useful life of such assets. While the Supreme Court's decision in Newark Morning Ledger confirms the Company's ability to amortize for tax purposes certain of its intangible assets, issues involving the valuation of these intangible assets remain unresolved in the Company's case with the IRS. Management believes that these matters will be resolved without a material adverse effect on the Company's financial position or results of operations. Liquidity and Capital Resources Liquidity Schwab Most of Schwab's assets are liquid, consisting primarily of short- term (i.e., less than 90 days) investment-grade, interest-earning investments (a substantial portion of which are segregated for the exclusive benefit of customers pursuant to regulatory requirements) and receivables from customers and broker-dealers. Customer margin loans are demand loan obligations secured by readily marketable securities. Receivables from and payables to other brokers, dealers and clearing organizations primarily represent current open transactions, which usually settle or can be closed out within a few days. Liquidity needs relating to customer trading and margin borrowing activities are met primarily through cash balances in customer accounts, which totaled $6.2 billion at September 30, 1994, up 9% from the December 31, 1993 level of $5.7 billion. Earnings from Schwab's operations are the primary source of liquidity for capital expenditures and investments in new services, marketing and technology. Management believes that customer cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab in the future. To manage Schwab's regulatory capital position, CSC provides Schwab with a $180 million subordinated revolving credit facility maturing in September 1995, of which $108 million was outstanding at September 30, 1994. At quarter end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC maturing in 1996. For use in its brokerage operations, Schwab also maintains uncommitted bank credit lines totaling $480 million, of which $400 million is available on an unsecured basis. Schwab used such borrowings for 27 days during the first nine months of 1994, with the daily amounts borrowed averaging $42 million. These lines were unused at September 30, 1994. M&S M&S' liquidity needs are generally met through earnings generated by its operations. Most of M&S' assets are liquid, consisting primarily of cash and equivalents, receivables from brokers, dealers and clearing organizations and marketable securities. M&S may borrow up to $10 million under a subordinated lending arrangement with CSC. Borrowings under this - 13 - arrangement qualify as regulatory capital for M&S. This credit facility has never been used. The Charles Schwab Corporation CSC's liquidity needs are generally met through cash generated by its subsidiaries. Schwab and M&S are the principal sources of this liquidity and are subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker- dealers. These regulations would prohibit Schwab and M&S from repaying subordinated borrowings to CSC, paying cash dividends, or making any unsecured advances or loans to CSC or employees if such payment would result in net capital for such subsidiary of less than 5% of its aggregate debit balances or less than 120% of its minimum dollar amount requirement of $1 million. At September 30, 1994, Schwab had $348 million of net capital (12% of aggregate debit balances), which was $291 million in excess of its minimum required net capital. At September 30, 1994, M&S had $7 million of net capital (161% of aggregate debit balances), which was $6 million in excess of its minimum required net capital. Management believes that funds generated by Schwab's and M&S' operations will continue to be the primary funding source in meeting CSC's liquidity needs and maintaining Schwab's and M&S' net capital. In addition to liquidity needed by the broker-dealer subsidiaries, CSC has individual liquidity needs that arise from its long-term debt, which includes $170 million of its Senior Medium-Term Notes, Series A (Medium-Term Notes). The Medium-Term Notes have maturities ranging from two to nine years and fixed interest rates ranging from 4.9% to 7.7% with interest payable semiannually. In June 1994, CSC renewed its $225 million committed unsecured credit facility with a group of eleven banks. The funds are available for general corporate purposes and CSC pays a commitment fee on the unused balance. The terms of this credit facility require CSC to maintain minimum levels of stockholders' equity and Schwab and M&S to maintain minimum levels of net capital as defined. This credit facility has never been used. At September 30, 1994, CSC had outstanding a $35 million Senior Term Loan due in March 1995, which was prepaid during October of 1994 using working capital funds. When the loan was prepaid, an interest rate exchange arrangement that had been used to convert the loan's variable interest rate to a fixed rate of 6.9% was terminated. Cash Flows Cash provided by operating activities was $176 million for the first nine months of 1994, up 40% from $126 million for the first nine months of 1993. During the first nine months of 1994, the Company invested $27 million in equipment and office facilities as it continued to expand its branch office network and customer telephone service center facilities and enhance its data processing and telecommunications systems. During the first nine months of 1994, the Company repurchased and recorded as treasury stock a total of 1,275,000 shares of its common stock for $34 million. Currently, the Company has authorization from its Board of Directors to repurchase a total of 1,000,000 additional shares of its common stock. In January 1994, the Board of Directors announced an increase in the quarterly cash dividend from $.05 per share to $.07 per share. During the first nine months of 1994, the Company paid common stock cash dividends totaling $12 million, up from $8 million paid during the first nine months of 1993. Capital Adequacy The Company's stockholders' equity at September 30, 1994 totaled $442 million. In addition to its equity, the Company had long-term borrowings of $205 million that bear interest at a weighted average rate of 6.2%. These borrowings, together with the Company's equity, provided total financial capital of $647 million at September 30, - 14 - 1994, up $136 million, or 27% from a year ago. (After giving effect to the prepayment of the $35 million Senior Term Loan in October 1994, total financial capital would have been up $101 million or 20% from a year ago.) The Company monitors its financial leverage and the adequacy of its capital base relative to the level and composition of its assets using various financial measures. One of these measures is the ratio of total assets to total stockholders' equity. At September 30, 1994, the ratio of total assets to total stockholders' equity was 17 to 1 compared to a ratio of 18 to 1 at December 31, 1993. Over 95% of the Company's total assets relate to customer activity (primarily margin loans and segregated investments). Given the Company's intention of continuing to maintain an appropriate capital base as customer balances grow, management believes that the Company's present level of equity could support up to $4.7 billion of additional assets relating to customer activity. PART II - OTHER INFORMATION Item 1. Legal Proceedings Discussed in Notes to Condensed Consolidated Financial Statements under Contingent Liabilities in Part I, Item 1, and under Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations, under Income Taxes, and incorporated herein by reference. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this quarterly report on Form 10-Q. Exhibit Number Exhibit 10.141 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended October 18, 1994 (supersedes Exhibit 10.131 to Registrant's Form 10-K for the year ended December 31, 1993). 10.142 The Charles Schwab Corporation Deferred Compensation Plan, as amended October 18, 1994 (supersedes Exhibit 10.133 to Registrant's Form 10-K for the year ended December 31, 1993). 10.143 Form of Nonstatutory Stock Option Agreement (supersedes Exhibit 10.139 to Registrant's Form 10-Q for the quarter ended June 30, 1994). 10.144 Form of Incentive Stock Option Agreement. 11.1 Computation of Earnings per Common Equivalent Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. - 15 - (b) Reports on Form 8-K On July 12, 1994 the Registrant filed a Current Report on Form 8-K relating to several complaints in which M&S was named as a defendant. Schwab was named as a defendant in one of the complaints. The complaints generally allege an illegal combination and conspiracy among the defendant market makers to fix and maintain the spreads between the bid and ask prices of Nasdaq securities for varying periods back to 1989 through the date of the complaints. - 16 - 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 11, 1994 A. John Gambs /s/ ------------------------------------- A. John Gambs Executive Vice President - Finance, and Chief Financial Officer - 17 - EX-10 2 EXHIBIT 10.141 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN (RESTATED TO INCLUDE AMENDMENTS THROUGH OCTOBER 18, 1994) ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board of Directors on March 26, 1992. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging Non-Employee Directors and Key Employees to focus on long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors and Key Employees with exceptional qualifications and (c) linking Non-Employee Directors and Key Employees directly to stockholder interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Performance Share Awards or Options, which may constitute incentive stock options or nonstatutory stock options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. ARTICLE 2. ADMINISTRATION. 2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more disinterested directors of the Company, who shall be appointed by the Board. A member of the Committee shall not be eligible to receive any award under the Plan, other than Options granted under Section 4.2. 2.2 Disinterested Directors. A member of the Board shall be deemed to be "disinterested" only if he or she satisfies such requirements as the Securities and Exchange Commission may establish for disinterested administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act. 2.3 Committee Responsibilities. The Committee shall select the Key Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. LIMITATION ON AWARDS. The aggregate number of Restricted Shares, Performance Share Awards and Options awarded under the Plan shall not exceed 6,550,000 (including those shares awarded prior to the amendment of the Plan). If any Restricted Shares, Performance Share Awards or Options are forfeited, or if any Performance Share Awards terminate for any other reason without the associated Common Shares being issued, or if any Options terminate for any other reason before being exercised, then such Restricted Shares, Performance Share Awards or Options shall again become available for Awards under the Plan. The limitation of this Article 3 shall be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. Subject to the overall limit on the aggregate shares set forth above, the following limitations shall apply: (a) The maximum number of Common Shares which may be granted subject to an Option to any one Participant in any one fiscal year shall be 500,000; and (b) The maximum number of Restricted Shares or Performance Share Awards which may be granted to any one Participant in any one fiscal year shall be 200,000. ARTICLE 4. ELIGIBILITY. 4.1 General Rule. Except as provided in Section 4.2, only Key Employees shall be eligible for designation as Participants by the Committee. 4.2 Non-Employee Directors. Non-Employee Directors shall be entitled to receive the NSOs described in this Section 4.2 (and no other Awards). (a) Each Non-Employee Director shall receive an NSO covering 1,000 Common Shares for each Award Year with respect to which he or she serves as a Non-Employee Director on the grant date described in subsection (b) below; (b) The NSO for a particular Award Year shall be granted to each Non-Employee Director as of May 15 of each Award Year, and if May 15 is not a business day, then the grant shall be made on and as of the next succeeding business day; (c) Each NSO shall be exercisable in full at all times during its term; (d) The term of each NSO shall be 10 years; provided, however, that any unexercised NSO shall expire on the date that the Optionee ceases to be a Non-Employee Director or a Key Employee for any reason other than death or disability. If an Optionee ceases to be a Non-Employee Director or Key Employee on account of death or disability, any unexercised NSO shall expire on the earlier of the date 10 years after the date of grant or one year after the date of death or disability of such Director; and (e) The Exercise Price under each NSO shall be equal to the Fair Market Value on the date of grant and shall be payable in any of the forms described in Article 6. 4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10 percent of the total combined voting power of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for the grant of an ISO unless (a) the Exercise price under such ISO is at least 110 percent of the Fair Market Value of a Common Share on the date of grant and (b) such ISO by its terms is not exercisable after the expiration of five years from the date of grant. 2 4.4 Attribution Rules. For purposes of Section 4.3, in determining stock ownership, a Key Employee shall be deemed to own the stock owned, directly or indirectly, by or for his or her brothers, sisters, spouse, ancestors or lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries. Stock with respect to which the Key Employee holds an option shall not be counted. 4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the ISO to the Key Employee. "Outstanding stock" shall not include treasury shares or shares authorized for issuance under outstanding options held by the Key Employee or by any other person. ARTICLE 5. OPTIONS. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan, and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. The Committee may designate all or any part of an Option as an ISO, except for Options granted to Non-Employee Directors under Section 4.2. 5.2 Options Nontransferability. No Option granted under the Plan shall be transferable by the Optionee other than by will or the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Each Stock Option Agreement shall also specify whether the Option is an ISO or an NSO. 5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant, except as otherwise provided in Section 4.3. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with Article 6. 5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. The term of an ISO shall in no event exceed 10 years 3 from the date of grant, and Section 4.3 may require a shorter term. Subject to the preceding sentence, the Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided that, in appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability, retirement, or other termination of employment and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's employment. Except as provided in Section 4.2, NSOs may also be awarded in combination with Restricted Shares, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares are forfeited. In addition, NSOs granted under this Section 5 may be granted subject to forfeiture provisions which provide for forfeiture of the Option upon the exercise of tandem awards, the terms of which are established in other programs of the Company. 5.6 Limitation on Amount of ISOs. The aggregate fair market value (determined at the time the ISO is granted) of the Common Shares with respect to which ISOs are exercisable for the first time by the Optionee during any calendar year (under all incentive stock option plans of the Company) shall not exceed $100,000; provided, however, that all or any portion of an Option which cannot be exercised as an ISO because of such limitation shall be treated as an NSO. 5.7 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in Control with respect to the Company. 5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Common Shares. 5.9 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant (other than NSOs granted pursuant to Section 4.2), the Committee may authorize the grant of Replacement Options. If Replacement Options have been authorized by the Committee with respect to a particular award of Options (the "Underlying Options"), the Option Agreement with respect to the Underlying Options shall so state, and the terms and conditions of the Replacement Options shall be provided therein. The grant of any Replacement Options shall be effective only upon the exercise of the Underlying Options through the use of Common Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall equal the number of Common Shares used to exercise the Underlying Options, and, if the Option Agreement so provides, the number of Common Shares used to satisfy any tax withholding requirements incident to the exercise of the Underlying Options in accordance with Section 13.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. Notwithstanding the fact that the Underlying Option may be an ISO, a Replacement Option is not intended to qualify as an ISO. The Exercise 4 Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee's employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. However, the Committee may specify in the Stock Option Agreement that payment may be made pursuant to Section 6.2 or 6.3. (b) In the case of an NSO, the Committee may at any time accept payment pursuant to Section 6.2 or 6.3. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company; provided, however, that such Common Shares which are surrendered must have been beneficially owned by the Participant for at least six (6) months prior to the date such shares are surrendered. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased. 6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes; provided, however, that certain restrictions may be imposed by the Committee on persons who are considered a director or officer of the Company, to the extent required by Section 16 of the Exchange Act or any rule thereunder. ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS. 7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares or Performance Share Awards with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the 5 Award recipient and the Company. The amount of each Award of Restricted Shares or Performance Share Awards shall be determined by the Committee. Awards under the Plan may be granted in the form of Restricted Shares or Performance Share Awards or in any combination thereof, as the Committee shall determine at its sole discretion at the time of the grant. Restricted Shares or Performance Share Awards may also be awarded in combination with NSOs, and such an Award may provide that the Restricted Shares or Performance Share Awards will be forfeited in the event that the related NSOs are exercised. 7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. 7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. Common Shares shall be issued pursuant to Performance Share Awards in full or in installments upon satisfaction of the issuance conditions specified in the Stock Award Agreement. The Committee shall select the vesting conditions in the case of Restricted Shares, or issuance conditions in the case of Performance Share Awards, which may be based upon the Participant's service, the Participant's performance, the Company's performance or such other criteria as the Committee may adopt. A Stock Award Agreement may also provide for accelerated vesting or issuance, as the case may be, in the event of the Participant's death, disability or retirement. The Committee, in its sole discretion, may determine, at the time of making an Award of Restricted Shares, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. The Committee, in its sole discretion, may determine, at the time of making a Performance Share Award, that the issuance conditions set forth in such Award shall be waived in the event that a Change in Control occurs with respect to the Company. The Committee shall have the discretion to adjust the payouts associated with Awards downward. Unless and until (i) the rules set forth under Code Section 162(m) permit discretionary adjustments to increase payouts; or (ii) the Committee determines that compliance with Code Section 162(m) is not desired with respect to some or all Named Executive Officers, no payout associated with an Award held by a Named Executive Officer shall be discretionarily adjusted upward in a manner that would eliminate the ability of the Award to satisfy the "performance-based" exception under Treasury Regulation Section 1.162 - 27(e)(2). 7.4 Form of Settlement of Performance Share Awards. Settlement of Performance Share Awards shall only be made in the form of Common Shares. Until a Performance Share Award is settled, the number of Performance Share Awards shall be subject to adjustment pursuant to Article 10. 7.5 Death of Recipient. Any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Performance Share Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with 6 the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Common Shares that are to be issued pursuant to a Performance Share Award after the recipient's death shall be delivered or distributed to the recipient's estate. The Committee, in its sole discretion, shall determine the form and time of any distribution(s) to a recipient's beneficiary or estate. ARTICLE 8. CLAIMS PROCEDURES. Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review. Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of the claimant's position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee's receipt of the notice of appeal, unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the Committee's receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision on review shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and shall specifically refer to the pertinent Plan provisions on which it is based. All determinations of the Committee shall be final and binding on Participants and their beneficiaries. ARTICLE 9. VOTING RIGHTS AND DIVIDENDS. 9.1 Restricted Shares. (a) All holders of Restricted Shares who are not Named Executive Officers shall have the same voting, dividend, and other rights as the Company's other stockholders. (b) During the period of restriction, Named Executive Officers holding Restricted Shares granted hereunder shall be credited with all regular cash dividends paid with respect to all Restricted Shares while they are so held. If a dividend is paid in the form of cash, such cash dividend shall be credited to Named Executive Officers subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were 7 paid. If any dividends or distributions are paid in shares of Common Stock, the shares of Common Stock shall be subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid. Subject to the succeeding paragraph, and to the restrictions on vesting and the forfeiture provisions, all dividends credited to a Named Executive Officer shall be paid to the Named Executive Officer within forty-five (45) days following the full vesting of the Restricted Shares with respect to which such dividends were earned. In the event that any dividend constitutes a "derivative security" or an "equity security" pursuant to Rule 16(a) under the Exchange Act, such dividend shall be subject to a vesting period equal to the longer of: (i) the remaining vesting period of the Restricted Shares with respect to which the dividend is paid; or (ii) six (6) months. The Committee shall establish procedures for the application of this provision. Named Executive Officers holding Restricted Shares shall have the same voting rights as the Company's other stockholders. 9.2 Performance Share Awards. The holders of Performance Share Awards shall have no voting or dividend rights until such time as any Common Shares are issued pursuant thereto, at which time they shall have the same voting, dividend and other rights as the Company's other stockholders. ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS. 10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options, Restricted Shares and Performance Share Awards available for future Awards under Article 3, (b) the number of Performance Share Awards included in any prior Award which has not yet been settled, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. 10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options, Restricted Shares and Performance Share Awards shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash. 10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the 8 Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. ARTICLE 11. LIMITATION OF RIGHTS. 11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any). 11.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10. 11.3 Creditors' Rights. A holder of Performance Share Awards shall have no rights other than those of a general creditor of the Company. Performance Share Awards represent unfunded and unsecured obligations of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. 11.4 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award until such time as: (a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable state securities laws; and (b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York Stock Exchange or any other securities exchange on which Common Shares are then listed. ARTICLE 12. LIMITATION OF PAYMENTS. 12.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer in the nature of compensation to or for the benefit of a Participant, whether paid or payable (or transferred or transferable) pursuant to the terms of this Plan or otherwise (a "Payment"), would be nondeductible for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, 9 then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided, however, that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 12. For purposes of this Article 12, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 12.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election, the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 12, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 12 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan, and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 12.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company on demand, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 10 12.4 Related Corporations. For purposes of this Article 12, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. ARTICLE 13. WITHHOLDING TAXES. 13.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or distribution until such obligations are satisfied. 13.2 Nonstatutory Options, Restricted Shares or Performance Share Awards. The Committee may permit an Optionee who exercises NSOs, or who receives Awards of Restricted Shares, or who receives Common Shares pursuant to the terms of a Performance Share Award, to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission. ARTICLE 14. ASSIGNMENT OR TRANSFER OF AWARD. Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law. However, this Article 14 shall not preclude (i) a Participant from designating a beneficiary to succeed, after the Participant's death, to those of the Participant's Awards (including without limitation, the right to exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, or (ii) a transfer of any Award hereunder by will or the laws of descent or distribution. ARTICLE 15. FUTURE OF PLANS. 15.1 Term of the Plan. The Plan, as set forth herein, shall become effective on May 8, 1992. The Plan shall remain in effect until it is terminated under Section 15.2, except that no ISOs shall be granted after May 7, 2002. 15.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan; provided, however, that any amendment of the Plan shall be subject to the approval of the Company's stockholders to the extent required by applicable laws, regulations or rules; and provided further, that Section 4.2 shall not be amended more than once every six months, other than to comport with changes in the Code or ERISA, or the rules thereunder. 11 15.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option, Restricted Share or Performance Share Award previously granted under the Plan. ARTICLE 16. DEFINITIONS. 16.1 "Award" means any award of an Option, a Restricted Share or a Performance Share Award under the Plan. 16.2 "Award Year" means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted. 16.3 "Board" means the Company's Board of Directors, as constituted from time to time. 16.4 "Change in Control" means the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1: (a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act; (b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (c) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. 16.5 "Code" means the Internal Revenue Code of 1986, as amended. 12 16.6 "Committee" means the Compensation Committee of the Board, as constituted from time to time. 16.7 "Common Share" means one share of the common stock of the Company. 16.8 "Company" means The Charles Schwab Corporation, a Delaware corporation. 16.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 16.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 16.11 "Exercise Price" means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement. 16.12 "Fair Market Value" means the market price of a Common Share, determined by the committee as follows: (a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. 16.13 "ISO" means an incentive stock option described in section 422(b) of the Code. 16.14 "Key Employee" means a key common-law employee of the Company or any Subsidiary, as determined by the Committee. 16.15 "Named Executive Officer" means a Participant who, as of the date of vesting of an Award is one of a group of "covered employees," as defined in the Regulations promulgated under Code Section 162(m), or any successor statute. 13 16.16 "Non-Employee Director" means a member of the Board who is not a common-law employee. 16.17 "NSO" means an employee stock option not described in sections 422 through 424 of the Code. 16.18 "Option" means an ISO or NSO, including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share. 16.19 "Optionee" means an individual, or his or her estate, legatee or heirs at law that holds an Option. 16.20 "Participant" means a Non-Employee Director or Key Employee who has received an Award. 16.21 "Performance Share Award" means the conditional right to receive in the future one Common Share, awarded to a Participant under the Plan. 16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab Corporation, as it may be amended from time to time. 16.23 "Replacement Option" means an Option that is granted when a Participant uses a Common Share held or to be acquired by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option. 16.24 "Restricted Share" means a Common Share awarded to a Participant under the Plan. 16.25 "Stock Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Performance Share Award which contains the terms, conditions and restrictions pertaining to such Restricted Share or Performance Share Award. 16.26 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her option. 16.27 "Subsidiary" means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 14 EX-10 3 EXHIBIT 10.142 THE CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN (RESTATED TO INCLUDE AMENDMENTS THROUGH OCTOBER 18, 1994) CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN TABLE OF CONTENTS
Section Page - ------- ---- Article I. Purpose 1.1 Establishment of the Plan 2 1.2 Purpose of the Plan 2 Article II. Definitions 2.1 Definitions 3 2.2 Gender and Number 4 Article III. Administration 3.1 Committee and Administrator 5 Article IV. Participants 4.1 Participants 6 Article V. Deferrals 5.1 Salary Deferrals 7 5.2 Deferrals of Bonuses and Other Cash Incentive Compensation 7 5.3 Deferral Procedures 8 5.4 Election of Time and Manner of Payment 8 5.5 Accounts and Earnings 10 5.6 Maintenance of Accounts 11 5.7 Change in Control 11 5.8 Payment of Deferred Amounts 14 5.9 Acceleration of Payment 14
Section PAGE - ------- ---- Article VI. General Provisions 6.1 Unfunded Obligation 15 6.2 Informal Funding Vehicles 15 6.3 Beneficiary 16 6.4 Incapacity of Participant or Beneficiary 17 6.5 Nonassignment 17 6.6 No Right to Continued Employment 17 6.7 Tax Withholding 17 6.8 Claims Procedure and Arbitration 17 6.9 Termination and Amendment 19 6.10 Applicable Law 19
THE CHARLES SCHWAB CORPORATION DEFERRED COMPENSATION PLAN ARTICLE I. PURPOSE 1.1 Establishment of the Plan. Effective as of July 1, 1994, The Charles Schwab Corporation (hereinafter, the "Company") hereby establishes The Charles Schwab Corporation Deferred Compensation Plan (the "Plan"), as set forth in this document. 1.2 Purpose of the Plan. The Plan permits participating employees to defer the payment of certain cash compensation that they may earn. The opportunity to elect such deferrals is provided in order to help the Company attract and retain key employees. This Plan is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. It is accordingly intended to be exempt from the participation, vesting, funding, and fiduciary requirements set forth in Title I of the Employee Retirement Income Security Act of 1974. 2 ARTICLE II. DEFINITIONS 2.1 Definitions. The following definitions are in addition to any other definitions set forth elsewhere in the Plan. Whenever used in the Plan, the capitalized terms in this section shall have the meanings set forth below unless otherwise required by the context in which they are used: (a) "Administrator" the administrator described in section 3.1 that is selected by the Committee to assist in the administration of the Plan. (b) "Beneficiary" means a person entitled to receive any benefit payments that remain to be paid after a Participant's death, as determined under section 6.3. (c) "Board" means the Board of Directors of the Company. (d) "Company" means The Charles Schwab Corporation, a Delaware corporation. (e) "Category 1 Participant" and "Category 2 Participant" each refer to a specific Participant group and have the meaning set forth in section 4.1. (f) "Committee" means the Compensation Committee of the Board. (g) "Deferral Account" means the account representing deferrals of cash compensation, plus investment adjustments, as described in sections 5.5 and 5.6. (h) "Participant" means any employee who meets the eligibility requirements of the Plan, as set forth in Article 4, and includes, where appropriate to the context, any former employee who is entitled to benefits under this Plan. (i) "Plan" means The Charles Schwab Corporation Deferred Compensation Plan, as in effect from time to time. (j) "Plan Year" means the calendar year. (k) "Retirement" shall mean any termination of employment with the Company and its Subsidiaries for any reason other than death after the Participant has attained age 50, but only if the Participant has completed a continuous period of service of at least seven (7) years ending on the date of the termination of employment; provided that with respect to any 3 payments made on account of a deferral election made prior to November 1, 1994, Retirement shall also mean any termination of employment with the Company and its Subsidiaries for any reason other than death after the Participant has attained age 55. (l) "Subsidiary" means a corporation or other business entity in which the Company owns, directly or indirectly, securities with more than 80 percent of the total voting power. (m) "Valuation Date" means each December 31 and any other date designated from time to time by the Committee for the purpose of determining the value of a Participant's Deferral Account balance pursuant to section 5.5. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine or feminine terminology shall also include the neuter and other gender, and the use of any term in the singular or plural shall also include the opposite number. 4 ARTICLE III. ADMINISTRATION 3.1 Committee and Administrator. The Committee shall administer the Plan and may select one or more persons to serve as the Administrator. The Administrator shall perform such administrative functions as the Committee may delegate to it from time to time. Any person selected to serve as the Administrator may, but need not, be a Committee member or an officer or employee of the Company. However, if a person serving as Administrator or a member of the Committee is a Participant, such person may not vote on a matter affecting his interest as a Participant. The Committee shall have discretionary authority to construe and interpret the Plan provisions and resolve any ambiguities thereunder; to prescribe, amend, and rescind administrative rules relating to the Plan; to select the employees who may participate and to terminate the future participation of any such employees; to determine eligibility for benefits under the Plan; and to take all other actions that are necessary or appropriate for the administration of the Plan. Such interpretations, rules, and actions of the Committee shall be final and binding upon all concerned and, in the event of judicial review, shall be entitled to the maximum deference allowable by law. Where the Committee has delegated its responsibility for matters of interpretation and Plan administration to the Administrator, the actions of the Administrator shall constitute actions of the Committee. 5 ARTICLE IV. PARTICIPANTS 4.1 Participants. Officers and other key employees of the Company and each of its Subsidiaries shall be eligible to participate in this Plan upon selection by the Committee. To be nominated for participation, an employee must be highly compensated or have significant responsibility for the management, direction and/or success of the Company as a whole or a particular business unit thereof. Directors of the Company who are full-time employees of the Company shall be eligible to participate in the Plan. Participating employees of the Company in the position of executive vice president or above shall be "Category 1 Participants." All other participating employees shall be "Category 2 Participants." 6 ARTICLE V. DEFERRALS 5.1 Salary Deferrals. Each Category 2 Participant selected under section 4.1 may elect to defer up to 50 percent of his regular base salary (subject to the provisions of this Article V). Any such election must be made by entering a deferred compensation agreement with the employer, as evidenced by a form approved by and filed with the Administrator on or before the deadline specified by the Committee (which shall be no earlier than one month prior to the beginning of the election period for which the deferred salary is to be earned). For this purpose, the election period shall be the calendar year; provided, however, that during periods in which the Plan is not in effect for a full calendar year or an employee is not a Participant for a full calendar year, the election period shall be the portion of the calendar year during which the Plan is in effect and the employee is an eligible Participant. Notwithstanding the foregoing, a person who is not a Participant at the beginning of a calendar year shall not be allowed to elect a deferral of compensation that takes effect during that year without the consent of the Committee. Salary deferrals that have been elected shall occur throughout the election period in equal increments for each payroll period. 5.2 Deferrals of Bonuses and Other Cash Incentive Compensation. Each Category 1 Participant and each Category 2 Participant may elect to defer all or any portion (subject to the provisions of this Article V) of any amount that he subsequently earns under an annual cash bonus program and/or a long-term cash incentive compensation program of the Company or a participating Subsidiary. Any such election must be made by entering a deferred compensation agreement with the employer, as evidenced by a form approved by the Committee that is filed with the Administrator on or before the deadline specified by the Committee. For annual cash bonuses, this deadline shall be no earlier than one month prior to the beginning of year (or portion thereof) for which the bonus will be earned. For other cash incentive compensation, this deadline shall be a date no later than six months before the end of the year or other period for which the incentive compensation will be earned. Rules similar to those in section 5.1 shall apply in cases 7 where the Plan is not in existence or an employee is not a Participant for the full period in which an annual cash bonus or long-term incentive compensation award is earned. 5.3 Deferral Procedures. Participants eligible to elect salary deferrals under section 5.1 shall have an opportunity to do so each year. Participants eligible to elect deferrals under section 5.2 shall have a separate opportunity to do so for each cash bonus under an annual bonus program and for each other cash bonus or incentive payment under a long-term incentive plan that they may earn. Unless the Committee specifies other rules for the deferrals that may be elected, the minimum deferral shall be 20 percent of the compensation to which a deferral election applies; and, subject to the maximum percentage allowed under section 5.1 or 5.2, as applicable, deferrals in excess of the minimum allowable percentage may be made only in increments of 10 percent. If a deferral is elected, the election shall be irrevocable with respect to the particular compensation that is subject to the election. Deferral elections shall be made on a form prescribed by the Committee or the Administrator. As provided in section 6.7, any deferral is subject to appropriate tax withholding measures and may be reduced to satisfy tax withholding requirements. 5.4 Election of Time and Manner of Payment. At the time a Participant makes a deferral election under section 5.1 or 5.2, the Participant shall also designate the manner of payment and the date on which payments from his or her Deferral Account shall begin, from among the following options: (i) a lump sum payable by the end of February of any year that the Participant specifies; (ii) a lump sum payable by the end of February in the year immediately following the Participant's Retirement; (iii) a series of annual installments, commencing in any year selected by the Participant and payable each year on or before the end of February, over a period of four years; or 8 (iv) a series of annual installments, commencing in the year following the Participant's Retirement and payable each year on or before the end of February, over a period of five, ten, or fifteen years, as designated by the Participant. However, if a Participant terminates employment for any reason other than Retirement, the payment of the Participant's entire Deferral Account, including any unpaid installments pursuant to clause (iii) above, shall be made in a single lump sum by the end of February in the year next following the year in which the Participant terminates employment, notwithstanding the terms of the Participant's election. Any election of a specified payment date pursuant to clauses (i) or (iii) shall be subject to any restrictions that the Committee may, in its sole discretion, choose to establish in order to limit the number of different payment dates that a Participant may have in effect at one time. If payment is due in the form of a lump sum, the payment shall equal the balance of the Deferral Account being paid, determined as of the Valuation Date coincident with or immediately preceding the payment date. If payment is due in the form of installments, the amount of each installment payment shall be equal to the quotient determined by dividing (A) the value of the portion of the Deferral Account to which the installment payment election applies (determined as of the Valuation Date coincident with or immediately preceding the date the payment is to be made), by (B) the number of years over which the installment payments are to be made, less the number of years in which prior payments attributable to such installment payment election have been made. Notwithstanding the foregoing, however, if earnings or any other amounts credited to a Participant's Deferral Account are not considered performance-based compensation, within the meaning of Section 162(m) of the Internal Revenue Code, and do not otherwise meet Internal Revenue Code conditions allowing the Company and its Subsidiaries to receive a federal income tax deduction for such amounts upon paying them at the time provided under the Participant's election, the payment of such amounts, to the extent in excess of the amount that would be 9 currently tax deductible, shall automatically be deferred until the earliest year that the payment can be deducted. 5.5 Accounts and Earnings. The Company shall establish a Deferral Account for each Participant who has elected a deferral under section 5.1 or 5.2 above, and its accounting records for the Plan with respect to each such Participant shall include a separate Deferral Account or subaccount for each deferral election of the Participant that could cause a payment made at a different time or in a different form from other payments of deferrals elected by the same Participant. Each Deferral Account balance shall reflect the Company's obligation to pay a deferred amount to a Participant or Beneficiary as provided in this Article V. Under procedures approved by the Committee and communicated to Participants, a Participant's Deferral Account balance shall be increased periodically (not less frequently than annually) to reflect an assumed earnings increment, based on an interest rate or other benchmark selected by the Committee and in effect at the time. Until the time for determining the amount to be paid to the Participant or Beneficiary, such assumed earnings shall accrue from each Valuation Date on the Deferral Account balance as of that date and shall be credited to the account as of the next Valuation Date. The rate of earnings may, but need not, be determined with reference to the actual rate of earnings on assets held under any existing grantor trust or other informal funding vehicle that is in effect pursuant to section 6.2. Any method of crediting earnings that is followed from time to time may, with reasonable advance notice to affected Participants, be revoked or revised prospectively as of the beginning of any new Plan Year. Earnings that have been credited for any Plan Year, like deferred amounts that have been previously credited to a Participant, shall not be reduced or eliminated retroactively unless they were credited in error. The crediting of assumed earnings shall not mean that any deferred compensation promise to a Participant is secured by particular investment assets or that the Participant is actually earning interest or any other form of investment income under the Plan. Consistent with the foregoing authority to exercise flexibility in establishing a method for crediting assumed earnings on account balances, the Committee may, but need not, consult with 10 Participants about their investment preferences and may, but need not, institute a program of assumed earnings that tracks the investment performance in a Participant's qualified defined contribution plan account or in an assumed participant-directed investment arrangement. 5.6 Maintenance of Accounts. The Accounts of each Participant shall be entered on the books of the Company and shall represent a liability, payable when due under this Plan, out of the general assets of the Company. Prior to benefits becoming due hereunder, the Company shall expense the liability for such accounts in accordance with policies determined appropriate by the Company's auditors. Except to the extent provided pursuant to the second paragraph of this section 5.6, the Accounts created for a Participant by the Company shall not be funded by a trust or an insurance contract; nor shall any assets of the Company be segregated or identified to such account; nor shall any property or assets of the Company be pledged, encumbered, or otherwise subjected to a lien or security interest for payment of benefits hereunder. Notwithstanding that the amounts to be paid hereunder to Participants constitute an unfunded obligation of the Company, the Company may direct that an amount equal to any portion of the Accounts shall be invested by the Company as the Company, in its sole discretion, shall determine. The Committee may in its sole discretion determine that all or any portion of an amount equal to the Accounts shall be paid into one or more grantor trusts that may be established by the Company for the purpose of providing a potential source of funds to pay Plan benefits. The Company may designate an investment advisor to direct the investment of funds that may be used to pay benefits, including the investment of the assets of any grantor trusts hereunder. 5.7 Change in Control. In the event of a Change in Control (as defined below), the following rules shall apply: (a) All Participants shall continue to have a fully vested, nonforfeitable interest in their Deferral Accounts. (b) Deferrals of amounts for the year that includes the Change in Control shall cease beginning with the first payroll period that follows the Change in Control. 11 (c) A special allocation of earnings on all Deferral Accounts shall be made under section 5.5 as of the date of the Change in Control on a basis no less favorable to Participants than the method being followed prior to the Change in Control. (d) All payments of deferred amounts following a Change in Control, whether or not they have previously begun, shall be made in a cash lump sum no later than 30 days following the Change in Control and, except as provided in section 5.4 with respect to installment payments in progress, shall be in an amount equal to the full Deferral Account balance, as adjusted pursuant to paragraph (c) above, as of the date of the Change in Control. (e) Nothing in this Plan shall prevent a Participant from enforcing any rules in a contract or another plan of the Company or any Subsidiary concerning the method of determining the amount of a bonus, incentive compensation, or other form of compensation to which a Participant may become entitled following a change in control, or the time at which that compensation is to be paid in the event of a change in control. For purposes of this Plan, a "Change in Control" means any of the following: (1) Any "person" who, alone or together with all "affiliates" and "associates" of such person, is or becomes (1) an "acquiring person" or (2) the "beneficial owner" of 35% of the outstanding voting securities of the Company (the terms "person", "affiliates", "associates" and "beneficial owner" are used as such terms are used in the Securities Exchange Act of 1934 and the General Rules and Regulations thereunder); provided, however, that a "Change in Control" shall not be deemed to have occurred if such "person" is Charles R. Schwab, the Company, any subsidiary or any employee benefit plan or employee stock plan of the Company or of any Subsidiary, or any trust or other entity organized, established or holding shares of such voting securities by, for or pursuant to, the terms of any such plan; or 12 (2) Individuals who at the beginning of any period of two consecutive calendar years constitute the Board cease for any reason, during such period, to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's Shareholders, of each new Board Member was approved by a vote of at least three-quarters (3/4) of the Board members then still in office who were Board members at the beginning of such period; or (3) Approval by the shareholders of the Company of: (A) the dissolution or liquidation of the Company; (B) the sale or transfer of substantially all of the Company's business and/or assets to a person or entity which is not a "subsidiary" (any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company); or (C) an agreement to merge or consolidate, or otherwise reorganize, with one or more entities which are not subsidiaries (as defined in (B) above), as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Company; or (4) The Board agrees by a majority vote that an event has or is about to occur that, in fairness to the Participants, is tantamount to a Change in Control. A Change of Control shall occur on the first day on which any of the preceding conditions has been satisfied. However, notwithstanding the foregoing, this section 5.7 shall not apply to any Participant who alone or together with one or more other persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or 13 disposing of securities of the Company, triggers a "Change in Control" within the meaning of paragraphs (1) and (2) above. 5.8 Payment of Deferred Amounts. A Participant shall have a fully vested, nonforfeitable interest in his or her Deferral Account balance at all times. However, vesting does not confer a right to payment other than in the manner elected by the Participant pursuant to section 5.4 (subject to any modification that may occur pursuant to section 5.5, 5.7 or 5.9). Upon the expiration of a deferral period selected by the Participant in one or more deferral elections, the Company shall pay to such Participant (or to the Participant's Beneficiary, in the case of the Participant's death) an amount equal to the balance of the Participant's Account attributable to such expiring deferral elections, plus assumed earnings (determined by the Company pursuant to section 5.5) thereon. 5.9 Acceleration of Payment. The Committee, in its discretion, upon receipt of a written request from a Participant, may accelerate the payment of all or any portion of the unpaid balance of a Participant's Deferral Account in the event of the Participant's Retirement, death, permanent disability, resignation or termination of employment, or upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe, unforeseeable financial hardship creating an immediate and heavy need for cash that cannot reasonably be satisfied from sources other than an accelerated payment from this Plan. The Committee in making its determination may consider such factors and require such information as it deems appropriate. 14 ARTICLE VI. GENERAL PROVISIONS 6.1 Unfunded Obligation. The deferred amounts to be paid to Participants pursuant to this Plan constitute unfunded obligations of the Company. Except to the extent specifically provided hereunder, the Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments, including any grantor trust investments which the Company has determined and directed the Administrator to make to fulfill obligations under this Plan shall at all times remain in the Company. Any investments and the creation or maintenance of any trust or Accounts shall not create or constitute a trust or a fiduciary relationship between the Administrator or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim for any changes in the value of any assets which may be invested or reinvested by the Company in an effort to match its liabilities under this Plan. 6.2 Informal Funding Vehicles. Notwithstanding section 6.1, the Company may, but need not, arrange for the establishment and use of a grantor trust or other informal funding vehicle to facilitate the payment of benefits and to discharge the liability of the Company and participating Affiliates under this Plan to the extent of payments actually made from such trust or other informal funding vehicle. Any investments and any creation or maintenance of memorandum accounts or a trust or other informal funding vehicle shall not create or constitute a trust or a fiduciary relationship between the Committee or the Company or an affiliate and a Participant, or otherwise confer on any Participant or Beneficiary or his or her creditors a vested or beneficial interest in any assets of the Company or any Affiliate whatsoever. Participants and Beneficiaries shall have no claim against the Company or any Affiliate for any changes in the value of any assets which may be invested or reinvested by the Company or any Affiliate with respect to this Plan. 15 6.3 Beneficiary. The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. A Participant may designate a Beneficiary on a form provided by the Administrator, executed by the Participant, and delivered to the Administrator. The Administrator may require the consent of the Participant's spouse to a designation if the designation specifies a Beneficiary other than the spouse. Subject to the foregoing, a Participant may change a Beneficiary designation at any time. Subject to the property rights of any prior spouse, if no Beneficiary is designated, if the designation is ineffective, or if the Beneficiary dies before the balance of the Account is paid, the balance shall be paid to the Participant's surviving spouse, or if there is no surviving spouse, to the Participant's estate. 6.4 Incapacity of Participant or Beneficiary. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Administrator receives a written notice, in a form and manner acceptable to the Administrator, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Administrator finds that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or because he or she is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or to any person or institution considered by the Administrator to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. If a guardian of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Administrator. In the event a person claiming or receiving benefits under the Plan is a minor, payment may be made to the custodian of an account for such person 16 under the Uniform Gifts to Minors Act. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. 6.5 Nonassignment. The right of a Participant or Beneficiary to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution, or other legal process. 6.6 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company, nor shall the Plan interfere in any way with the right of the Company to terminate the employment of such Participant at any time without assigning any reason therefor. 6.7 Tax Withholding. Appropriate taxes shall be withheld from cash payments made to Participants pursuant to the Plan. To the extent tax withholding is payable in connection with the Participant's deferral of income rather than in connection with the payment of deferred amounts, such withholding may be made from other wages and salary currently payable to the Participant, or, as determined by the Administrator, the amount of the deferral elected by the Participant may be reduced in order to satisfy required tax withholding for employment taxes and any other taxes. 6.8 Claims Procedure and Arbitration. The Company shall establish a reasonable claims procedure consistent with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Following a Change in Control of the Company (as determined under section 5.8) the claims procedure shall include the following arbitration procedure. Since time will be of the essence in determining whether any payments are due to the Participant under this Plan following a Change in Control, a Participant may submit any claim for payment to arbitration as follows: On or after the second day following the termination of the Participant's employment or other event triggering a right to payment), the claim may be filed with an arbitrator of the Participant's choice by submitting the claim in writing and providing a copy to the Company. The arbitrator must be: 17 (a) a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the Federal Mediation and Conciliation Service or the American Arbitration Association; or (b) a retired judge of the State in which the claimant is a resident who served at the appellate level or higher. The arbitration hearing shall be held within 72 hours (or as soon thereafter as possible) after filing of the claim unless the Participant and the Company agree to a later date. No continuance of said hearing shall be allowed without the mutual consent of the Participant and the Company. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion, and the arbitrator may close the hearing in his or her sole discretion upon deciding he or she has heard sufficient evidence to satisfy issuance of an award. In reaching a decision, the arbitrator shall have no authority to ignore, change, modify, add to or delete from any provision of this Plan, but instead is limited to interpreting this Plan. The arbitrator's award shall be rendered as expeditiously as possible, and unless the arbitrator rules within seven days after the close of the hearing, he will be deemed to have ruled in favor of the Participant. If the arbitrator finds that any payment is due to the Participant from the Company, the arbitrator shall order the Company to pay that amount to the Participant within 48 hours after the decision is rendered. The award of the arbitrator shall be final and binding upon the Participant and the Company. Judgment upon the award rendered by the arbitrator may be entered in any court in any State of the United States. In the case of any arbitration regarding this Agreement, the Participant shall be awarded the Participant's costs, including attorney's fees. Such fee award may not be offset against the deferred compensation due hereunder. The Company shall pay 18 the arbitrator's fee and all necessary expenses of the hearing, including stenographic reporter if employed. 6.9 Termination and Amendment. The Committee may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, the Committee may reinstate any or all of its provisions. Except as otherwise required by law, the Committee may delegate to the Administrator all or any of its foregoing powers to amend, suspend, or terminate the Plan. Any such amendment, suspension, or termination may affect future deferrals without the consent of any Participant or Beneficiary. However, with respect to deferrals that have already occurred, no amendment, suspension or termination may impair the right of a Participant or a designated Beneficiary to receive payment of the related deferred compensation in accordance with the terms of the Plan prior to the effective date of such amendment, suspension or termination, unless the affected Participant or Beneficiary gives his express written consent to the change. 6.10 Applicable Law. The Plan shall be construed and governed in accordance with applicable federal law and, to the extent not preempted by such federal law, the laws of the State of California. 19 EX-10 4 EXHIBIT 10.143 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of _______________, 19___ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and ___________________________________________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended (the "Plan") in order to provide selected Key Employees and Non-Employee Directors with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, it is agreed as follows: SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase___________ Common Shares for the amount of $_______________ per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1992 Stock Incentive Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Office of the Corporate Secretary of the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. PAGE 1 (c) Tax Treatment. This Option is not intended to qualify as an incentive stock option described in Section 422(b) of the Code. (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date set forth below, and subject to the provisions of Section 3(d) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to ten percent (10%) of the Total Award Common Shares; (iii) upon and after the second anniversary of the Date of Grant, the Optionee may purchase an additional fifteen percent (15%) of the Total Award Common Shares; (iv) upon and after the third, fourth and fifth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, so that this Option shall become fully exercisable, subject to the Optionee's continued employment with the Company or its subsidiaries, on the fifth anniversary of the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. PAGE 2 (d) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options and Performance Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Office of the Corporate Secretary of the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; (B) in the case of a Termination Event resulting from Retirement, the date two years following such PAGE 3 Termination Event; or (C) in all other cases, the date three (3) months following such Termination Event. (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment PAGE 4 representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder, and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Office of the Corporate Secretary of the Company or its designee. PAGE 5 (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. PAGE 6 (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; (2) If the Common Share was traded over-the counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Retirement" shall mean a termination of employment of the Optionee occurring at any time after the Optionee has attained fifty (50) years of age, but only if the Optionee has completed a continuous period of service of at least seven (7) years ending on the date of the termination of employment. (i) "Securities Act" shall mean the Securities Act of 1933, as amended. PAGE 7 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its officer duly authorized to act on behalf of the Committee, and the Optionee has personally executed this Agreement. THE CHARLES SCHWAB CORPORATION By: ____________________________________ Its: Chairman and Chief Executive Officer ------------------------------------ Company's Address: 101 Montgomery Street San Francisco, California 94104 OPTIONEE _____________________________________________ Signature Full Name (please print): ___________________ _____________________________________________ Date:________________________________________ Optionee's Address (please print): _____________________________________________ _____________________________________________ Optionee's Social Security Number: _____________________________________________ PAGE 8 EX-10 5 EXHIBIT 10.144 THE CHARLES SCHWAB CORPORATION 1992 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT THIS AGREEMENT is entered into as of _______________, 19___ between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and _____________________ (the "Optionee"). W I T N E S S E T H: WHEREAS, the Board has adopted and the stockholders of the Company have approved The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended (the "Plan") in order to provide selected Key Employees and Non-Employee Directors with an opportunity to acquire Common Shares; and WHEREAS, the Committee has determined that the Optionee is a Key Employee and that it would be in the best interests of the Company and its stockholders to grant the stock option described in this Agreement (the "Option") to the Optionee as an inducement to enter into or remain in the service of the Company or its subsidiaries and as an incentive for extraordinary efforts during such service: NOW, THEREFORE, it is agreed as follows: SECTION 1. GRANT OF OPTION. (a) Option. On the terms and conditions stated below, the Company hereby grants to the Optionee the option to purchase __________ Common Shares for the amount of $_______ per Common Share (the "Exercise Price"), which is agreed to be 100% of the Fair Market Value thereof on the Date of Grant. The number of Common Shares subject to this Option and the Exercise Price shall be subject to adjustment under certain limited circumstances as provided in Article 10 of the Plan. (b) 1992 Stock Incentive Plan. This Option is granted pursuant to the Plan, the provisions of which are incorporated into this Agreement by reference, and a copy of which is available upon request at no charge to the Optionee from the Office of the Corporate Secretary of the Company. In the event of any inconsistency between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall prevail. (c) Tax Treatment. This Option is intended to qualify as an incentive stock option described in Section 422(b) of the Code. PAGE 1 (d) Expiration Date. Notwithstanding any other provision contained herein, this Option shall expire not later than the date immediately preceding the tenth anniversary of the Date of Grant. SECTION 2. NO TRANSFER OR ASSIGNMENT OF OPTION. Except as otherwise provided in this Agreement or as permitted by the Plan, this Option, and any interest therein, shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. SECTION 3. RIGHT TO EXERCISE OPTION. (a) Vesting. This Option shall become exercisable by the Optionee with respect to the total number of Common Shares subject to this Option as set forth under Section 1(a) above (the "Total Award Common Shares"), subject to the continued employment of the Optionee by the Company or its subsidiaries on each date set forth below, and subject to the provisions of Section 3(d) hereof, in annual increments of the Total Award Common Shares beginning on the first anniversary of the Date of Grant, such that (i) no portion of this Option will be exercisable prior to such first anniversary of the Date of Grant; (ii) upon and after such first anniversary of the Date of Grant, the Optionee may purchase up to ten percent (10%) of the Total Award Common Shares; (iii) upon and after the second anniversary of the Date of Grant, the Optionee may purchase an additional fifteen percent (15%) of the Total Award Common Shares; (iv) upon and after the third, fourth and fifth anniversaries of the Date of Grant, respectively, the Optionee may purchase an additional twenty-five percent (25%) of the Total Award Common Shares, so that this Option shall become fully exercisable, subject to the Optionee's continued employment with the Company or its subsidiaries, on the fifth anniversary of the Date of Grant. (b) Minimum Number of Shares. This Option shall be exercisable for at least 100 Common Shares (without regard to adjustments to the number of Common Shares subject to this Option pursuant to Article 10 of the Plan) or, if less, (i) the number of shares with respect to which this Option has become vested under Section 3(a) above, or (ii) all of the remaining Common Shares subject to this Option. (c) Full Vesting on Change in Control. Notwithstanding subparagraph (a) hereof, this Option shall become fully exercisable as to the Total Award Common Shares immediately preceding any Change in Control with respect to the Company. In the event that the Committee determines that a Change in Control is likely to occur, the Company shall so advise the Optionee, and the provisions of this subparagraph (c) shall take effect as of the date ten (10) days prior to the anticipated date of such Change in Control. PAGE 2 (d) Vesting Contingent on Satisfactory Performance. Notwithstanding subparagraph (a) hereof, the continued accrual of vesting pursuant to subparagraph (a) is contingent upon the Optionee's satisfactory job performance, and the Company may, in its sole discretion, upon notice to the Optionee suspend or delay the vesting of Options and Performance Shares hereunder for any period of time in the event that the Company determines, within its sole discretion, that the Optionee's performance is unsatisfactory. SECTION 4. EXERCISE OF OPTION. (a) Notice of Exercise. The Optionee or the Optionee's representative may exercise this Option by giving written notice to the Office of the Corporate Secretary of the Company (or its designee) pursuant to Section 9(d). The notice shall specify the election to exercise this Option, the date of exercise, the number of Common Shares for which it is being exercised and the form of payment. The notice shall be signed by the person or persons exercising this Option. In the event that this Option is being exercised by the representative of the Optionee, the notice shall be accompanied by proof satisfactory to the Company of the representative's right to exercise this Option. The Purchase Price for Common Shares shall be paid in a form that conforms to Sections 6.1 through 6.3 of the Plan at the time such notice is given. (b) Issuance of Shares. After receiving a proper notice of exercise, the Company shall cause to be issued a certificate or certificates for the Common Shares so purchased, registered in the name of the person exercising this Option. The Company shall cause such certificate or certificates to be delivered to or upon the order of the person exercising this Option. SECTION 5. TERM. (a) Basic Term. This Option shall in any event expire on the date specified in Section 1(d). (b) Termination of Employment. Upon the Optionee's termination of employment with the Company and its subsidiaries for any reason, whether as a result of death, Permanent Disability or any other involuntary or voluntary event of termination of employment (including a termination of employment as may be provided for or determined under an employment contract, if any, entered into between the Company or its subsidiary and the Optionee) (each, a "Termination Event"), no unvested portion of the Total Award Common Shares thereafter shall vest or become exercisable. With respect to the vested or exercisable portion of the Total Award Common Shares as of the date of such a Termination Event, this Option shall expire on the earlier of (i) the expiration date specified in Section 1(d) or (ii) whichever of the following is applicable: (A) in the case of a Termination Event resulting from death or Permanent Disability, the date one year following such Termination Event; or (B) in all other cases, the date three (3) months following such Termination Event. PAGE 3 (c) Divestment of Options. Notwithstanding anything to the contrary contained herein, this Option shall immediately become forfeited and expire in the event that the Company terminates the Optionee's employment on account of conduct inimical to the best interests of the Company, including, without limitation, conduct constituting a violation of law or Company policy, fraud, theft, conflict of interest, dishonesty or harassment. The determination whether the Optionee's employment has been terminated on account of conduct inimical to the best interests of the Company shall be made by the Company in its sole discretion. SECTION 6. LEGALITY OF INITIAL ISSUANCE. No Common Shares shall be issued upon the exercise of this Option unless and until the Company has determined that: (a) A registration statement for the Common Shares is effective under the Securities Act or an exemption from the registration requirements thereof has been perfected; (b) Any applicable listing requirement of any stock exchange on which Common Shares are listed has been satisfied; and (c) Any other applicable provisions of state or federal law have been satisfied. SECTION 7. NO REGISTRATION RIGHTS. The Company may, but shall not be obligated to, register or qualify the Common Shares for resale or other disposition by the Optionee under the Securities Act or any other applicable law. SECTION 8. RESTRICTIONS ON TRANSFER OF SHARES. (a) Restrictions. Regardless of whether the offering and sale of Common Shares under the Plan have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of such Common Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. (b) Investment Intent at Exercise. If the Common Shares under the Plan are not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, the Optionee shall represent and agree at the time of exercise that the Common Shares being acquired upon exercising this Option are being acquired PAGE 4 for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. (c) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 8 shall be conclusive and binding on the Optionee and all other persons. SECTION 9. MISCELLANEOUS PROVISIONS. (a) Withholding Taxes. To the extent required by applicable federal, state, local or foreign law the Optionee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of the exercise of an Option hereunder and no Option may be exercised unless such obligation is satisfied. (b) Rights as a Stockholder. Neither the Optionee nor the Optionee's representative shall have any rights as a stockholder with respect to any Common Shares subject to this Option until certificates for such Common Shares have been issued in the name of the Optionee or the Optionee's representative. (c) No Employment Rights. Nothing in this Agreement shall be construed as giving the Optionee the right to be retained as an employee of the Company or its subsidiaries. The Company reserves the right to terminate the Optionee's employment at any time for any reason, subject only to the terms of any written employment contract entered into between the Company and the Optionee. (d) Notice. Any notice required by the terms of this Agreement shall be given in writing and shall be deemed effective upon personal delivery or upon deposit with the appropriate postal service, by registered or certified mail with postage and fees prepaid and addressed to the party entitled to such notice at the address shown below such party's signature on this Agreement, or at such other address as such party may designate by ten (10) days advance written notice to the other party to this Agreement. Notwithstanding the foregoing, no notice of exercise, as required by Section 4(a), shall be effective until actual receipt thereof by the Office of the Corporate Secretary of the Company or its designee. (e) Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof; provided, however, that in the event of any inconsistency or conflict between any provision hereof and the terms of the Plan, the terms of the Plan shall control. (f) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State. PAGE 5 SECTION 10. DEFINITIONS. (a) Capitalized terms defined in the Plan shall have the same meaning when used in this Agreement. (b) "Change in Control" shall mean the occurrence of any of the following events after the effective date of the Plan as set out in Section 15.1 of the Plan: (1) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (2) A change in the composition of the Company's Board of Directors (the "Board"), as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; (3) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. (c) "Common Share" shall mean one share of the common stock of the Company. (d) "Date of Grant" shall mean the date of this Agreement, which is the date first written above. (e) "Fair Market Value" shall mean the market price of a Common Share, determined by the Committee as follows: (1) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date; PAGE 6 (2) If the Common Share was traded over-the counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date; (3) If the Common Share was traded over-the- counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and (4) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. (f) "Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which has lasted, or can be expected to last, for a continuous period of not less than twelve (12) months or which can be expected to result in death. (g) "Purchase Price" shall mean the Exercise Price multiplied by the number of Common Shares with respect to which this Option is being exercised. (h) "Securities Act" shall mean the Securities Act of 1933, as amended. PAGE 7 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its officer duly authorized to act on behalf of the Committee, and the Optionee has personally executed this Agreement. THE CHARLES SCHWAB CORPORATION By: ------------------------------------ Its: Chairman and Chief Executive Officer ------------------------------------ Company's Address: 101 Montgomery Street San Francisco, California 94104 OPTIONEE ---------------------------------- Signature Full Name (please print): ------- ---------------------------------- Date: ---------------------------- Optionee's Address (please print): ----------------------------------- ----------------------------------- Optionee's Social Security Number: ----------------------------------- PAGE 8 EX-11 6 EXHIBIT 11.1 THE CHARLES SCHWAB CORPORATION Computation of Earnings per Common Equivalent Share (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ---- ---- ---- ---- Income before extraordinary charge $31,195 $28,859 $101,544 $95,854 Extraordinary charge - early retirement of debt 6,700 6,700 - ---------------------------------------------------------------------------------------------------------------------- Net Income $31,195 $22,159 $101,544 $89,154 ====================================================================================================================== Shares Weighted average number of common shares outstanding 56,408 57,622 56,659 57,473 Common stock equivalent shares related to option plans 1,664 2,041 1,748 1,845 - ---------------------------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 58,072 59,663 58,407 59,318 ====================================================================================================================== Earnings per Common Equivalent Share: Income before extraordinary charge $ .54 $ .48 $ 1.74 $ 1.61 Extraordinary charge - early retirement of debt .11 .11 - ---------------------------------------------------------------------------------------------------------------------- Net Income $ .54 $ .37 $ 1.74 $ 1.50 ======================================================================================================================
EX-12 7 EXHIBIT 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands, unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1994 1993 1994 1993 ---- ---- ---- ---- Earnings before extraordinary charge and income taxes $ 51,594 $47,671 $168,357 $161,035 - ---------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense - customer 48,843 28,250 118,177 85,232 Interest expense - other 5,755 4,614 14,751 13,632 Interest portion of rental expense 4,353 3,965 12,578 11,402 - ---------------------------------------------------------------------------------------------------------- Total fixed charges (a) 58,951 36,829 145,506 110,266 - ---------------------------------------------------------------------------------------------------------- Earnings before extraordinary charge and income taxes and fixed charges (b) $110,545 $84,500 $313,863 $271,301 ========================================================================================================== Ratio of earnings to fixed charges (b) divided by (a)* 1.9 2.3 2.2 2.5 ========================================================================================================== Ratio of earnings to fixed charges as adjusted** 6.1 6.6 7.2 7.4 ========================================================================================================== * The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such purposes, "earnings" consist of earnings before extraordinary charge and income taxes and fixed charges. "Fixed charges" consist of interest expense incurred on payables to customers, subordinated borrowings, term debt, capitalized interest, and one-third of rental expense, which is estimated to be representative of the interest factor. ** Because interest expense incurred in connection with payables to customers is completely offset by interest revenue on related investments and margin loans, the Company considers such interest to be an operating expense. Accordingly, the ratio of earnings to fixed charges as adjusted reflects the elimination of such interest expense as a fixed charge.
EX-15 8 [ARTICLE] BD This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Income and Condensed Consolidated Balance Sheet of the Company's Form 10-Q for the quarterly period ended September 30, 1994, and is qualified in its entirety by reference to such financial statements. [MULTIPLIER] 1000 [PERIOD-TYPE] 9-MOS [FISCAL-YEAR-END] DEC-31-1994 [PERIOD-START] JAN-1-1994 [PERIOD-END] SEP-30-1994 [CASH] 360479 [RECEIVABLES] 2885514 [SECURITIES-RESALE] 4025034 [SECURITIES-BORROWED] 0 [INSTRUMENTS-OWNED] 0 [PP&E] 135985 [TOTAL-ASSETS] 7564785 [SHORT-TERM] 111462 [PAYABLES] 6619560 [REPOS-SOLD] 0 [SECURITIES-LOANED] 0 [INSTRUMENTS-SOLD] 0 [LONG-TERM] 206494 [COMMON] 595 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [OTHER-SE] 441467 [TOTAL-LIABILITY-AND-EQUITY] 7564785 [TRADING-REVENUE] 124645 [INTEREST-DIVIDENDS] 251042 [COMMISSIONS] 414008 [INVESTMENT-BANKING-REVENUES] 0 [FEE-REVENUE] 113810 [INTEREST-EXPENSE] 132928 [COMPENSATION] 331140 [INCOME-PRETAX] 168357 [INCOME-PRE-EXTRAORDINARY] 168357 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 101544 [EPS-PRIMARY] 1.74 [EPS-DILUTED] 1.74
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