10-K 1 ANNUAL REPORT ON FORM 10-K 12/31/94 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Number) 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock - $0.01 par value New York Stock Exchange, Inc. The Pacific Stock Exchange Incorporated Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 6, 1995, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $1,669,644,563. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant and by the Charles Schwab Profit Sharing and Employee Stock Ownership Plan were deemed to be shares of Common Stock held by affiliates. The number of shares of Common Stock outstanding as of March 6, 1995 was 85,693,972* shares. DOCUMENTS INCORPORATED BY REFERENCE Part I and II of this Form 10-K incorporate certain information contained in the registrant's 1994 Annual Report to Stockholders by reference to portions of that document. Part III of this Form 10-K incorporates certain information contained in the registrant's definitive proxy statement for its annual meeting of stockholders to be held May 8, 1995 by reference to portions of that document. * Reflects the 1995 three-for-two common stock split. THE CHARLES SCHWAB CORPORATION Annual Report On Form 10-K For Fiscal Year Ended December 31, 1994 --------------------------------------- TABLE OF CONTENTS Part I ------ Item 1. Business-------------------------------------------------------- 1 Item 2. Properties------------------------------------------------------ 10 Item 3. Legal Proceedings----------------------------------------------- 10 Item 4. Submission of Matters to a Vote of Security Holders------------- 11 Item 4a. Executive Officers of the Registrant---------------------------- 11 Part II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters------------------------------------------- 11 Item 6. Selected Financial Data---------------------------------------- 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations----------------- 11 Item 8. Financial Statements and Supplementary Data------------------- 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure------------------------ 12 Part III -------- Item 10. Directors and Executive Officers of the Registrant------------ 12 Item 11. Executive Compensation---------------------------------------- 13 Item 12. Security Ownership of Certain Beneficial Owners and Management------------------------------------------------ 13 Item 13. Certain Relationships and Related Transactions---------------- 13 Part IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K--------------------------------------------------- 14 Exhibit Index-------------------------------------------- 15 Signatures----------------------------------------------- 20 Index to Financial Statement Schedules------------------ F-1 PART I Item 1. Business (a) General Development of Business. The Charles Schwab Corporation -------------------------------- (CSC) is a holding company engaged, through its subsidiaries, in securities brokerage and related investment services. CSC's principal operating subsidiary, Charles Schwab & Co., Inc. (Schwab), serves an estimated 42% of the discount brokerage market as measured by commission revenues. Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade execution services to broker-dealers and institutional customers. During 1994, orders handled by M&S totaled over 5 billion shares, or over 6% of the total shares traded on Nasdaq. As used herein, the "Company" refers to CSC and subsidiaries. Schwab was incorporated in California in 1971 and adopted the name Charles Schwab & Co., Inc. after Mr. Charles R. Schwab became its owner and President. In September 1987, the Company raised $123 million in its initial public offering. Since becoming a publicly- owned entity, the Company has experienced significant growth in revenues, customer assets and number of accounts. This growth has been accomplished through investment in technology, product and service development, marketing programs and customer service delivery systems. In addition, the Company has broadened its service capability through the acquisition and development of additional businesses. In October 1989, Charles Schwab Investment Management, Inc. (CSIM) was formed as a subsidiary of CSC. In January 1990, CSIM became the general investment adviser (employing a sub-adviser to perform portfolio management for certain funds), as well as the administrator for three money market funds. Substantially all of the balances previously invested by Schwab customers in other money market funds having similar investment objectives were transferred to these money market funds in January 1990. Schwab subsequently introduced additional mutual funds. The Company refers to all funds for which CSIM is the investment adviser as the SchwabFunds (registered trademark). In response to the continued growth of customer trading activity in Nasdaq securities and a desire to secure a capability to execute customer trades in these and other securities, CSC acquired M&S in July 1991. Since the acquisition, M&S has executed substantially all the Nasdaq security trades originated by the customers of Schwab, which in 1994 accounted for approximately 17% of Schwab's total trading volume. Principal transaction revenues generated by M&S have contributed significantly to the Company's operating results. During July 1992, Schwab introduced nationally its no-transaction- fee mutual fund service, known as the Mutual Fund OneSource (trademark) service, which at December 31, 1994, enabled customers to trade 280 mutual funds in 28 well-known fund families without incurring brokerage transaction fees. In March 1992, CSC opened The Charles Schwab Trust Company (CSTC), which provides custody services for independent investment managers and serves as trustee for employee benefit plans (primarily 401(k) plans). CSTC's primary focus is to provide services to fee-based independent investment managers and 401(k) plan record keepers and administrators. Developments During 1994 and Early 1995 During 1994, the Company experienced record revenues, net income and customer account openings. Net income for 1994 was $135 million, or $1.54 per share, up from $118 million, or $1.32 per share, in 1993, after a $.07 per share extraordinary charge for early debt retirement, and $81 million, or $.92 per share, in 1992. Schwab opened 736,000 new accounts during 1994, which contributed significantly to the $26.8 billion, or 28%, increase in assets held in Schwab customer accounts. The Company invested $32 million in various capital expenditures during 1994, including enhancements to its data processing and telecommunications systems, and a fourth regional customer telephone service center. The Company also opened 10 branch offices and made improvements to certain existing office facilities. Several financing transactions were completed during 1994. The Company repurchased 2,499,600 shares of its common stock for $47 million, prepaid its $35 million Senior Term Loan due in March 1995 and terminated a related interest rate exchange arrangement, issued $20 million in Medium-Term Notes and paid common stock dividends of $16 million. During the second half of 1994, Schwab commenced operation of five specialists' posts on the Pacific Stock Exchange. These posts make markets in over 240 common stocks. The Company expects to continue to expand its capacity to provide principal execution services to customers. In July 1994, the Securities and Exchange Commission (SEC) approved a National Association of Securities Dealers, Inc. (NASD) Interpretation to its Rules of Fair Practice governing the way in which market makers in Nasdaq securities handle 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. This Interpretation has caused principal transaction revenues to decline. Additional rule changes in this area currently under consideration by the NASD, such as the proposed Aqcess system, also may adversely impact principal transaction - 1 - revenues. See also "Regulation" below. In December 1994, a $100 million letter of credit facility was established by CSC with a commercial bank to issue letters of credit (LOCs) to three of the SchwabFunds (registered trademark) money market funds. CSC has agreed to reimburse the bank for any payments made under the LOCs. At December 31, 1994, LOCs totaling $58.5 million were outstanding under this facility. See "Commitments, Contingent Liabilities and Other Information" in the Notes to Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. In January 1995, the Company's Board of Directors declared a three- for-two stock split of the Company's common stock, effected in the form of a 50% stock dividend, payable March 1, 1995 to stockholders of record February 1, 1995. Share information throughout this report has been restated to reflect this transaction. Also in January 1995, the Board increased the Company's quarterly cash dividend 29% to $.060 per share payable February 15, 1995 to stockholders of record February 1, 1995. In the first quarter of 1995, Schwab's Mutual Fund OneSource (trademark) service was expanded and now includes over 335 mutual funds in 38 well-known fund families. In addition, Schwab introduced FundMap (trademark), a mutual fund selection software for Windows (registered trademark). (b) Financial Information About Industry Segments. The Company ----------------------------------------------- operates in a single industry segment: securities brokerage and related investment services. No material part of the Company's consolidated revenues is received from a single customer or group of customers, or from foreign operations. As of December 31, 1994, approximately 28% of Schwab's total customer accounts were located in California. The next highest geographic concentrations of total customer accounts were approximately 7% in each of New York and Florida. (c) Narrative Description of Business. Schwab provides securities ---------------------------------- brokerage and related investment services to more than 3.0 million active investor accounts. These accounts held $122.6 billion in assets at December 31, 1994. M&S operates four offices in four states offering trade execution services for Nasdaq securities to broker- dealers, including Schwab, and institutional customers. Schwab's primary focus is serving retail clients who seek a wide selection of quality investment services at fees that, in most cases, are substantially lower than those of full-commission firms. The table on the following page sets forth on a comparative basis the Company's revenues for the three years ended December 31, 1994. These revenue figures reflect developments in, and the composition of, the Company's business. Schwab provides its customers, most of whom are retail investors, with convenient and prompt execution of their orders to purchase and sell securities, and with rapid access to market-related information. A key to both the quality and speed of Schwab's service and to its ability to provide commission discounts is its sophisticated communications and information processing systems. Schwab primarily serves investors who wish to conduct their own research and make their own investment decisions and do not wish to pay, through brokerage commissions, for research or portfolio management. To attract and accommodate investors who want research and portfolio management services, however, Schwab offers a variety of fee-based (primarily third-party) research and portfolio management products. This customer segment has become increasingly significant to Schwab's growth in customer assets and accounts. During 1994, Schwab customer assets held in customer accounts managed by independent investment managers increased $9.7 billion (42%) to a total of $32.6 billion. Although Schwab does not generally maintain inventories of securities for sale to its customers or engage in principal transactions with its customers, it has recently expanded, through the acquisition of specialists' posts on the Pacific Stock Exchange, its capability to execute customer orders in listed securities on a principal basis. Other instances where Schwab acts as principal include: (1) having temporary positions resulting from execution errors, unavailability of the various exchanges' automated trade execution facilities or nonpayment by customers, (2) positioning of listed securities to accommodate institutional customers, and (3) engaging in certain riskless principal and other similar transactions where, in response to a customer order, Schwab will purchase securities (generally municipal and government securities) from another source and resell them to customers at a markup. Schwab's customer service delivery systems reduce dependency on the need for personal relationships between Schwab's customers and employees to generate orders. Schwab does not generally assign customers to individual employees. Each customer-contact employee has immediate access to the customer account and market-related information necessary to respond to any customer's inquiries, and for most customer orders, can enter the order and confirm the transaction. Customer orders involving certain types of transactions, such as those in fixed income securities and mutual funds, are handled by separate groups of registered representatives that specialize in such transactions. As a result of this approach, the departure of a registered representative generally does not result in a loss of customers for the firm. As a market maker in Nasdaq securities, M&S generally executes customer trades as principal. M&S business practices call for competitively priced customer executions generally defined as the highest bid price on a sell order and the lowest offer price on a buy order quoted through the network of NASD member firms that are market makers. - 2 - Sources of Revenues (Dollar amounts in thousands)
Year Ended December 31, ----------------------------------------------------------------- 1994 1993 1992 -------------------- ------------------ ------------------- Type of Revenue Amount Percent Amount Percent Amount Percent -------------------- ------------------ ------------------- Commissions Listed securities $ 278,025 26.1% $ 299,153 31.0% $ 251,453 33.6% Nasdaq 169,236 15.9% 168,855 17.5% 122,022 16.3% Mutual funds 59,949 5.6% 47,265 4.9% 35,507 4.7% Options 38,902 3.7% 36,933 3.8% 32,290 4.3% Other 157 ------------------------------------------------------------------------------------------------------- Commissions 546,112 51.3% 552,206 57.2% 441,429 58.9% ------------------------------------------------------------------------------------------------------- Interest revenue Investments, customer-related 168,485 15.8% 112,944 11.7% 140,428 18.7% Margin loans to customers 184,871 17.4% 132,471 13.7% 104,337 13.9% Other 9,588 0.9% 6,816 0.7% 6,266 0.9% Interest expense (198,236) (18.6%) (132,382) (13.7%) (159,491) (21.3%) ------------------------------------------------------------------------------------------------------- Interest revevenue, net of interest expense 164,708 15.5% 119,849 12.4% 91,540 12.2% ------------------------------------------------------------------------------------------------------- Principal transactions 162,595 15.3% 169,081 17.5% 130,013 17.3% Mutual fund service fees 156,812 14.7% 98,554 10.2% 63,391 8.5% Other 34,370 3.2% 25,323 2.7% 23,139 3.1% ------------------------------------------------------------------------------------------------------- Total $1,064,597 100.0% $ 965,013 100.0% $ 749,512 100.0% ======================================================================================================= Certain prior years' revenues and expenses have been reclassified to conform to the 1994 presentation. This table should be read in connection with the Company's consolidated financial statements and notes in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. -------------------------------------------------------------------------------------------------------
Customer trades exceeding certain sizes are executed on a negotiated basis. In the normal course of its market-making activities, M&S maintains inventories in Nasdaq securities on both a "long" and "short" basis. While long inventory positions represent M&S' ownership of securities, short inventory positions represent obligations of M&S to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, long or short inventory positions may result in gains or losses to M&S as market values of these securities fluctuate. The securities brokerage industry is directly affected by fluctuations in volumes and price levels of securities transactions generally, which are affected by many national and international economic and political factors that cannot be predicted, including broad trends in business and finance, legislation and regulation affecting the United States and international business and financial communities, currency values, and the level and volatility of interest rates. Sustained low volumes of retail investment activity or of securities transactions generally, particularly if accompanied by low securities prices, could substantially reduce the Company's transaction-based revenues and could lead to reduced margin account balances, thus reducing interest revenue as well. Shifts in customer investment vehicle preferences from individual equity securities to products that have lower commissions per transaction, such as mutual funds, could also reduce transaction-based revenues. In connection with its information processing systems, its branch office network, its regional customer telephone service centers and other aspects of its business, the - 3 - Company incurs substantial expenses that do not vary directly, at least in the short term, with fluctuations in securities transaction volumes and revenues. In the event of a material reduction in revenues, the Company may not reduce such expenses quickly and, as a result, the Company could experience reduced profitability or losses. Conversely, sudden surges in transaction volume can result in increased profits and profit margins. To ensure that it has the capacity to process projected increases in transaction volumes, the Company has historically made substantial capital and operating expenditures in advance of such projected increases, including during periods of low transaction volumes. In the event that such growth in transaction volumes does not occur, the expenses related to such investments could, as they have in the past, cause reduced profitability or losses. Competition The Company encounters rigorous competition from full-commission and discount brokerage firms, as well as from financial institutions, mutual fund sponsors, market makers in Nasdaq securities and other organizations. The general financial success within the securities industry over the past several years has strengthened existing competitors, and management believes that such success will continue to attract additional competitors such as banks, insurance companies and providers of on-line financial and information services. Some of these competitors are larger, more diversified, have greater capital resources, and offer a wider range of services and financial products than the Company. Particularly as financial services and products proliferate, to the extent such competitors are able to attract and retain customers on the basis of the convenience of one- stop shopping, the Company's business or its ability to grow could be adversely affected. In many instances, the Company is competing with such organizations for the same customers. Management believes that the main competitive factors are quality, convenience, price of services and products offered, and breadth of product line. Most discount brokerage firms charge commissions lower than Schwab. Full-commission brokerage firms also offer discounted commissions to selected retail brokerage customers. Many brokerage firms employ substantial funds in advertising and direct solicitation of customers to increase their market share of commission dollars and other securities-related income. If the well-capitalized brokerage firms pursue these competitive strategies successfully, Schwab's new account growth, commission revenues and profit margins could be adversely affected. Marketing and Promotion Advertising plays a crucial role in obtaining new customers, which have constituted an important source of revenue and revenue growth for the Company. The Company's advertising and market development expense for the years ended December 31, 1994, 1993 and 1992 was $36 million, $41 million and $34 million, respectively. For the same years, the numbers of new accounts opened were approximately 736,000, 706,000 and 562,000, respectively. New account openings represent a significant portion of the growth in customer assets, which the Company believes is critical to growth in revenues. Accounts opened during 1994, 1993 and 1992 generated approximately 14%, 16% and 18% of total commission revenues during each of those years, respectively. The branch office network also plays a key role in building Schwab's business. Many customers prefer to open accounts in person in Schwab branch offices. With the customer service support of the regional customer telephone service centers and TeleBroker (registered trademark), branch personnel are able to focus a significant portion of their time on business development. Branch training programs and compensation plans emphasize identifying customer needs that can be satisfied with Schwab products and services, and increasing customer assets held in Schwab accounts. Schwab advertises regularly in financially-oriented newspapers and periodicals and occasionally in general circulation publications. Schwab advertisements appear regularly on national and local cable television and periodically on radio and independent television stations. Schwab employs volume-buying and other strategies to minimize the expense of broadcast advertising. Through these broadcast-buying strategies and by using Schwab employees to produce and buy print advertising, management believes Schwab realizes savings on its promotional expenses. Schwab also engages extensively in targeted direct mail advertising through monthly statement "inserts" and special mailings. Such efforts have increased Schwab's brand awareness among investors. In its advertising, as well as in promotional events such as press appearances, Schwab has aggressively promoted the name and likeness of its Chairman, Mr. Schwab. The Company believes there is a substantial benefit related to Mr. Schwab's association with the Company. The Company has an agreement with Mr. Schwab by which he, subject to certain limitations, has assigned to the Company and Schwab all service mark, trademark, and trade name rights in his name (and variations thereon) and likeness. - 4 - Products and Services Accounts and Features. Each Schwab customer has a ---------------------- brokerage account through which securities may be purchased or sold. If approved for margin transactions, a customer may borrow a portion of the price of certain securities purchased through Schwab, or may sell securities short. Customers must have specific approval to trade options; as of December 31, 1994, approximately 149,000 accounts were so approved. To write uncovered options, customers must go through an additional approval process and must maintain a significantly higher level of equity in their brokerage accounts. Because Schwab does not pay interest on cash balances in basic brokerage accounts, it provides customers with an option to have cash balances in their accounts automatically swept into certain SchwabFunds (registered trademark) money market funds. In July 1994, Schwab instituted a $1,000 cash and/or securities minimum opening balance requirement for basic brokerage accounts. A customer may receive additional services by qualifying for and opening a Schwab One (registered trademark) brokerage account. A customer may remove available funds from his or her Schwab One account either with a personal check or a VISA debit card. If a Schwab One customer is approved for margin trading, which most are, the checks and debit card also provide access to margin cash available. For cash balances awaiting investment, Schwab pays interest to Schwab One customers at a discretionary rate of interest. Alternatively, Schwab One customers seeking tax-exempt income may elect to have cash balances swept into one of three tax-exempt SchwabFunds money market funds. During 1994, the number of active Schwab One accounts increased 17% and the customer assets in all Schwab One accounts increased 26%. The Company considers customer accounts with cash balances, positions or trading activity within the preceding twelve months to be active. Schwab acts as custodian, as well as broker, for Individual Retirement Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three SchwabFunds money market funds. During 1994, active IRAs increased 26% and customer assets in all IRAs increased 29%. Schwab also acts as custodian and broker for Keogh accounts. During 1994, Schwab expanded its Schwab 500 Brokerage (trademark) service to attract and retain customers who trade frequently. This service provides discounts from Schwab's standard commission rates as well as customized services and information resources. Customer Financing. Customers' securities transactions are effected ------------------- on either a cash or margin basis. Generally, a customer buying securities in a cash-only brokerage account is required to make payment by settlement date, usually five business days after the trade is executed. However, for purchases of certain types of securities, such as mutual fund shares, a customer must have a cash or money market fund balance in his or her account sufficient to pay for the trade prior to execution. When selling securities, a customer is required to deliver the securities, and is entitled to receive the proceeds, on settlement date. In an account authorized for margin trading, Schwab may lend its customer a portion of the market value of certain securities up to the limit imposed by the Federal Reserve Board, which for most equity securities is initially 50%. Such loans are collateralized by the securities in the customer's account. "Short" sales of securities represent sales of borrowed securities and create an obligation to purchase the securities at a later date. Customers may sell securities "short" in a margin account subject to minimum equity and applicable margin requirements and the availability of such securities to be borrowed and delivered. Interest on margin loans to customers provides an important source of revenue to Schwab. During the year ended December 31, 1994, Schwab's outstanding margin loans to its customers averaged approximately $2.7 billion, up from 1993's average of $2.2 billion. In permitting a customer to engage in transactions, Schwab takes the risk of such customer's failure to meet his or her obligations in the event of adverse changes in the market value of the securities positions in his or her account. Under applicable rules and regulations for margin transactions, Schwab, in the event of such an adverse change, requires the customer to deposit additional securities or cash, so that the amount of the customer's obligation is not greater than specified percentages of the cash and market values of the securities in the account. As a matter of policy, Schwab generally requires its customers to maintain higher percentages of collateral values than the minimum percentages required under these regulations. Schwab may use cash balances in customer accounts to extend margin credit to other customers. Under SEC Rule 15c3-3, the portion of such cash balances not used to extend margin credit (increased or decreased by certain other customer-related balances) must be held in segregated investment accounts. The balances in these segregated investment accounts must be invested in qualified interest-bearing securities. To the extent customer cash balances are available for use by Schwab at interest costs lower than Schwab's costs of borrowing from alternative sources (e.g., balances in Schwab One brokerage accounts) or at no interest cost (e.g., balances in other accounts and outstanding checks that have not yet cleared Schwab's bank), Schwab's cost of funds is reduced and its net income is enhanced. Such interest savings contribute substantially to Schwab's profitability and, if a significant reduction of customer cash balances were to occur, Schwab's borrowings from other sources would have to increase and such - 5 - profitability would decline. To the extent Schwab's customers elect to have cash balances in their brokerage accounts swept into certain SchwabFunds money market funds, the cash balances available to Schwab for investments or for financing margin loans are reduced. However, Schwab receives mutual fund service fees from such funds based on the daily average invested balances. See also "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's 1994 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of this report, and "Regulation" below. Mutual Funds. CSIM provides investment advisory and administrative ------------- services to the SchwabFunds (registered trademark), which consisted of nine money market funds, including three that were added during 1994, a broad-based equity index fund, an international index fund, an index fund that attempts to track the performance of common stocks of the second 1,000 largest United States corporations and six bond funds at December 31, 1994. Customer assets invested in the SchwabFunds totaled approximately $23.3 billion at December 31, 1994, a 47% increase over the prior year. The Company intends to offer additional mutual funds to its customers in the future. Through its Mutual Fund Marketplace (registered trademark) program, Schwab purchases and redeems for its customers shares of over 900 mutual funds in over 100 fund families sponsored by third parties. At December 31, 1994, the Mutual Fund Marketplace totaled $31.0 billion in customer assets, including $12.5 billion in the Mutual Fund OneSource (trademark) service. The Mutual Fund Marketplace program provides Schwab's customers with the convenience of purchasing and redeeming mutual fund shares with a single telephone call and of using margin credit to purchase most mutual fund shares. Schwab charges a transaction fee on trades placed in the funds included in its Mutual Fund Marketplace (except as described below). Commissions from customer transactions in mutual fund shares comprised approximately 11% of Schwab's total commission revenues in 1994, compared to approximately 9% in 1993 and approximately 8% in 1992. At December 31, 1994, Schwab's Mutual Fund OneSource service enabled customers to trade 280 mutual funds in 28 well-known fund families without incurring brokerage transaction fees. The service is particularly attractive to investors who execute mutual fund trades directly with multiple mutual fund companies to avoid brokerage transaction fees and achieve investment diversity among fund families. While Schwab does not receive transaction fees (commissions) on customer transactions in the Mutual Fund OneSource program, it is compensated directly by the participating funds or their sponsors via fees received for providing record keeping and shareholder services. Such compensation is ongoing, based on daily balances of customer assets invested in the participating funds and held at Schwab. Market Making In Nasdaq Securities. M&S provides trade execution ------------------------------------ services in Nasdaq securities to broker-dealers and institutional customers. These services feature highly automated, competitively priced executions of both Nasdaq and nonNasdaq stocks and warrants. In most instances, customer orders are routed directly to M&S' trading system and are executed automatically. Services for Independent Investment Managers. To attract the ------------------------------------------------ business of accounts managed by fee-based independent investment managers, Schwab has a dedicated group through which, among other things, it assigns specific, experienced registered representatives to individual managers and occasionally provides certain research materials for the benefit of the managed accounts. Independent investment managers participating in this program may use SchwabLink (trademark) to access information in their customers' accounts directly from Schwab's computer data bases and to enter their customers' trades on-line. During 1994, Schwab added over 500 independent investment managers to this program, which at December 31, 1994 totaled more than 4,700. Schwab's brokerage business generated by independent investment managers and other professional investors represented approximately 14% of Schwab's total commission revenues in 1994, 11% in 1993 and 10% in 1992. During 1994, CSC acquired Performance Technologies, Inc. (PT), the developer of Centerpiece (registered trademark), an investment software for independent investment managers. PT is located in Raleigh, North Carolina and had 11 employees at December 31, 1994. Fixed Income. Fixed income investments available through Schwab -------------- include U.S. Treasuries, zero-coupon bonds, listed and OTC corporate bonds, municipal bonds, GNMAs, unit investment trusts and bond mutual funds. Schwab also makes available to its customers certificates of deposit (CDs) with specific financial institutions located in a variety of states. Such institutions pay Schwab fees for its services in making such CDs available and in transmitting funds and performing certain accounting functions. Schwab's customers do not pay any commission or fee when they purchase CDs. Customer Service Delivery Systems Branch Office Network. Schwab believes that the existence of branch ---------------------- offices is important to increasing new account openings and maintaining high levels of customer - 6 - satisfaction. At December 31, 1994, the Company maintained a network of 208 branches throughout the United States, including a branch office in the Commonwealth of Puerto Rico and the United Kingdom. Schwab plans to continue its branch expansion program in 1995 by opening approximately 20 to 25 new branches. Customers can use branch offices to obtain market information, place orders, open accounts, deliver and receive checks and securities, and obtain related customer services in person, yet most branch activities are conducted by telephone and mail. Branch offices remain open during normal market hours to service customers in person and by telephone. Many branch offices offer extended office hours. Customer calls received during nonbranch hours are routed to regional customer telephone service centers. Regional Customer Telephone Service Centers. Schwab's four regional -------------------------------------------- customer telephone service centers, located in Indianapolis, Denver, Phoenix and Orlando, handle calls to many of Schwab's toll-free numbers, customer calls that otherwise would have to wait for available registered representatives at branches during business hours, and calls routed from branches after hours and on weekends. Through the service centers, customers may place orders twenty-four hours a day, seven days a week, except for certain holidays. Customer orders placed during nonmarket hours are routed to appropriate markets the following business day. The capacity of the service centers allows new branches to be opened and maintained at lower staffing levels. Electronic Delivery Services. Schwab provides automated brokerage ----------------------------- services through which investors may place orders, receive account information and obtain securities market information. These services are designed to provide added convenience for customers and minimize Schwab's costs of responding to and processing routine customer transactions. Schwab's TeleBroker Service (registered trademark), which enables customers to place orders for stocks, options and certain mutual funds, as well as obtain real-time securities quotes and account information electronically from any touchtone telephone, was introduced in 1989 and was made available to customers nationally during 1991. TeleBroker (registered trademark), which provides customers with an additional 10% discount on commissions, has become increasingly important in providing customers access to Schwab, particularly during periods of heavy customer activity. In 1993, TeleBroker was enhanced to accommodate Mutual Fund OneSource (trademark) transactions. In December 1994 and March 1995, Schwab introduced TeleBroker in Spanish and Mandarin languages, respectively. On-line access to brokerage and investment information services is also available through Schwab's on-line trading software, StreetSmart (trademark) for Windows (trademark) and Macintosh (registered trademark), introduced in October 1993 and July 1994, respectively. During 1994, TeleBroker and other on-line brokerage services handled over half of Schwab's customer calls. Information Systems Schwab's operations rely heavily on its information processing and communications systems. Schwab's system for processing a securities transaction is highly automated. Registered representatives equipped with on-line computer terminals can access customer account information, obtain securities prices and related information, and enter orders on-line. Most equity market orders are automatically executed and the representative is able to confirm execution to the customer while on the telephone. A written confirmation is generated automatically and is generally sent to the customer on the next business day. Under normal circumstances, most customer orders are executed without any Schwab employee filling out a single piece of paper. To support its customer service delivery systems, as well as other applications such as clearing functions, account administration, record keeping and direct customer access to investment information, Schwab maintains a sophisticated computer network connecting all of the branch offices and regional customer telephone service centers. Schwab's computers are also linked to the major registered United States securities exchanges, M&S, the National Securities Clearing Corporation and The Depository Trust Company. In 1979, Schwab obtained from Beta Systems, Inc. a non-exclusive license to use its basic software for executing brokerage functions. Since that time, Schwab has made substantial additions and modifications to that program. Schwab's computer systems also support on-line employee training, management information systems, software development activities and telecommunication network control functions. During periods of exceptionally high trading volume, the Company takes steps to provide customer service functions with maximum processing capacity. These steps include rescheduling processing jobs unrelated to customer trading functions and restricting on-line access to the Company's mainframe computer functions. The Company's computer capacity is continuously monitored and efforts are made to achieve an optimal balance between the costs of additional processing capacity and the customer service benefits it provides during high-volume periods. Failure of Schwab's information processing or communications systems for a significant period of time could limit Schwab's ability to process its large volume of transactions accurately and rapidly. This could cause Schwab to be unable to satisfy its obligations to customers and other securities firms, and could result in regulatory - 7 - violations. External events, such as an earthquake or power failure, loss of external information feeds, such as security price information, as well as internal malfunctions, such as those that could occur during the implementation of system modifications, could render part of or all such systems inoperative. To enhance the reliability of the system and integrity of data, Schwab maintains carefully monitored backup and recovery functions. These include logging of all critical files intraday, duplication and storage of all critical data outside of its central computer site every 24 hours, and maintenance of facilities for backup and communications in San Francisco. They also include the maintenance and periodic testing of a disaster recovery plan that management believes would permit Schwab to recommence essential computer operations if its central computer site were to become inaccessible. To reduce the exposure to system failures caused by external factors, including earthquakes, the Company relocated its primary data center in 1993 from San Francisco to a newly constructed and owned site in Phoenix. Clearing and Account Maintenance Schwab performs clearing services for all securities transactions in customer accounts. These services involve the confirmation, receipt, execution, settlement and delivery functions involved in securities transactions. Among other things, performing its own clearing services allows Schwab to provide margin loans to customers and use customer cash balances to finance them. During the year ended December 31, 1994, Schwab processed over 11 million trades. Schwab clears the vast majority of customer transactions through the facilities of the National Securities Clearing Corporation or the Options Clearing Corporation. Certain other transactions, such as mutual fund transactions and transactions in securities not eligible for settlement through a clearing corporation, are settled directly with the mutual funds or other financial institutions. Schwab is obligated to settle transactions with clearing corporations, mutual funds and other financial institutions even if Schwab's customer fails to meet his or her obligations to Schwab. In addition, for transactions that do not settle through a clearing corporation, Schwab takes the risk of the other party's failure to settle the trade. See "Commitments, Contingent Liabilities and Other Information" in the Notes to Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. Customer securities are typically held by Schwab in its name, on deposit at one or more of the recognized securities industry depository trust companies, or in the case of government and certain other fixed-income securities and other instruments (e.g., certain limited partnership interests), at a custodial bank. Schwab collects dividends and interest on securities held in its name, making the appropriate credits to customer accounts. Schwab also facilitates exercise of subscription rights on securities held for customers. Schwab arranges for the transmittal of proxy and tender offer materials and company reports to customers. Employees As of December 31, 1994, the Company had approximately 6,500 employees and contractors. This amount includes full-time employees and full-time equivalents for part-time and temporary employees, as well as persons employed on a contract basis. None of the employees are represented by a union, and the Company believes its relations with its employees are good. Regulation The securities industry in the United States is subject to extensive regulation under both Federal and state laws. The SEC is the Federal agency charged with administration of the Federal securities laws. Schwab and M&S are registered as broker-dealers with the SEC. Schwab and CSIM are registered as investment advisers with the SEC. Much of the regulation of broker-dealers has been delegated to self- regulatory organizations, principally the NASD and the national securities exchanges such as the New York Stock Exchange, Inc. (NYSE), which has been designated by the SEC as Schwab's primary regulator with respect to its securities activities. The NASD has been designated as M&S' primary regulator by the SEC with respect to its securities activities. During 1994, the American Stock Exchange was Schwab's designated primary regulator with respect to options trading activities. These self-regulatory organizations adopt rules (subject to approval by the SEC) governing the industry and conduct periodic examinations of broker-dealers. Securities firms are also subject to regulation by state securities authorities in the states in which they do business. Schwab is registered as a broker-dealer in 50 states, the District of Columbia and Puerto Rico. M&S is registered as a broker-dealer in 18 states as of December 1994. The principal purpose of regulations and discipline of broker- dealers and investment advisers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers and investment advisers. The regulations to which broker-dealers and investment advisers are subject cover all aspects of the securities business, including sales methods, trading practices among broker-dealers, uses and safekeeping of - 8 - customers' funds and securities, capital structure of securities firms, record keeping, fee arrangements, disclosure to clients, and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self- regulatory organizations or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of broker-dealers and investment advisers. The SEC, self-regulatory organizations and state securities authorities may conduct administrative proceedings which can result in censure, fine, cease and desist orders, or suspension or expulsion of a broker-dealer or an investment adviser, its officers, or employees. Schwab and M&S have been the subject of such administrative proceedings. The Department of Justice, the SEC and the NASD have during the past year commenced a series of investigations and regulatory actions involving the activities of many market makers in Nasdaq securities. M&S is a significant participant in the Nasdaq market. As a result of such inves- tigations and actions, and possible future regulatory actions, changes are occurring in the manner in which this market conducts its business. Current practices may change as a consequence of rulemaking and improvements in technology or may be subject to increased disclosure requirements. New market systems, if approved, could significantly impact the manner in which business is currently conducted. Schwab and M&S are cooperating with the various investigations and have and will continue to work with regulators to respond to questions related to their businesses. These investigations and regulatory actions may have a material adverse impact on M&S' future business. The Company anticipates that it will adapt to any new market environment and intends to promote practices which are designed to benefit its customers. As registered broker-dealers and NASD member organizations, Schwab and M&S are required by Federal law to belong to the Securities Investor Protection Corporation (SIPC), which provides, in the event of the liquidation of a broker-dealer, protection for securities held in customer accounts held by the firm of up to $500,000 per customer, subject to a limitation of $100,000 on claims for cash balances. SIPC is funded through assessments on registered broker-dealers. In addition, in 1994, Schwab has purchased from private insurers additional account protection of up to $49.5 million per customer, as defined, for customer securities positions only. This account protection has increased from 1993's account protection of $24.5 million. Mutual funds, including money market funds, are considered securities for the purposes of SIPC coverage and the additional coverage. Neither SIPC coverage nor the additional coverage applies to fluctuations in the market value of securities. Schwab is also authorized by the Municipal Securities Rulemaking Board to effect transactions in municipal securities on behalf of its customers and has obtained certain additional registrations with the SEC and state regulatory agencies necessary to permit it to engage in certain other activities incidental to its brokerage business. For example, Schwab is registered with the SEC as a transfer agent in connection with certain services it provides to the SchwabFunds (registered trademark). Margin lending by Schwab and M&S is subject to the margin rules of the Board of Governors of the Federal Reserve System and the NYSE. Under such rules, broker-dealers are limited in the amount they may lend in connection with certain purchases and short sales of securities and are also required to impose certain maintenance requirements on the amount of securities and cash held in margin accounts. In addition, those rules and rules of the Chicago Board Options Exchange govern the amount of margin customers must provide and maintain in writing uncovered options. As a California state-chartered trust company, CSTC is authorized to conduct business in California, and is primarily regulated by the California State Banking Department. Since it provides employee benefit plan trust services, CSTC is also required to comply with the Employee Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to oversight by both the Internal Revenue Service and Department of Labor. CSTC is required under ERISA to maintain a fidelity bond for the protection of employee benefit trusts for which it serves as trustee. Charles Schwab Limited, a subsidiary of Schwab, is registered as an arranger with the Securities and Futures Authority in the United Kingdom, and engages in business development activities on behalf of Schwab. Net Capital Requirements As registered broker-dealers, Schwab and M&S are subject to the Uniform Net Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule), which has also been adopted through incorporation by reference in NYSE Rule 325. Schwab is a member firm of the NYSE and the NASD, and M&S is a member firm of the NASD. The Net Capital Rule specifies minimum net capital requirements for all registered broker- dealers and is designed to measure financial integrity and liquidity. Failure to maintain the required net capital may subject a firm to suspension or expulsion by the NYSE and the NASD, certain punitive actions by the SEC and other regulatory bodies, and ultimately may require a firm's liquidation. Because CSC itself is not a registered broker-dealer, it is not subject to the Net Capital Rule. However, Schwab's failure to maintain specified levels of net capital would constitute a default by CSC under certain debt covenants. - 9 - "Net capital" is essentially defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings, less certain deductions that result from excluding assets that are not readily convertible into cash and from conservatively valuing certain other assets. These deductions include charges that discount the value of firm security positions to reflect the possibility of adverse changes in market value prior to disposition. The Net Capital Rule requires notice of equity capital withdrawals to be provided to the SEC prior to and subsequent to withdrawals exceeding certain sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net capital to an amount less than 25% of its deductions required by the Net Capital Rule as to its security positions. The Net Capital Rule also allows the SEC, under limited circumstances, to restrict a broker-dealer from withdrawing equity capital for up to 20 business days. Schwab and M&S have elected the alternative method of calculation under paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to maintain minimum net capital equal to 2% of its "aggregate debit items," computed in accordance with the Formula for Determination of Reserve Requirements for Brokers and Dealers (SEC Rule 15c3-3). "Aggregate debit items" are assets that have as their source transactions with customers, primarily margin loans. Under the alternative method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends or permit equity capital to be removed if, after giving effect to such payment, withdrawal, or removal, its net capital would be less than 5% of its aggregate debit items. Under NYSE Rule 326, Schwab is required to reduce its business if its net capital is less than 4% of aggregate debit items for more than 15 consecutive business days; NYSE Rule 326 also prohibits the expansion of business if net capital is less than 5% of aggregate debit items for more than 15 consecutive business days. The provisions of NYSE Rule 326 also become operative if capital withdrawals (including scheduled maturities of subordinated borrowings during the following six months) would result in a reduction of a firm's net capital to the levels indicated. If compliance with applicable net capital rules were to limit Schwab's or M&S' operations and Schwab's ability to repay its subordinated debt to the Company, this in turn could limit the Company's ability to repay debt, pay cash dividends and purchase shares of its outstanding stock. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's 1994 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of this report. At December 31, 1994, Schwab was required to maintain minimum net capital under the Net Capital Rule of $61 million and had total regulatory net capital of $315 million. At December 31, 1994, the amounts in excess of 2%, 4% and 5% of aggregate debit items were $254 million, $194 million and $164 million, respectively. At December 31, 1994, M&S was required to maintain minimum net capital under the Net Capital Rule of $1 million and had total regulatory net capital of $5 million. At December 31, 1994, the amount in excess of 2% of aggregate debit items exceeded $4 million. CSTC's capital requirement is established by the California Superintendent of Banks under the California Financial Code. The Code requires that CSTC's ratio of contributed capital, as defined, to accumulated deficit shall exceed 2.5 to 1. At December 31, 1994, the ratio of contributed capital to accumulated deficit was 2.7 to 1. If CSTC's capital declines, or if the Superintendent of Banks determines that additional capital is required for other reasons, CSC could be required to contribute additional capital to CSTC. Item 2. Properties The Company's corporate headquarters are located in a 28-story building at 101 Montgomery Street in San Francisco. The building contains approximately 296,000 square feet and is leased by Schwab under a term expiring in the year 2000. The current rental is approximately $8.7 million per year, subject to certain increases and obligations to pay certain operating expenses such as utilities, insurance and taxes. Schwab has three successive five-year options to renew the lease at the then market rental value. Schwab also leases space in other buildings for its San Francisco operations aggregating approximately 380,000 square feet at year-end 1994. M&S' headquarters are located in leased office space in Jersey City, New Jersey. The Company's primary data center is located in Phoenix in a 105,000 square feet facility owned by the Company. All of Schwab's branch offices and regional customer telephone service centers and M&S' branch offices are located in leased premises, generally with lease expiration dates five to ten years from inception. Item 3. Legal Proceedings The information required to be furnished pursuant to this item is set forth under the caption "Commitments, Contingent Liabilities and Other Information" in the Notes to the Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. - 10 - Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1994. Item 4a. Executive Officers of the Registrant See Item 10 in Part III of this report. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is listed on the New York and Pacific Stock Exchanges under the ticker symbol SCH. The number of common stockholders of record as of February 10, 1995 was 1,909. The other information required to be furnished pursuant to this item is set forth under the caption "Quarterly Financial Information (Unaudited)" in the Company's 1994 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of this report. Item 6. Selected Financial Data The information required to be furnished pursuant to this item is set forth under the captions "Operating Results (for the year)," "Other (at year end)" and "Other (for the year)" in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required to be furnished pursuant to this item is set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's 1994 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of this report. Average balances and interest rates for the fourth quarters of 1994 and 1993 are summarized as follows (dollars in millions):
------------------------------------------------------------------- Three Months Ended December 31, 1994 1993 ------------------------------------------------------------------- Earning Assets (customer-related): Investments: Average balance outstanding $4,040 $3,564 Average interest rate 5.27% 3.23% Margin loans to customers: Average balance outstanding $2,855 $2,448 Average interest rate 7.58% 5.97% Average yield on earning assets 6.23% 4.35% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $5,645 $4,883 Average interest rate 4.21% 2.39% Other interest-bearing sources: Average balance outstanding $ 368 $ 329 Average interest rate 3.29% 3.17% Average noninterest-bearing portion $ 881 $ 800 Average interest rate on funding sources 3.62% 2.11% Summary: Average yield on earning assets 6.23% 4.35% Average interest rate on funding sources 3.62% 2.11% -------------------------------------------------------------------- Average net interest margin 2.61% 2.24% ====================================================================
Average net interest margin increased 37 basis points from the fourth quarter of 1993 to the fourth quarter of 1994. Average balances of investments increased 13% and margin loans to customers increased 17% over this same period. The average yield on investments and margin loans to customers increased 188 basis points from the fourth quarter of 1993 to the fourth quarter of 1994. Over this same period, interest-bearing customer cash balances increased 16% and the average interest rate paid on funding sources increased 151 basis points. Item 8. Financial Statements and Supplementary Data The information required to be furnished pursuant to this item is set forth in the Consolidated Financial Statements and under the caption "Quarterly Financial Information (Unaudited)" in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. - 11 - Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information relating to directors of the Company required to be furnished pursuant to this item is incorporated by reference from portions of the Company's definitive proxy statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after December 31, 1994 (the Proxy Statement) under the captions "Election of Directors" (excluding all information under the subcaption "Information about the Board of Directors and Committees of the Board") and "Principal Stockholders." Executive Officers of the Registrant The following table provides certain information about each of the Company's current executive officers. Executive officers are elected by and serve at the discretion of the Company's Board of Directors. However, Mr. Schwab has an employment agreement which expires on March 31, 1995. A new employment agreement, which has an initial term of five years and renews for an additional year at each anniversary, is scheduled to be submitted to the stockholders for approval at the May 8, 1995 Annual Meeting of Stockholders. Executive Officers of the Registrant
Name Age Position with the Company ---- --- ------------------------- Charles R. Schwab 57 Chairman and Chief Executive Officer, and Director Lawrence J. Stupski 49 Vice Chairman, and Director David S. Pottruck 46 President and Chief Operating Officer, and Director John Philip Coghlan 43 Executive Vice President - Schwab Institutional A. John Gambs 49 Executive Vice President - Finance and Chief Financial Officer Dawn Gould Lepore 41 Executive Vice President and Chief Information Officer Ronald W. Readmond 52 Executive Vice President Elizabeth Gibson Sawi 43 Executive Vice President - Mutual Funds Tom Decker Seip 45 Executive Vice President - Retail Brokerage John N. Tognino 56 Executive Vice President - Capital Markets and Trading Luis E. Valencia 50 Executive Vice President - Human Resources
Mr. Schwab has been Chairman and Chief Executive Officer and a director of the Company since its incorporation in November 1986. Mr. Schwab was a founder of Schwab in 1971 and has been its Chairman since 1978. Mr. Schwab is currently a director of The Gap, Inc., Transamerica Corporation, AirTouch Communications and a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios, all registered investment companies. Mr. Stupski has been Vice Chairman of the Company since July 1992 and a director of the Company since its incorporation in November 1986. Mr. Stupski was Chief Operating Officer of the Company from November 1986 to March 1994 and the Company's President from November 1986 to July 1992. He also served as Chief Executive Officer and Chief Operating Officer of Schwab from July 1988 to July 1992. He served as Vice Chairman of Schwab from July 1992 to August 1994. - 12 - Mr. Pottruck has been Chief Operating Officer and a director of the Company since March 1994, President of the Company and Chief Executive Officer of Schwab since July 1992, and President of Schwab since July 1988. Mr. Pottruck was Executive Vice President of the Company and Schwab from March 1987 to July 1992. Mr. Pottruck joined Schwab in March 1984. Mr. Coghlan has been Executive Vice President of the Company and Schwab and General Manager of Schwab Institutional since July 1992. Mr. Coghlan joined Schwab in January 1986, became a Vice President in 1988 and became Senior Vice President in 1990. Mr. Gambs has been Executive Vice President and Chief Financial Officer of the Company and Schwab since he joined the Company in March 1988. Ms. Lepore has been Executive Vice President and Chief Information Officer of the Company and Schwab since October 1993. Ms. Lepore joined Schwab in September 1983 and became Senior Vice President in 1989. Mr. Readmond has been Executive Vice President of the Company and Vice Chairman of Schwab since January 1995. From July 1992 to January 1995, he was Senior Executive Vice President of the Company and Schwab, as well as Chief Operating Officer of Schwab. From the time that Mr. Readmond joined the Company in August 1989 until July 1992, he was Executive Vice President - Operations, Trading and Credit of the Company and Schwab. Ms. Sawi has been President of Charles Schwab Investment Management, Inc., Executive Vice President - Mutual Funds of the Company and Schwab since April 1994. Prior to that, she was Executive Vice President - Marketing and Advertising of the Company and Schwab from January 1992 to April 1994. Ms. Sawi joined Schwab in November 1982. Mr. Seip has been Executive Vice President - Retail Brokerage of the Company and Schwab since January 1995. From April 1994 to January 1995 he was Senior Executive Vice President - Retail Brokerage of the Company and Schwab. He was President of Charles Schwab Investment Management, Inc. (CSIM) from July 1992 to April 1994 and Chief Operating Officer of CSIM from June 1991 to April 1994. From July 1992 to April 1994, he was Executive Vice President - Mutual Funds and Fixed Income Products of the Company and Schwab. Mr. Seip joined Schwab in January 1983. Prior to becoming Senior Vice President of Schwab and assuming his mutual fund responsibilities in June 1991, Mr. Seip was the divisional executive in charge of Schwab's retail branches east of the Mississippi. Mr. Tognino has been Executive Vice President - Capital Markets and Trading of the Company and Schwab since October 1993. Prior to joining the Company in October 1993, Mr. Tognino was a Managing Director at Merrill Lynch in New York since 1991, and was based in London as Managing Director of equity products from 1990 to 1991. Mr. Tognino serves on the NASDAQ (registered trademark) Board of Governors. Mr. Valencia has been Executive Vice President - Human Resources of the Company and Schwab since March 1994. Before joining the Company in March 1994, Mr. Valencia served as a Managing Director of Commercial Credit Corp., a subsidiary of the Travelers engaged in consumer finance for the Travelers, from January 1993 to February 1994. From 1975 to 1993, he held various positions with Citicorp, including President and Chief Executive Officer of Transaction Technology, a subsidiary of Citicorp, from 1990 to 1993. Item 11. Executive Compensation The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under the captions "Executive Compensation" (excluding all information under the subcaption "Board Compensation Committee Report on Executive Compensation" and "Performance Graph") and "Certain Transactions." Item 12. Security Ownership of Certain Beneficial Owners and Management The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under the caption "Principal Stockholders." Item 13. Certain Relationships and Related Transactions The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy Statement under the caption "Certain Transactions." - 13 - PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents filed as part of this Report -------------------------------------- 1. Financial Statements The financial statements and independent auditors' report are set forth in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report and are listed below: Consolidated Statement of Income Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Stockholders' Equity Notes to Consolidated Financial Statements Independent Auditors' Report 2. Financial Statement Schedules The financial statement schedules required to be furnished pursuant to this item are listed in the accompanying index appearing on page F-1. (b) Reports on Form 8-K ------------------- None filed during the last quarter of 1994. - 14 - (c) Exhibits -------- The exhibits listed below are filed as part of this annual report on Form 10-K.
Sequentially Exhibit Numbered Number Exhibit Page ------------------------------------------------------------------------------- 3.3 Restated Certificate of Incorporation, as amended as of December 1, 1988, of the Registrant, filed as Exhibit 3.3 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 3.4 Amended and Restated By-Laws of the Registrant, as amended March 25, 1991, filed as Exhibit 3.4 to the Registrant's Form 10-K for the year ended December 31, 1990 and incorporated herein by reference. 10.4 Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc. * 10.5 Employment Agreement dated as of March 31, 1987 among Registrant, Charles Schwab & Co., Inc. and Charles R. Schwab. * + 10.9 Executive Officer Stock Option Plan (1987) dated as of March 24, 1987, with form of Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan (1987)) attached. * + 10.17 Agreement of Lease dated May 18, 1983 between California Jones Company and Charles Schwab & Co., Inc. (headquarters, San Francisco, California). * 10.20 License Agreements dated April 18, 1979 and April 11, 1983 between International Business Machines Corporation and Charles Schwab & Co., Inc. * 10.22 License Agreement dated as of February 28, 1979 between Applied Data Research, Inc. and Beta Systems, Inc. and Assignment, dated February 21, 1979. * 10.23 License Agreement dated as of February 21, 1979 between Beta Systems, Inc. and Charles Schwab & Co., Inc. * 10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush Street Associates and Charles Schwab & Co., Inc. * 10.34 Form of Indemnification Agreement entered into between Registrant and certain members of the Board of Directors of Registrant, filed as Exhibit 10.34 to the Registrant's Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. 10.55 Cash Subordination Agreements between Schwab Holdings, Inc. and Charles Schwab & Co., Inc. with Assignments dated March 31, 1987 by Schwab Holdings, Inc., of all right, title, and interest in Cash Subordination Agreements to Registrant, filed as Exhibit 4.20 to Registrant's Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
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10.57 Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant's Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference. 10.63 Revolving Subordinated Loan Agreement as of September 29, 1988, between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.63 to the Registrant's Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. 10.72 Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant, filed as Exhibit 10.72 to the Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 10.73 1987 Stock Option Plan, as Amended and Restated, as of April 17, 1989, with form of Non-Qualified Stock Option Agreement (General Management Plan) attached, filed as Exhibit 4.1 to Registrant's Registration Statement No. 33- 21582 on Form S-8 and incorporated herein by reference. + 10.83 First Amendment to Revolving Subordinated Loan Agreement, as of April 18, 1990, between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.83 to the Registrant's Form 10-Q for the quarter ended March 31, 1990 and incorporated herein by reference. 10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective November 1, 1990, dated October 25, 1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for the quarter ended September 30, 1990 and incorporated herein by reference. 10.98 Credit Agreement dated as of August 30, 1991, between the Registrant and the Banks listed therein, filed as Exhibit 10.62 to the Registrant's Form 10-Q for the quarter ended September 30, 1991 and incorporated herein by reference. 10.99 Second Amendment to Revolving Subordinated Loan Agreement, as of November 1, 1991, between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.99 to the Registrant's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective January 1, 1992, dated December 20, 1991, filed as Exhibit 10.101 to the Registrant's Form 10-K for the year ended December 31, 1991 and incorporated herein by reference. 10.113 Schwab One Services Agreement dated April 17, 1992 between Charles Schwab & Co., Inc. and Provident National Bank, filed as Exhibit 10.113 to the Registrant's Form 10-Q for the quarter ended March 31, 1992 and incorporated herein by reference.
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10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective July 1, 1992, dated June 30, 1992, filed as Exhibit 10.116 to the Registrant's Form 10-Q for the quarter ended June 30, 1992 and incorporated herein by reference. 10.118 Credit Agreement dated as of August 28, 1992, between Registrant and the banks listed therein, filed as Exhibit 10.118 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. 10.119 First Amendment to Credit Agreement dated as of August 28, 1992, between Registrant and the banks listed therein, filed as Exhibit 10.119 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. 10.120 ESOP Loan Agreement, effective as of January 19, 1993, between Registrant and The Charles Schwab Profit Sharing and Employee Stock Ownership Plan and Trust, filed as Exhibit 10.120 to the Registrant's Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. + 10.126 First Amendment dated June 30, 1993 to the Credit Agreement dated August 28, 1992, between Registrant and the banks listed therein, filed as Exhibit 10.126 to the Registrant's Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. 10.127 Second Amendment dated June 30, 1993 to the Credit Agreement dated August 30, 1991 as amended by the First Amendment dated August 28, 1992, between Registrant and the banks listed therein, filed as Exhibit 10.127 to the Registrant's Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. 10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended, effective January 1, 1994 (supersedes Exhibit 10.96 to Registrant's Form 10-Q for the quarter ended June 30, 1991). + 10.137 Credit Agreement dated as of June 30, 1994, between the Registrant and the Banks listed therein, filed as Exhibit 10.137 to the Registrant's Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference. 10.138 Form of Nonstatutory Stock Option Agreement for Non- Employee Directors (filed as Exhibit 4.4 to the Company's Registration Statement No. 33-47842 on Form S-8 and incorporated herein by reference). + 10.140 Form of Restricted Shares Agreement (filed as Exhibit 4.6 to the Company's Registration Statement No. 33-54701 on Form S-8 and incorporated herein by reference). + 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), filed as Exhibit 10.141 to the Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. +
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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), filed as Exhibit 10.142 to the Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. + 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), filed as Exhibit 10.143 to the Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. + 10.144 Form of Incentive Stock Option Agreement, filed as Exhibit 10.144 to the Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. + 10.145 The Charles Schwab Profit Sharing and Employee Stock Ownership Plan, restated December 15, 1994, effective January 1, 1994 (supersedes Exhibit 10.102 to the Registrant's Form 10-K for the year ended December 31, 1991; Exhibits 10.114 and 10.115 to the Registrant's Form 10-Q for the quarter ended June 30, 1992; and Exhibits 10.135 and 10.136 to the Registrant's Form 10-K for the year ended December 31, 1993). + 10.146 Annual Executive Individual Performance Plan dated as of January 1, 1995 (supersedes Exhibit 10.134 to the Registrant's Form 10-K for the year ended December 31, 1993). + 10.147 Corporate Executive Bonus Plan dated as of January 1, 1995 (formerly the Annual Executive Bonus Plan) (supersedes Exhibit 10.130 to the Registrant's Form 10-K for the year ended December 31, 1993). + 10.148 Summary of Individual Bonus Plan effective as of January 1, 1995 with Ronald W. Readmond. + 10.149 Employment Agreement dated as of March 31, 1995 between the Registrant and Charles R. Schwab. + 10.150 Reimbursement Agreement dated as of December 19, 1994 between the Registrant and Bank of America National Trust and Savings Association. 11.1 Computation of Earnings per Common Equivalent Share. 12.1 Computation of Ratio of Earnings to Fixed Charges. 13.1 Portions of The Charles Schwab Corporation 1994 Annual Report to Stockholders, which have been incorporated herein by reference. Except for such portions, such annual report is not deemed to be "filed" herewith.
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21.1 Subsidiaries of the Registrant. 23.1 Independent Auditors' Consent. 27.1 Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's Registration Statement No. 33-16192 on Form S-1, as amended and declared effective on September 22, 1987. + Management contract or compensatory plan. - 19 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 24, 1995. THE CHARLES SCHWAB CORPORATION (Registrant) BY: CHARLES R. SCHWAB /s/ --------------------------- Charles R. Schwab Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on March 24, 1995.
Signature Title --------- ----- CHARLES R. SCHWAB /s/ Chairman, Chief Executive Officer --------------------- and Director Charles R. Schwab (principal executive officer) LAWRENCE J. STUPSKI /s/ Vice Chairman and Director ----------------------- Lawrence J. Stupski DAVID S. POTTRUCK /s/ President, Chief Operating Officer --------------------- and Director David S. Pottruck A. JOHN GAMBS /s/ Executive Vice President - Finance, ----------------- and Chief Financial Officer A. John Gambs (principal financial and accounting officer) NANCY H. BECHTLE /s/ Director -------------------- Nancy H. Bechtle C. PRESTON BUTCHER /s/ Director ---------------------- C. Preston Butcher DONALD G. FISHER /s/ Director -------------------- Donald G. Fisher ANTHONY M. FRANK /s/ Director -------------------- Anthony M. Frank JAMES R. HARVEY /s/ Director ------------------- James R. Harvey STEPHEN T. McLIN /s/ Director -------------------- Stephen T. McLin ROGER O. WALTHER /s/ Director -------------------- Roger O. Walther
- 20 - THE CHARLES SCHWAB CORPORATION Index to Financial Statement Schedules
Page ---- Independent Auditors' Report F-2 Schedule I - Condensed Financial Information of Registrant: Condensed Balance Sheet F-3 Condensed Statement of Income and Retained Earnings F-4 Condensed Statement of Cash Flows F-5 Schedule II - Valuation and Qualifying Accounts F-6
Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the Company's consolidated financial statements and notes in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. F-1 INDEPENDENT AUDITORS' REPORT ------------------------------ To the Stockholders and Board of Directors of The Charles Schwab Corporation: We have audited the consolidated financial statements of The Charles Schwab Corporation and subsidiaries (the Company) as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, and have issued our report thereon dated February 27, 1995; such consolidated financial statements and report are included in your 1994 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedules of the Company and subsidiaries appearing on pages F-3 through F-6. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. February 27, 1995 F-2 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Balance Sheet (In thousands, except share data)
December 31, 1994 1993 ---- ---- Assets Cash and equivalents $ 63,893 Receivable from subsidiaries 38,006 $ 49,831 Subordinated receivable from subsidiary 124,000 132,728 Investment in subsidiaries, at equity 418,389 384,043 Other assets 4,678 2,512 ------------------------------------------------------------------------------------------------- Total $648,966 $569,114 ================================================================================================= Liabilities and Stockholders' Equity Accrued expenses $ 11,952 $ 4,941 Long-term borrowings 170,000 185,000 ------------------------------------------------------------------------------------------------- Total liabilities 181,952 189,941 ------------------------------------------------------------------------------------------------- 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; 89,230,020 shares in 1994 and 1993* 595 595 Additional paid-in capital 166,103 161,052 Retained earnings 373,161 253,692 Treasury stock - 3,781,995 shares in 1994 and 2,474,217 shares in 1993, at cost* (57,968) (23,153) Note receivable from Profit Sharing Plan (13,013) Unearned ESOP shares (10,174) Unamortized restricted stock compensation (4,703) ------------------------------------------------------------------------------------------------- Stockholders' equity 467,014 379,173 ------------------------------------------------------------------------------------------------- Total $648,966 $569,114 ================================================================================================= * Reflects the 1995 three-for-two common stock split. See Notes to Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report, for a discussion of long-term borrowings and contingent liabilities.
F-3 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Statement of Income and Retained Earnings (In thousands)
Year Ended December 31, 1994 1993 1992 ---- ---- ---- Interest revenue $ 14,379 $ 14,952 $ 12,235 Interest expense (12,079) (13,258) (13,570) ----------------------------------------------------------------------------------------------------- Net interest income (expense) 2,300 1,694 (1,335) Other revenues 18 Other expenses (8,467) (2,159) (2,132) ----------------------------------------------------------------------------------------------------- Loss before income tax benefit, equity in earnings of subsidiaries and extraordinary charge (6,149) (465) (3,467) Income tax benefit 2,490 472 1,254 ----------------------------------------------------------------------------------------------------- Income (loss) before equity in earnings of subsidiaries and extraordinary charge (3,659) 7 (2,213) Equity in earnings of subsidiaries Equity in undistributed earnings of subsidiaries 30,632 86,821 48,063 Dividends paid by subsidiaries 108,370 37,540 35,378 ----------------------------------------------------------------------------------------------------- Total 139,002 124,361 83,441 Income before extraordinary charge 135,343 124,368 81,228 Extraordinary charge - early retirement of debt (6,700) ----------------------------------------------------------------------------------------------------- Net income 135,343 117,668 81,228 Dividends on common stock (16,038) (10,946) (8,411) Stock options and warrants exercised 1,413 Other 164 (198) Retained earnings: At beginning of year 253,692 147,168 72,938 ----------------------------------------------------------------------------------------------------- At end of year $373,161 $253,692 $147,168 =====================================================================================================
F-4 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Statement of Cash Flows (In thousands)
Year Ended December 31, 1994 1993 1992 ---- ---- ---- Cash flows from operating activities Net income $135,343 $ 117,668 $ 81,228 Noncash item included in net income: Equity in undistributed earnings of subsidiaries (30,632) (86,821) (48,063) Extraordinary charge for early retirement of debt 11,205 Change in accrued expenses 7,011 1,447 681 Change in other assets (2,144) (1,715) (239) --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 109,578 41,784 33,607 --------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Decrease (increase) in receivable from subsidiaries 17,475 (39,118) 894 Collection on subordinated loans to subsidiary 8,728 26,500 10,000 Issuance of subordinated loans to subsidiary (5,000) (48,500) Increase in net investment in subsidiaries (3,468) (46,179) (5,295) Purchase of life insurance policies (2,268) Collection on note receivable from Profit Sharing Plan 1,467 6,241 3,925 --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 21,934 (57,556) (38,976) --------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from loans on life insurance policies 2,247 Proceeds from long-term borrowings 20,000 150,000 35,000 Repayment of long-term borrowings (35,000) Repayment of subordinated borrowings (126,933) Purchase of treasury stock (46,781) (23,227) Dividends paid (16,038) (10,946) (8,411) Other 7,953 3,651 2,007 --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (67,619) 15,772 5,369 --------------------------------------------------------------------------------------------------------------------- Change in cash and equivalents 63,893 ---- ---- Cash and equivalents at beginning of year ---- ---- ---- --------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 63,893 $ ---- $ ---- ===================================================================================================================== Prior years' financial statements have been reclassified to conform to the 1994 presentation. See Notes to the Consolidated Financial Statements in the Company's 1994 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report, for a discussion of additional cash flow information.
F-5 SCHEDULE II THE CHARLES SCHWAB CORPORATION Valuation and Qualifying Accounts (In thousands)
Additions Balance at -------------------- Balance at Beginning Charged End Description of Year to Expense Other Written off of Year ------- ---------- ----- ----------- ------- For the year ended December 31, 1994: Allowance for doubtful accounts $2,229 $ 1,193 $150 $ (368) $3,204 =========================================================== For the year ended December 31, 1993: Allowance for doubtful accounts $3,449 $ 336 $ 19 $(1,575) $2,229 =========================================================== For the year ended December 31, 1992: Allowance for doubtful accounts $2,769 $ 1,270 $(75) $ (515) $3,449 ===========================================================
F-6 EX-3 2 EXHIBIT 3.3 EXHIBIT 3.3 CERTIFICATE OF RETIREMENT OF STOCK The Charles Schwab Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Company"), DOES HEREBY CERTIFY: FIRST: That the Certificate of Incorporation of the Company prohibits the reissuance of any and all issued and outstanding shares of the Company's Series A Preferred Stock, par value $0.01 per share (the "Series A Shares"), which are subsequently redeemed by the Company. SECOND: That the Certificate of Incorporation authorizes the Company to issue 60,000 Series A Shares, all of which have been issued. THIRD: That the company subsequently has redeemed and retired 60,000 Series A Shares, thereby reducing the number of authorized Series A Shares from 60,000 to zero and no shares acquired by the Company by reason of redemption, purchase, exchange, or otherwise shall be reissued and all such shares shall be canceled, retired, and eliminated from the shares authorized to issue. FOURTH: That this certificate has been made pursuant to and in accordance with the provisions of Section 243(b) of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, The Charles Schwab Corporation has caused this certificate to be signed and attested by its duly authorized officers, this 18th day of November, 1988. THE CHARLES SCHWAB CORPORATION By: /s/ Barbara A. Wolfe Barbara A. Wolfe Executive Vice President ATTEST: /s/ Charmel Huffman RECEIVED FOR RECORD Charmel Huffman Jan 3 1989 Assistant Corporate Secretary William H. Honey, Recorder CERTIFICATE OF CHANGE OF REGISTERED AGENT AND REGISTERED OFFICE The Charles Schwab Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: The present registered agent of the corporation is Corporation Service Company and the present registered office of the corporation is in the county of New Castle. The Board of Directors of The Charles Schwab Corporation adopted the following resolution on the 18th day of February, 1988. Resolved, that the registered office of The Charles Schwab Corporation in the state of Delaware be and it hereby is changed to Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, and the authorization of the present registered agent of this corporation be and the same is hereby withdrawn, and THE CORPORATION TRUST COMPANY, shall be and is hereby constituted and appointed the registered agent of this corporation at the address of its registered office. IN WITNESS WHEREOF, The Charles Schwab Corporation has caused this statement to be signed by Barbara A. Wolfe, its Exec. Vice President and attested by Pamela Herlich, its Asst. Corp. Secretary this 18th day of November, 1988. THE CHARLES SCHWAB CORPORATION By /s/ Barbara A. Wolfe Exec. Vice President ATTEST: /s/ Pamela E. Herlich Asst. Corporate Secretary CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION The Charles Schwab Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY THAT: The amendment to the Corporation's certificate of incorporation set forth in the following resolution was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware: RESOLVED, that paragraph (C)(7) of Article TENTH of the Restated Certificate of Incorporation of The Charles Schwab Corporation be amended to read as follows: "(7) The term "Disinterested Director" with respect to a Business Combination means any member of the Board of Directors of this Corporation who (a) is not an Interested Stockholder involved in such Business Combination, (b) is not an Affiliate or Associate of such Interested Stockholder, (c) is not a party to any agreement or arrangement with such Interested Stockholder to act in concert with such Interested Stockholder to direct the management or policies of this Corporation, and (d) either (i) was a member of the Board of Directors prior to the time that such Interested Stockholder became an Interested Stockholder, or (ii) is a successor of a Disinterested Director and was nominated to succeed a Disinterested Director by a majority of the Disinterested Directors at the time of his nomination; provided, however, that any member of the Board of Directors may be a Disinterested Director with respect to a Business Combination involving an Interested Stockholder who was an Interested Stockholder on the date that the second Restated Certificate of Incorporation of this Corporation filed by the Secretary of State of Delaware was so filed, notwithstanding the failure of such member to satisfy the conditions set forth in clause (d) above. Any reference to "Disinterested Directors" shall refer to a single Disinterested Director if there be but one. Any matter referred to as requiring approval of, or having been approved by, a majority of the Disinterested Directors shall mean the matter requires the approval of, or has been approved by, the Board of Directors of this Corporation without giving effect to the vote of any Director who is not a Disinterested Director and with the affirmative vote of a majority of the Disinterested Directors." IN WITNESS WHEREOF, The Charles Schwab Corporation has caused this certificate to be signed by its duly authorized officers, this 21st day of September, 1987. THE CHARLES SCHWAB CORPORATION /s/ Robert W. Fivis Robert W. Fivis Executive Vice President ATTEST: /s/ Barbara A. Wolfe Barbara A. Wolfe, Secretary RESTATED CERTIFICATE OF INCORPORATION OF THE CHARLES SCHWAB CORPORATION (Originally incorporated on November 25, 1986 under the name CL Acquisition Corporation.) FIRST. The name of this corporation (hereinafter called the "Corporation") is THE CHARLES SCHWAB CORPORATION. SECOND. The address of the registered office of this Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle, and its registered agent at that address is CORPORATION SERVICE COMPANY. THIRD. The purpose of this Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. (A) This Corporation is authorized to issue two classes of stock, preferred stock and common stock. The authorized number of shares of capital stock is Two Hundred Ten Million (210,000,000) shares, of which the authorized number of shares of preferred stock is Ten Million (10,000,000) and the authorized number of shares of common stock is Two Hundred Million (200,000,000). The stock, whether preferred stock or common stock, shall have a par value of one cent ($0.01) per share. (B) Shares of preferred stock may be issued from time to time in one or more series. The Board of Directors of this Corporation is hereby authorized to fix or alter the voting rights, powers, preferences and privileges, and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock; and to fix the number of shares constituting any such series and the designation thereof; and to increase or decrease the number of shares of any series of preferred stock (but not below the number of shares thereof then outstanding). (C) The Board of the Corporation has created a series of preferred stock of the Corporation which is designated "Series A Preferred Stock" and which consists of 60,000 shares. The powers, designations, preferences, and relative, participating, optional, or other rights, and the qualifications, limitations, or restrictions of the Series A Preferred Stock, in addition to those set forth elsewhere in this Restated Certificate of Incorporation, are as follows: Section 1. Definitions. As used in this Paragraph (C) of Article FOURTH, the following definitions shall apply. Except as specifically provided herein, all other capitalized words shall have the meanings set forth in the Agreement (hereinafter defined). (a) "Agreement" shall mean the Preferred Stock Purchase Agreement, entered into March 31, 1987, between the Corporation and Security Pacific Corporate Funding, Inc., a Delaware corporation. (b) "Board" shall mean the board of directors of the Corporation. (c) "Commitment Date" shall mean the Closing Date of the Agreement. (d) "Corporation" shall mean The Charles Schwab Corporation, a Delaware corporation. (e) "Common Stock" shall mean the common stock of the Corporation. (f) "Dividend Rate" shall mean the Eurodollar Rate (using a six-month Eurodollar Period) plus 3%. (g) "Initial Date" shall man the first day of the first full Fiscal Quarter following the Commitment Date. (h) "Loan Agreement" shall mean the Loan Agreement, entered into March 31, 1987, between the Corporation, the banks therein named, and Security Pacific National Bank, a national banking association, as Agent. (i) "Preferred Stock" shall mean the Series A Preferred Stock of the Corporation which is set forth in this paragraph (C) of Article FOURTH. (j) "Redetermination Date" shall mean any day that is an integral multiple of six months after the Initial Date. Section 2. Dividends. (a) Right to Dividends. The holders of the then outstanding Preferred Stock shall be entitled to receive dividends, payable quarterly, on the last day of each Fiscal Quarter, whenever funds are legally available and when and as declared by the Board. Such dividends shall accrue, for each share of Preferred Stock, from, and including, the Commitment Date and from day to day thereafter as follows: (i) From, and including, the Commitment Date to, but not including, the Initial Date, at an annual rate equal to ten thousand (10,000) multiplied by 9% of the par value for one share of Preferred Stock; and (ii) From, and including, the Initial Date, and thereafter, at ten thousand (10,000) multiplied by the Dividend Rate multiplied by the par value for one share of Preferred Stock, calculated as of the Initial Date and then recalculated every six months thereafter as of each Redetermination Date. Such dividends shall be cumulative on a quarterly basis such that if accrued dividends in respect of any previous or current quarterly dividend period, at the rate specified above, shall not have been paid or declared and a sum sufficient for the payment thereof set apart, then the deficiency shall first be fully paid before any dividend or other distribution shall be paid or declared and set apart for the Common Stock. (b) Priority. Unless full accrued dividends on the Preferred Stock for all past dividend periods and the then current dividend period shall have been paid: (1) no dividend whatsoever (other than in Common Stock or in another class or series of stock ranking junior to the Preferred Stock as to dividends and liquidation preference) shall be paid or declared, and no distribution shall be made, on any Common Stock; and (2) no shares of Common Stock shall be purchased, redeemed, or acquired by the Corporation, except for repurchase at the original cost paid for shares of Common Stock in the case of unvested stock repurchased from employees, officers, directors, and independent contractors whose stock is subject to vesting arrangements. (c) Additional Dividends. The holders of the then outstanding Preferred Stock shall be entitled to receive additional dividends, subject to the terms and conditions of this Section 2, in amounts as set forth in Section 3.8 of the Loan Agreement, mutatis mutandis. Section 3. Liquidation Rights of Preferred Stock. (a) Preference. If there is any liquidation, dissolution, or winding up of the Corporation, whether voluntary of involuntary, after payment or provision for payment of the debts or other liabilities of the Corporation, then the holders of each share of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made pursuant to Section 3(b) herein, an amount equal to one hundred dollars ($100.00) per share of the Preferred Stock, plus an amount equal to all accrued and unpaid dividends thereon, whether or not declared, to the date fixed for distribution, shall be tendered to the holders of the Preferred Stock with respect to such liquidation, dissolution, or winding up. If upon any liquidation, dissolution or winding up of the Corporation, whether voluntary of involuntary, the assets to be distributed to the holders of the Preferred Stock shall be insufficient to permit the payment to such shareholders of the full preferential amounts aforementioned, then all of the assets of the Corporation to be distributed shall be distributed ratably to the holders of the Preferred Stock until the full preferential amounts attributable to the Preferred Stock shall have been paid in full. Nothing contained in this Section 3 shall be deemed to prevent redemption of the Preferred Stock in the manner provided in Section 4 hereof. (b) Remaining Assets. After the payment or distribution to the holders of the Preferred Stock of the full preferential amounts aforementioned, the holders of the Common Stock then outstanding, and the holders of any other series of preferred stock of the Corporation, shall be entitled to receive all of the remaining assets of the Corporation to be distributed. (c) Reorganization. (i) If there is (A) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization in which, in either event, the Corporation shall not be the continuing or surviving entity of such consolidation, merger, or reorganization, or (B) a sale of all or substantially all of the assets of the Corporation, then holders of the Preferred Stock shall first receive, for each share of such Preferred Stock, cash or securities (which may include a series of preferred stock or other equity securities) received from the acquiring corporation, or a combination thereof, at the closing of any such transaction, in an amount equal to the liquidation preference of such share. After the payment or distribution to the holders of the Preferred Stock of the full preferential amounts aforementioned, the holders of the Common Stock then outstanding, and the holders of any other series of preferred stock of the Corporation, shall be entitled to receive all remaining payments or distributions. (ii) Any securities to be delivered to the holders of the Preferred Stock pursuant to subsection 3(c)(i) above shall be valued as follows: If such securities are not publicly traded as of a particular date set for the closing of such transaction, then the fair market value shall be as reasonably determined by the Corporation, in good faith, and the Corporation shall deliver to the holders of the then outstanding shares of Preferred Stock a written document setting forth in detail the calculations made in determining such fair market value (such determination to be conclusive if approved by the holders of not less than a majority of the then outstanding shares of Preferred Stock). During such time as such securities are publicly traded but are not listed upon an established stock exchange, the fair market value per share shall be the last sale price on the business day immediately prior to such closing date as reported on the National Market System, or, if such shares are not then reported on the National Market System but quotations are reported on the National Association of Securities Dealers Automated Quotations System, the average of the bid and asked prices on that date, in either event as such price quotes are listed in The Wall Street Journal, Western Edition (or, if not so reported in The Wall Street Journal, any other listing service or publication known to the Board). If such securities are listed upon an established stock exchange or exchanges, then such fair market value shall be deemed to be the closing price of the shares on the largest such stock exchange upon which such shares are listed on the business day immediately prior to such closing date. (iii) The Corporation shall give each holder of Preferred Stock written notice of such impending transaction at least ten (10) Banking Days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Subsection 3(c), and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than ten (10) Banking Days after the Corporation has given the first notice provided for herein or sooner than five (5) Banking Days after the Corporation has given notice of any material changes provided for herein; provided that such periods may be shortened upon the written consent of the holders of a majority of the shares of Preferred Stock then outstanding. Section 4. Redemption. (a) Optional Redemption. (i) At any time or from time to time, whenever funds are legally available, the Corporation may, at its option, redeem, in cash, the Preferred Stock, in whole or in part, at the Redemption Price (defined herein below). (ii) The Corporation may, at its option at any time, whenever funds are legally available, subject to the terms and conditions of this Section 4(a)(ii), redeem all, but not part, of the then outstanding shares of Preferred Stock by exchanging such shares for debt ("Most Junior Subordinated Debt") in an amount equal to one hundred dollars ($100.00) per outstanding share, plus all accrued and unpaid dividends (whether or not declared) per share of Preferred Stock to and including the date set for the exchange, of Preferred Stock to be exchanged. Such exchange shall constitute a full and complete retirement of the shares of Preferred Stock so exchanged, and all rights in connection therewith shall be extinguished. The amount of the Most Junior Subordinated Debt shall be allocated pro rata among the holders of shares of Preferred Stock (individually, "Holder," collectively, "Holders") based upon the aggregate number of outstanding shares of Preferred Stock held by each Holder. The terms and conditions of the Most Junior Subordinated Debentures shall be set forth in an indenture substantially identical to the indenture covering the BAC Junior Subordinate Debenture, except for these changes: (1) such debt shall bear interest at a fixed interest rate, determined as of the date on which the Preferred Stock is exchanged into such debt ("Exchange Date"), equal to the Eurodollar Rate (using a six-month Eurodollar Period) on the Exchange Date plus 7%, payable on the last day of each Fiscal Quarter, but not to exceed the maximum rate permitted under applicable law; (2) the principal of such debt shall be due in two installments: (i) 50% of the amount then outstanding on March 31, 1998; and (ii) the balance on March 31, 2002, including any unpaid interest; (3) at any time, at the option of the Corporation, such debt may be prepaid in full, including any unpaid interest, without premium; (4) such debt shall be prepaid, including any unpaid interest, without premium: (1) upon any public offering of any of the Company's equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (but specifically excluding any registration statement covering (i) stock issued or to be issued under any benefit plan (including, without limitation, any stock purchase or stock option plan) or (ii) any grant or exercise of options or warrants pursuant to such a plan), if such offering includes a secondary equity offering (i.e., an offering of the Company's equity securities by any person other than the Corporation ("Secondary Sellers")), in an amount equal to the gross offering proceeds (net of any underwriters' discounts or commissions, but not net of any other offering expenses) to be received by the Secondary Sellers; or (ii) upon the payment of any dividends with respect to the common stock of the Corporation, if such dividends are in excess of $1,000,000 (in any Fiscal Year), in an amount equal to such excess dividends; provided that any such prepayment shall not be required to be made unless and until any such prepayment may be made without violating or causing an event of default under the Loan Agreement or either of the indentures covering the BAC Junior Subordinated Debenture and the BAC Senior Subordinated Debenture, without regard to any amendments made to such Loan Agreement or indentures after the Closing Date; (5) such debt shall be junior and subordinate to all present and future indebtedness of the Corporation; (6) the trustee under such indenture shall be as determined by the Corporation; (7) such indenture shall not be required to qualify under the Trust Indenture Act of 1939, as amended; and (8) such debt shall be subject to all restrictions on transfer and rights of first refusal as are applicable to shares of Preferred Stock. Sixty (60) days before the Exchange Date, the Corporation shall send a written notice to each Holder, using each Holder's most recent address as listed in the Company's records, which shall state: (1) the Exchange Date; (2) the aggregate amount of the Most Junior Subordinated Debt to be issued in exchange for all of the then outstanding shares of Preferred Stock; and (3) the number of shares of Preferred Stock required to be surrendered by the Holder to the transfer agent (who may be the Corporation) designated by the Corporation ("Transfer Agent"). On the Exchange Date, each Holder shall surrender certificates representing all of his shares of Preferred Stock to the Transfer Agent in exchange for the Most Junior Subordinated Debt. If such shares are not surrendered, then, with respect to such shares, the exchange shall be deemed to have occurred and such shares of Preferred Stock shall be automatically exchanged into debt and such certificates shall be deemed canceled. All interest and principal payments on the Most Junior Subordinated Debt shall be sent to each Holder's above-referenced address. Unless full accrued interest on the Most Junior Subordinated Debt for all past interest periods and the then current interest period shall have been paid: (1) no dividend whatsoever (other than in a series of stock) shall be paid or declared, and no distribution shall be made, on any Common Stock; and (2) no shares of Common Stock shall be purchased, redeemed, or acquired by the Corporation, except for repurchase at the original cost paid for shares of Common Stock in the case of unvested stock repurchased from employees, officers, directors, and independent contractors whose stock is subject to vesting arrangements. (b) Early Mandatory Redemption. The Corporation shall redeem the Preferred Stock at the Redempton Price (i) upon, or as soon thereafter as funds are legally available, any public offering of any of the Company's equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (but specifically excluding any registration statement covering (i) stock issued or to be issued under any benefit plan (including, without limitation, any stock purchase or stock option plan) or (ii) any grant or exercise of options or warrants pursuant to such a plan), if such offering includes a secondary equity offering (i.e., an offering of the Company's equity securities by any person other than the Corporation ("Secondary Sellers")), in an amount equal to the gross offering proceeds (net of any underwriters' discount or commission, but not net of any other offering expenses) received by the Secondary Sellers; or (iii) upon, or as soon thereafter as funds are legally available, the payment of any dividends with respect to the Common Stock, if such dividends are in excess of $1,000,000 (in any Fiscal Year), in an amount equal to such excess dividends; provided that any such redemption shall be subject to the limitations imposed by the Loan Agreement and by the indentures covering the BAC Junior Subordinated Debenture and the BAC Senior Subordinated Debenture, without regard to any amendments made to the Loan Agreement or such indentures after the Closing Date; and provided further that any such redemption shall be subject to the limitations, if any, imposed by any instrument evidencing senior debt and entered into between the Corporation and any person after March 31, 1987, but only if: (i) the principal amount of such senior debt is greater than or equal to $25,000,000; and (ii) the language used to describe such limitations, if any, is the exact same language (identical in every detail) used to describe the redemption limitations contained in the Loan Agreement and in the indentures covering the BAC Junior Subordinated Debenture and the BAC Senior Subordinated Debenture, without regard to any amendments made to the Loan Agreement or such indentures after the Closing Date. (c) Ultimate Mandatory Redemption. The Corporation shall redeem, as son as funds are legally available, the Preferred Stock at the Redemption Price as follows: (i) 50% of the number of shares of Preferred Stock then outstanding on March 31, 1998; and (ii) the balance of the shares of Preferred Stock on March 31, 2002. Section 5. Redemption Terms and Procedures. Any redemption pursuant to Sections 4(a)(i), 4(b), or 4(c) herein shall be accomplished in accordance with the following terms and procedures contained in this Section 5. (a) Redemption Notice. The Corporation shall mail, not less than thirty (30) days nor more than sixty (60) days prior to the date for the redemption of any Preferred Stock ("Redemption Date"), written notice ("Redemption Notice"), postage prepaid, to each Holder at each Holder's address as last shown on the records of the Corporation. The Redemption Notice shall state: (i) The total number of shares of Preferred Stock to be redeemed; (ii) The number of shares of Preferred Stock held by the Holder which the Corporation intends to redeem; (iii) The Redemption Date and Redemption Price; and (iv) The time and manner in, and place at, which the Holder is to surrender to the Corporation his certificate or certificates representing the shares of Preferred Stock to be redeemed. (b) Price. The redemption price for the Preferred Stock shall be an amount per share in cash equal to one hundred dollars ($100.00) per share of the Preferred Stock, plus all accrued and unpaid dividends, whether or not declared, to and including the applicable Redemption Date ("Redemption Price"); (c) Surrender of Stock. On or before the Redemption Date, each Holder shall surrender the certificate or certificates representing the shares of Preferred Stock to be redeemed to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. If less than all of the shares represented by such certificate are redeemed, then a new certificate representing the unredeemed shares shall be issued to the Holder of such shares. (d) Partial Redemption. If the Corporation redeems only a part of the shares of Preferred Stock, then the Corporation shall effect such redemption pro rata from the Holders according to the number of shares of Preferred Stock held of record by each Holder immediately prior to redemption. (e) Termination of Rights. If the Redemption Notice is duly given, then, notwithstanding the fact that the certificates evidencing any of the shares of Preferred Stock so called for redemption have not been surrendered, the dividends with respect to such shares shall cease to accrue after the Redemption Date; provided that, as of the Redemption Date, the Corporation has deposited with a bank or trust company in California having a capital and surplus of at least $100,000,000, as a trust fund for the benefit of the shares called for redemption, sufficient funds which are legally available for redemption, with irrevocable instructions to pay the Redemption Price upon surrender of the share certificates representing the shares called for redemption, and all rights with respect to such shares shall forthwith after the Redemption Date cease and terminate, except only the right of the holders to receive the Redemption Price without interest upon surrender of their certificates therefor. (f) Breakage Fees or Escrow Deposit. (i) If the Corporation redeems shares of Preferred Stock, and if the Redemption Date for such redemption is on a day which is not the day immediately prior to a Redetermination Date, then the Corporation shall pay to each Holder a fee calculated as follows: (A) one hundred dollars ($100.00) per share of Preferred Stock, times the number of days between the Redemption Date and the next Redetermination Date, divided by 360, times the applicable Interest Differential; plus (B) all out-of-pocket expenses incurred by the Holders and reasonably attributable to such redemption. (ii) If the Corporation redeems shares of preferred Stock, and if the Redemption Date for such redemption is on a day which is not the day immediately prior to a Redetermination Date, then the Corporation may, at its option, deposit in escrow with the agent an amount equal to the total redemption amount, with interest thereon for the account of the Corporation equal to the CD Base Rate, until the next Redetermination Date, and the date upon which such redemption shall be made shall be extended to the day immediately prior to such Redetermination Date. Section 6. Voting Rights of the Preferred Stock. The Preferred Stock shall be non- voting, except as required by applicable law. Section 7. No Reissuance of Preferred Stock. No share or shares of Preferred Stock acquired by the Corporation by reason of redemption, purchase, exchange, or otherwise shall be reissued and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. FIFTH. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend or repeal from time to time any or all of the Bylaws of this Corporation. SIXTH. The number of directors which shall constitute the whole Board of Directors of this Corporation shall be as specified in the Bylaws of this Corporation. SEVENTH. Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of this Corporation. EIGHTH. No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article EIGHTH shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. NINTH. Subject to the provisions of the next sentence, every stockholder entitled to vote at any election of directors may cumulate such stockholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the stockholder's shares are entitled, or distribute the stockholder's votes on the same principle among as many candidates as the stockholder thinks fit. No stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of stockholder's shares) unless such candidate or candidates' names have been placed in nomination prior to the voting and the stockholder has given notice at the meeting prior to the voting of the stockholder's intention to cumulate the stockholder's votes. If any one stockholder has given such notice, all stockholders may cumulate their votes for candidates in nomination. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. TENTH. (A) In addition to any affirmative vote required by law, by this Restated Certificate of Incorporation, by a certificate filed under Section 151(g) of the General Corporation Law of the State of Delaware, or by the Bylaws, and except as otherwise expressly permitted in paragraph (B) of this Article TENTH, a Business Combination (as hereafter defined) with, for, or on behalf of, any Interested Stockholder (as hereafter defined) or any Affiliate or Associate (as hereafter defined) of such Interested Stockholder shall require the affirmative vote of at least 80% of the votes entitled to be cast by the holders of all the then outstanding Voting Stock (as hereafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage of a separate class vote may otherwise be specified, by law or by any agreement between this Corporation and any national securities exchange or otherwise. (B) The provisions of paragraph (A) of this Article TENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such vote, if any, as is required by law, or by any other provisions of this Restated Certificate of Incorporation, or by a certificate filed under Section 151(g) of the General Corporation Laws of the State of Delaware, or by the Bylaws, or by any agreement between this Corporation and any national securities exchange, if (i) such Business Combination shall have been specifically approved by a majority of the Disinterested Directors (as hereafter defined) at the time or (ii) all the conditions specified in each of the following subparagraphs (1), (2), (3), (4), (5) and (6) are satisfied. (1) The aggregate amount of cash and the Fair Market Value (as hereafter defined) as of the Consummation Date (as hereafter defined) of any consideration other than cash to be received per share by holders of Voting Stock in such Business Combination, shall be at least equal to the highest amount determined under clauses (a) and (b) below: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of such Interested Stockholder for any share of Voting Stock in connection with the acquisition by the Interested Stockholder of Beneficial Ownership (as hereafter defined) of shares of Voting Stock (i) within the five-year period immediately prior to the Announcement Date (as hereafter defined) or (ii) in the transaction or series of transactions in which it became an Interested Stockholder, whichever is higher, in either case adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Voting Stock; or (b) the Fair Market Value per share of Voting Stock on the Announcement Date or the Determination Date (as hereafter defined), whichever is higher, as adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to Voting Stock. (2) The consideration to be received by holders of a particular class or series of outstanding Voting Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Stockholder in connection with its direct or indirect acquisition of Beneficial Ownership of shares of such class or series of Voting Stock. If the consideration so paid for shares of any class or series of Voting Stock varied as to form, the form of consideration for such class or series of Voting Stock shall either be cash or the form used to acquire Beneficial Ownership of the largest number of shares of such class or series of Voting Stock acquired by the Interested Stockholder during the five-year period prior to the Announcement Date. If non-cash consideration is to be paid, the Fair Market Value of such non- cash consideration shall be determined on and as of the Communication Date. (3) After the Determination Date and prior to the Consummation Date there shall have been (a) no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Voting Stock; (b) no reduction in the annual rate of dividends paid on the Voting Stock (except as necessary to reflect any split or subdivision of the Voting Stock), except as approved by a majority of the Disinterested Directors; (c) an increase in such annual rate of dividends (as necessary to prevent any such reduction) in the event of any reclassification (including any reverse stock split or combination of shares), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Voting Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (d) no transaction by which such Interested Stockholder has become the Beneficial Owner of any additional shares of Voting Stock except as part of the transaction that results in the Interested Stockholder becoming an Interested Stockholder and except in a transaction that, after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage Beneficial Ownership of any class or series of Voting Stock. (4) After the Determination Date, such Interested Stockholder shall not have received the benefit, directly or indirectly (except as a stockholder of this Corporation, in proportion to its stockholding), of any loans, advances, guarantees or similar financial assistance or any tax credits or tax advantages provided by this Corporation (collectively, "Financial Assistance"), whether in anticipation of or in connection with such Business Combination or otherwise. (5) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act, rules or regulations, or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent location, any statement as to the advisability or inadvisability of the Business Combination that the Disinterested Directors, or any of them, may desire to make, and, if deemed advisable by a majority of the Disinterested Directors, the proxy or information statement shall contain the opinion of an independent investment banking firm selected by a majority of the Disinterested Directors as to the fairness or lack of fairness of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Voting Stock other than the Interested Stockholder and its Affiliates or Associates, such investment banking firm to be paid a reasonable fee for its services by this Corporation. (6) Such Interested Stockholder shall not have made any major change in this Corporation's business or equity capital structure without the approval of a majority of the Disinterested Directors. (C) The following definitions shall apply with respect to this Article TENTH: (1) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to those terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, and as in effect on the date that this provision of the Restated Certificate of Incorporation of this Corporation is approved by the stockholders (the term "registrant" in said Rule 12b-2 meaning in this case the Corporation). (2) The term "Announcement Date" with respect to any Business Combination means the date of the first public announcement of the proposal of such Business Combination. (3) A person shall be a "Beneficial Owner" of, or have "Beneficial Ownership" of, or "Beneficially Own," any Voting Stock over which such person or any of its Affiliates or Associates, directly or indirectly, through any contract, arrangement, understanding or relationship, has or shares or, upon the exercise of any conversion right, exchange right, warrant, option or similar interest (whether or not then exercisable) would have or share, either (a) voting power (including the power to vote or to direct the voting) of such security or (b) investment power (including the power to dispose or direct the disposition) of such security. For the purposes of determining whether a person is an Interested Stockholder, the number of shares of Voting Stock deemed to be outstanding shall include any shares Beneficially Owned by such person even though not actually outstanding, but shall not include any other shares of Voting Stock which are not outstanding but which may be issuable to other persons pursuant to any agreement, arrangement or understanding, or upon exercise of any conversion right, exchange right, warrant, option or similar interest. (4) The term "Business Combination" shall mean: (a) any merger or consolidation of this Corporation or any Subsidiary (as hereafter defined) with (i) any Interested Stockholder (as hereafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition or security agreement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint venture participation or other arrangement (in one transaction or a series of related transactions) with or for the benefit of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder, involving any assets, securities, or commitments of this Corporation, any Subsidiary or any INterested Stockholder or any Affiliate or Associate or any Interested Stockholder which, together with all other such arrangements (including all contemplated future events) have an aggregate Fair Market Value (as hereafter defined) and/or involve aggregate commitments of $5,000,000 or more; or (c) the issuance or transfer by this Corporation or any Subsidiary (in one transaction or series of related transactions) to an Interested Stockholder or Associate or Affiliate of an Interested Stockholder of any securities of this Corporation or any Subsidiary in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value as of the Announcement Date of $5,000,000 or more, other than the issuance of securities upon the conversion or exchange of securities of this Corporation in exchange for securities of any Subsidiary which were acquired by an Interested Stockholder from this Corporation or a Subsidiary in a Business Combination which was approved by a vote of the shareholders pursuant to this Article TENTH; or (d) the adoption of any plan or proposal for the liquidation or dissolution of this Corporation; or (e) any reclassification of any securities of this Corporation (including any reverse stock split), any recapitalization of the Voting Stock of this Corporation, any merger or consolidation of this Corporation with or into any of its subsidiaries, or any other transaction (whether or not with or otherwise involving any Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Voting Stock or series thereof of the Corporation or of any Subsidiary Beneficially Owned by an Interested Stockholder or Associate or Affiliate of any Interested Stockholder or as a result of which the stockholders of the Corporation would cease to be stockholders of a corporation having, as part of its certificate of incorporation, provisions to the same effect as this Article TENTH and the provisions of Article ELEVENTH of this Restated Certificate of Incorporation relating to the provisions of this Article TENTH; or (f) any agreement, contract, or other arrangement providing for one or more of the actions specified in the foregoing paragraphs (a) through (e), or any series of transactions which, if taken together, would constitute one or more of the actions specified in the foregoing paragraphs (a) through (e). (5) The term "Consummation Date" means the date of the consummation of a Business Combination. (6) The term "Determination Date" in respect to an Interested Stockholder means the date on which such Interested Stockholder first became an Interested Stockholder. (7) The term "Disinterested Director" with respect to a Business Combination means any member of the Board of Directors of this Corporation who is not an Interested Stockholder or an Affiliate or Associate of, and was not directly or indirectly a nominee of, any Interested Stockholder involved in such Business Combination or any Affiliate or Associate of such Interested Stockholder and who either (a) was a member of the Board of Directors prior to the time that such Interested Stockholder became an Interested Stockholder, or (b) is a successor of a Disinterested Director and was nominated to succeed a Disinterested Director by a majority of the Disinterested Directors at the time of his nomination. Any reference to "Disinterested Directors" shall refer to a single Disinterested Director if there be but one. Any matter referred to as requiring approval of, or having been approved by, a majority of the Disinterested Directors shall mean the matter requires the approval of, or has been approved by, the Board without giving effect to the vote of any Director who is not a Disinterested Director and with the affirmative vote of a majority of the Disinterested Directors. (8) The term "Fair Market Value" as of any particular date means: (a) in the case of cash, the amount of such cash; (b) in the case of stock (including Voting Stock), the highest closing price per share of such stock during the thirty-day period immediately preceding the date in question on the largest United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed or, if such stock is not listed on any such exchange, the highest last sales price as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") during the thirty-day period immediately preceding the date in question if the stock is a National Market System security or, if such stock is not a National Market System security, the highest reported closing bid quotation for a share of such stock during the thirty- day period preceding the date in question on NASDAQ or any successor quotation reporting system or, if quotations are not available in such system, as furnished by the National Quotation Bureau Incorporated or any similar organization furnishing quotations, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; and (c) in the case of stock of any class or series which is not traded on any securities exchange or in the over-the- counter market, or in the case of property other than cash or stock, or in the case of Financial Assistance, the fair market value of such stock, property or Financial Assistance, as the case may be, on the date in question as determined by a majority of the Disinterested Directors in good faith. (9) The term "Interested Stockholder" shall mean any person, other than this Corporation, any Subsidiary or any employee benefit plan of this Corporation or any Subsidiary, who or which: (a) is, or has announced or publicly disclosed a plan or intention to become, the Beneficial Owner, directly or indirectly, of shares of Voting Stock representing 15% or more of the total votes which all of the then- outstanding shares of Voting Stock are entitled to cast in the election of directors; or (b) is an Affiliate or Associate of any person described in Subparagraph 9(a) at any time during the five-year period immediately preceding the date in question; or (c) acts with any other person as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of this Corporation, and such group is the Beneficial Owner, directly or indirectly, of shares of Voting Stock representing 15% or more of the total votes which all of the then-outstanding shares of Voting Stock are entitled to cast in the election of directors. Any reference to a particular Interested Stockholder involved in a Business Combination shall also refer to any Affiliate or Associate thereof, any predecessor thereto and any other person acting as a member of a partnership, limited partnership, syndicate or group with such particular Interested Stockholder within the meaning of the foregoing clause (c) of this subparagraph (9). (10) A "person" shall mean any individual, firm, company, corporation (which shall include a business trust), partnership, joint venture, trust or estate, association or other entity. (11) The term "Subsidiary" in respect of this Corporation means any corporation or partnership of which a majority of any class of its equity securities is owned, directly or indirectly, by this Corporation. (12) The term "Voting Stock" shall mean all shares of capital stock that entitle the holder to vote for the election of directors, including, without limitation, this Corporation's common stock. (D) A majority of the Disinterested Directors shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article TENTH, including, without limitation (1) whether a person is an Interested Stockholder, (2) the number of shares of Voting Stock Beneficially Owner by any person, (3) whether a person is an Affiliate or Associate of another person, (4) whether the requirements of paragraph (B) of this Article TENTH have been met with respect to any Business Combination, (5) whether the proposed transaction is with, or proposed by, or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder, and (6) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5,000,000 or more. The good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all purposes of this Article TENTH. (E) Nothing contained in this Article TENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. (F) The fact that any Business Combination complies with paragraph (B) of this Article TENTH shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of this Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. (G) For purposes of this Article TENTH, a Business Combination or any proposal to amend, repeal or adopt any provision of this Restated Certificate of Incorporation inconsistent with this Article TENTH (collectively, "Proposed Action") is presumed to have been proposed by, or on behalf of, an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder or a person who thereafter would become such if (1) after the Interested Stockholder became such, the Proposed Action is proposed following the election of any director of this Corporation who, with respect to such Interested Stockholder, would not qualify to serve as a Disinterested Director or (2) such Interested Stockholder, Affiliate, Associate or person votes for or consents to the adoption of any such Proposed Action, unless as to such Interested Stockholder, Affiliate, Associate or person, a majority of the Disinterested Directors makes a good faith determination that such Proposed Action is not proposed by or on behalf of such Interested Stockholder, Affiliate, Associate or person, based on information known to them after reasonable inquiry. ELEVENTH. (A) This Corporation reserves the right to any time and from time to time to amend, alter, change or repeal any provisions contained herein, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law, and all rights, preferences, and privileges of whatsoever nature conferred upon shareholders, directors, or any other person whomsoever by or pursuant to the Restated Certificate of Incorporation in its present form or as hereafter are granted, subject to the rights reserved in this Article ELEVENTH. (B) In addition to any requirements of law and other provisions hereof (and not withstanding the fact that approval by a lesser vote may be permitted by law or any other provision hereof), the affirmative vote of the holders of 80% or more of the combined voting power of the then-outstanding shares of Voting Stock, voting together as a single class, shall be required to amend, alter or repeal, or adopt any provision inconsistent with, this Article ELEVENTH or Article TENTH hereof. IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which only further amends the provisions of the Certificate of Incorporation of this Corporation as heretofore amended or supplemented or restated, there being no discrepancies between those provisions and the provisions of this Restated Certificate of Incorporation, and it having been duly adopted by the Corporation's Board of Directors in accordance with Section 245 of the General Corporation Law of the State of Delaware, has been executed by its duly authorized officers on this 29th day of July, 1987. THE CHARLES SCHWAB CORPORATION By /s/ Charles R. Schwab President Attest: /s/ Barbara A. Wolfe RECEIVED FOR RECORD Barbara A. Wolfe Aug 6 1987 Secretary William M. Honey, Recorder EX-10 3 EXHIBIT 10.72 EXHIBIT 10.72 RESTATEMENT OF ASSIGNMENT AND LICENSE Preamble. This is a restatement of the Assignment and License made the 31st day of March, 1987, and the Amendment thereof made as of July 30, 1987, by and between CL Acquisition Corporation, a Delaware corporation, The Charles Schwab Corporation, a Delaware corporation, Charles Schwab & Co., Inc., a California corporation, and Charles R. Schwab, an individual. For purposes of this restatement, the parties are referred to herein by their present names: The Charles Schwab Corporation, formerly CL Acquisition ("CS Corp."); Schwab Holdings, Inc., formerly The Charles Schwab Corporation ("Holdings, Inc."); Charles Schwab & Co., Inc. ("Schwab, Inc."); and Charles R. Schwab ("Schwab"). The parties hereby agree as follows: 1. Definitions. In this Agreement: a. "Name" means "Schwab" and each name and mark based thereon or derived therefrom including without limitation Schwab, C. Schwab, C. R. Schwab, Charles Schwab, Charles R. Schwab, Chuck Schwab, Schwab One, Schwab Tech, CRS, and the corporate names The Charles Schwab Corporation and Charles Schwab & Co., Inc. b. "Likeness" means any photograph, portrait, drawing or other image or likeness of Schwab, however reproduced, and whether still, single, multiple or moving. c. "Financial Services Business" means the business in which Schwab, Inc. is currently engaged and any additional and related business in which CS Corp., Holdings, Inc. and/or Schwab, Inc. are permitted to engage from time to time during the term of this Agreement under applicable statutes or by the rules, regulations or orders of those regulatory agencies to which such entities are from time to time subject. d. "Permitted Assignees and Licensees" means persons and entities who have been assigned or licensed the right to use the Name and/or Likeness as permitted in Section 9 hereof. e. "Employment Agreement" means that certain Employment Agreement of even date with the Assignment and License under the terms of which Schwab agrees to perform certain services on behalf of CS Corp. f. "Involuntary Termination," "Cause" and "Voluntary Termination" will have the same meaning as "involuntary termination," "cause," and "voluntary termination," respectively, in the Employment Agreement. g. "Loan Agreement" means that certain "Loan Agreement dated as of March 31, 1987 between CS Corp. as Borrower, The Banks herein named as the Banks, and Security Pacific National Bank, as the Agent." h. "Obligations," "Bank," "Agents," and "Loan Documents" will all have the same meaning as in the Loan Agreement. i. "Restricted Period" means that period beginning with the date of the Assignment and License and ending on the earlier of (i) eight years from the date of the Assignment and License and (ii) the first date when all Obligations are fully paid. 2. Assignment and License Back. Schwab hereby assigns to CS Corp. all service mark, trademark and trade name rights in and to the Name and Likeness as defined below as well as all good will associated therewith. CS Corp. hereby grants back to Schwab the perpetual, unrestricted, ongoing, exclusive, irrevocable license to use the Name and Likeness throughout the world for activities other than the Financial Services Business. 3. Reversion. In the event CS Corp. and all Permitted Assignees and Licensees shall all cease using the Name while Schwab still lives, all rights granted to CS Corp. with respect thereto shall revert to Schwab without further act or deed. In the event CS Corp. and all Permitted Assignees and Licensees shall all cease using the Likeness while Schwab still lives, all rights granted to CS Corp. with respect thereto shall revert to Schwab without further act or deed. 4. Representations by Schwab. Schwab represents that, except as provided in this Agreement, no person or organization is authorized, permitted or licensed by Schwab to use the Name and/or the Likeness in conjunction with any Financial Services Business, and Schwab agrees that he will not directly, nor indirectly through any other person or organization, use the Name and/or the Likeness in conjunction with any such business or authorize, permit, or license any other party to use the Name or the Likeness in conjunction with any such business, other than as permitted by Section 5 hereof. 5. Employment; Payment; Expansion of License. 5.1 As used in this Section 5: a. "Purchase Payment" means three-tenths of one percent (0.3%) of the Purchase Payment Base. b. "Purchase Payment Base" means the sum of the Net Revenues of all of the Included Users. c. "Net Revenues" of an Included User means the Gross Revenues of that Included User minus the Operating Interest Expense of that Included User, in each case during the Payment Period. d. "Gross Revenues" of an Included User means the gross revenues of that Included User during the Payment Period, determined in accordance with generally accepted accounting principles, and, to the extent permitted by such principles in consolidated financial statements of that Included User, shall include the gross revenues of all subsidiaries and affiliates of that Included User during the Payment Period, but excluding nonetheless from the gross revenues of that Included User and its subsidiaries and affiliates all gross revenues (i) that would otherwise be included more than once in the Purchase Payment Base, (ii) received from other Included Users, or (iii) received from subsidiaries and affiliates of other Included Users. e. "Operating Interest Expense" of an Included User means the operating interest expense of that Included User during the Payment Period, determined in accordance with generally accepted accounting principles and, to the extent permitted by such principles in consolidated financial statements of that Included User, shall include the operating interest expense of all subsidiaries and affiliates of the Included User during the Payment Period, but excluding nonetheless from the operating interest expense of that Included User and its subsidiaries and affiliates all operating interest expense that would otherwise be deducted more than once in calculating the Purchase Payment Base. f. "Included Users" means CS Corp. and all Permitted Assignees and Licensees except Banks and Agent. g. The "Payment Period" begins on the first day of the month following the termination of Schwab's employment by CS Corp., whether during or after the Restricted Period and regardless of the reason for such termination, unless (x) immediately prior to such termination Schwab and CS Corp. are parties to an employment agreement whose term extends beyond the date of termination, (y) that employment agreement requires CS Corp. to make a payment or payments in lieu of salary or other payments that would have been payable under the employment agreement had Schwab continued to be employed beyond the date of termination, and (z) CS Corp. makes such payment or payments or pays a mutually acceptable settlement in lieu thereof. If (x), (y) and (z) are all true, then the "Payment Period" shall begin on the first day of the month following the end of the full term of the employment agreement, provided that if a written agreement between CS Corp. and Schwab expressly provides that the payment(s) made or settlement paid as contemplated by (z) is (are) in lieu of salary or other payments otherwise payable under the employment agreement for a term shorter than the entire term of the employment agreement, then the "Payment Period" shall begin on the first day of the month following the end of such shorter term. The "Payment Period" shall end on the earliest of (i) such time as CS Corp. and all Permitted Assignees and Licensees shall no longer use the Name and/or Likeness, (ii) the day before the fifteenth (15th) anniversary of the beginning of the Payment Period, or (iii) a Disqualifying Event. h. A "Disqualifying Event" would occur if at any time during the Restricted Period, whether or not Schwab is still employed by CS Corp. and whether or not any license granted by Section 5.4 has come into effect, Schwab should serve as a director of, render services to, invest in or otherwise engage in any business competitive with any existing or contemplated business of CS Corp., Holdings, Inc. or Schwab, Inc., and fail to terminate such activity or investment within sixty (60) days after demand by CS Corp. Despite the foregoing, a purely passive investment will not constitute a basis for a Disqualifying Event if it is in (i) publicly traded securities, provided that Schwab does not own beneficially or of record more than five percent (5%) of any class of security or (ii) a professionally managed venture capital fund, provided that Schwab does not provide more than five percent (5%) of the capital invested in any such fund. The determination of the Board of Directors of CS Corp. that an action or activity is or is not competitive shall be controlling on Schwab unless Schwab objects to such determination within thirty (30) days after the demand, in which case the determination shall be made by arbitration in accordance with California Code of Civil Procedure Sections 1280 et seq., and that determination shall be binding upon the parties. Each party shall be entitled to discovery. The sixty-day opportunity to cure will not be extended by any actual or requested arbitration, so that if Schwab does not terminate the specified activity or investment within the sixty-day period and the arbitration subsequently determines that it was in fact competitive, Schwab will have no further opportunity to cure. Both CS Corp. and Schwab will use their best efforts to complete the arbitration before the end of the sixty-day period. 5.2 Subject to the provisions of Sections 5.6 and 5.7 below, and in consideration for the assignments made herein, CS Corp. agrees to pay the Purchase Payment to Schwab, his executor, successor or assigns. The amount payable shall be computed and paid on a calendar quarterly basis, commencing with the end of the first complete calendar quarter in the Payment Period. CS Corp. agrees to keep (and to require each Included User to keep) accurate books of account and records relating to its Net Revenues, and Schwab and his duly authorized representatives shall have the right at all reasonable hours of the day to an examination and audit of such books of account and records and of all documents and materials in the possession or under the control of Included Users with respect to Gross Revenues and Operating Interest Expense. Each book of account and record shall be kept available for at least two (2) years after all payments are made with respect to the revenues and expenses reflected therein. 5.3 Despite anything in Section 5.2, payments to Schwab shall be limited as follows: a. As used in this Section 5.3: (i) The first day of the first calendar quarter during the Payment Period is the "Base Date." (ii) Each twelve month period which (x) begins on the Base Date or an anniversary of the Base Date and (y) falls entirely within the Payment Period will be a "Payment Year." (iii) If the Payment Period begins on any date other than the first day of a calendar quarter, then the period beginning on the first day of the Payment Period and ending the day before Base Date will be the "Initial Payment Period." (iv) If the Payment Period ends after the Base Date and on any date other than the day before an anniversary of the Base Date, then the period beginning on the last anniversary of the Base Date during the Payment Period and ending at the end of the Payment Period will be the "Final Payment Period." (v) "Consumer Price Index" means the Consumer Price Index for All Urban Consumes for the San Francisco-Oakland-San Jose Metropolitan Area published by the Bureau of Labor Statistics, as it was constituted for the month of May 1987. If the Bureau of Labor Statistics should cease publication of the Consumer Price Index for All Urban Consumers for the San Francisco-Oakland-San Jose Metropolitan Area or changes the basis on which it is constituted, then the parties shall use the index then being published by the Bureau of Labor Statistics or its successor agency which most closely approximates the original "Consumer Price Index." b. Despite anything to the contrary in this Agreement, the amount payable to Schwab pursuant to Section 5.2 of this Agreement with respect to any Initial Payment Period shall not exceed two million dollars ($2,000,000) multiplied by two fractions. The first fraction is the number of days in the Initial Payment Period divided by three hundred sixty-five (365). The second fraction is the Consumer Price Index for the calendar month preceding the Base Date divided by the Consumer Price Index for the same calendar month in 1987. c. Despite anything to the contrary in this Agreement, the amount payable to Schwab pursuant to Section 5.2 of the Agreement with respect to any Payment Year shall not exceed two million dollars ($2,000,000) multiplied by a fraction, the numerator of which is the Consumer Price Index for the calendar month immediately preceding the first month in the Payment Year and the denominator of which is the Consumer Price Index for the same calendar month in 1987. d. Despite anything to the contrary in this Agreement, the amount payable to Schwab pursuant to Section 5.2 of the Agreement with respect to any Final Payment Period shall not exceed two million dollars ($2,000,000) multiplied by two fractions. The first fraction is the number of days in the Final Payment Period divided by three hundred sixty-five (365). The second fraction is the Consumer Price Index for the calendar month preceding the beginning of the Final Payment Period divided by the Consumer Price Index for the same calendar month in 1987. e. If b, c or d above requires the use of the Consumer Price Index for a month for which it is not published, then the Consumer Price Index for the next preceding month which is published shall be used. 5.4 Subject to the provisions of Section 5.6 below: a. Effective immediately upon the termination of Schwab's employment by CS Corp., Schwab shall have, without further action on his part, a perpetual, unrestricted, ongoing, non-exclusive, irrevocable license to use the Likeness throughout the world in the following part of the Financial Services Business: the sale, distribution, broadcast and promotion of books, videotapes, lectures, radio programs and television programs. b. Any time after termination of Schwab's employment by CS Corp., Schwab may notify CS Corp. that Schwab proposes to engage in all or part of that portion of the Financial Services Business commonly known as financial planning. The notice shall describe in summary form the financial planning products and services that Schwab expects will be offered by the business in which he proposes to engage. CS Corp. promptly shall grant to Schwab an immediately effective, perpetual, unrestricted, ongoing, non-exclusive, irrevocable license to use the Likeness to engage in the financial planning business described except that CS Corp. need not grant such a license to the extent that the business described would be in direct competition with any Financial Services Business in which CS Corp. or any Permitted Assignee or Licensee is then engaged or which CS Corp. or any Permitted Assignee or Licensee plans as of the date of receipt of Schwab's notice to commence within three (3) months after receipt of Schwab's notice. c. Commencing on the date that is two (2) years from the beginning of the Payment Period, Schwab shall have a perpetual, unrestricted, ongoing, non-exclusive, irrevocable license to use the Likeness throughout the world in the Financial Services Business. This license will supersede any license previously granted pursuant to Section 5.4.b of this Agreement. d. The licenses pursuant to this Section 5.4 may not be assigned or sublicensed except that Schwab may grant sublicenses to use the Likeness in connection with the sale, distribution, broadcast and promotion of goods, services and programs that Schwab personally plans a substantial role in creating. 5.5 It is the understanding and intent of the parties that when and if any license granted in Section 5.4 of this Agreement comes into effect, Schwab then may engage in the business covered by the license and use his personal name, personal initials and personal nicknames in connection therewith without any restriction imposed by this Agreement except (i) the restrictions set forth in Sections 6.1, 6.2 and 7 of this Agreement and (ii) the possibility that the Payment Period might prematurely terminate because engaging in such a business might constitute a Disqualifying Event. Further, the restriction described in (ii) would terminate at the end of the Restricted Period. 5.6 Despite anything in Sections 5.2 and 5.4, if the termination of Schwab's employment by CS Corp. is an Involuntary Termination for Cause during the Restricted Period, or alternatively if such termination is a Voluntary Termination during the Restricted Period, then Sections 5.2 and 5.4 shall be of no further force or effect. 5.7 Despite anything in Section 5.2, if Banks or Agent should acquire legal and beneficial ownership of the Name by virtue of foreclosing a security interest granted to them in the Loan Documents, then thereafter Section 5.2 shall be of no further force or effect. Further, if a third party other than Banks or Agent should acquire legal and beneficial ownership of the Name by virtue of a foreclosure of the security interest granted to Banks and Agent in the Loan Documents and such foreclosure does not result in an immediate and complete satisfaction of the Obligations, then the Payment Period shall exclude all time elapsed between the date when that third party so acquires tittle and the first date when the Obligations are satisfied in full. 6. Schwab's Use of the Name. 6.1 Schwab may use all or part of his personal name, personal initials or personal nicknames in any manner not prohibited by this Agreement. Despite anything to the contrary in this Agreement, however, but subject nevertheless to the provisions of Section 3 of this Agreement, in exercising that right and the rights granted to Schwab in Sections 2 and 5.4 of this Agreement, Schwab may not (i) use or authorize another to use the Name (including without limitation his personal name, personal initials or personal nicknames) as a service mark, trademark or trade name in the Financial Services Business or (ii) use or authorize another to use the Name or Likeness or both in a manner that causes confusion as to whether CS Corp. or any of the Permitted Assignees and Licensees has created, manufactured, endorsed, sold or otherwise been involved with any product or service. 6.2 Further, Schwab may not refer or authorize another to refer to CS Corp. or any of the Permitted Assignees and Licensees by name in any advertisement, press release, interview or other written, spoken or visual material which is intended to promote any product or service, without first obtaining the written consent of CS Corp. CS Corp. shall not withhold any consent required by the previous sentence unless CS Corp. reasonably believes that the proposed reference would be a breach of Section 6.1 of this Agreement or another term of the Agreement. Should Schwab request any such consent, Schwab shall provide CS Corp. with all information that CS Corp. reasonably requests regarding the proposed reference in order to determine whether or not such reference would be a breach of Section 6.1 of this Agreement or another term of the Agreement. 7. Quality of Goods and Services. CS Corp. acknowledges that Schwab has, and Schwab acknowledges that CS Corp. intends to develop, the highest quality reputation for the delivery of goods and services in the Financial Services Business, and each agrees that the goods and services offered by it or him using the Name or Likeness shall be of such quality as to be appropriate and suited to the protection and enhancement of the Name and Likeness and the good will appurtenant thereto, that such goods and services will be manufactured, sold, distributed and performed in accordance with all Federal, state and local laws that are applicable and material, and that the sale, distribution, provision of services, and/or exploitation by it or him shall be of the highest standard and that the same shall in no manner reflect adversely upon the good name of the other or the name and/or Likeness. Further, CS Corp. agrees not to use any Likeness in advertising or as a mark while Schwab is alive without first obtaining Schwab's approval of his appearance in the Likeness, but such approval shall not be unreasonably withheld. 8. Remedies. CS Corp. and Schwab each acknowledge that the manufacture, sale or distribution of goods or the provision of services in breach of Section 7 of this Agreement would result in immediate and irreparable damage to the other. Each acknowledges and admits that there is no adequate remedy at law for such manufacture, sale, distribution or provision and agrees that the other shall be entitled to equitable relief by way of temporary and permanent injunctions, without bond, and such other further relief as any court having jurisdiction shall deem just and proper. However, such relief may not include an injunction or other prohibition against use of the Name and Likeness that is permitted by this Agreement, a rescission of this Agreement or a reversion of the rights granted to either party herein. 9. Assignment. 9.1 Subject to compliance with Section 9.2 below, CS Corp. may assign or license any or all rights granted to it herein: (i) as security under the Loan Documents; (ii) to Holdings, Inc., to Schwab, Inc. and to subsidiaries and affiliates of CS Corp., Holdings, Inc. and Schwab, Inc.; (iii) if Schwab gives his prior written consent or votes in favor of the assignment in his capacity as a director of CS Corp., Holdings, Inc., or Schwab, Inc., and (iv) after the death of Schwab. In exercise of their rights under the Loan Documents, the Banks and Agent may assign or license any and all rights assigned to them pursuant to the preceding sentence. 9.2 All assignments to Banks or Agent must be made expressly subject to all the terms and conditions of this Agreement. In any other assignment or license pursuant to the other provisions of Section 9.1, all assignees and licensees must join in all covenants of CS Corp. hereunder and assume joint and several liability for all obligations of CS Corp. hereunder, with such joinder and assumption being made for the express and direct benefit of Schwab. No assignment or license by CS Corp. shall relieve it of any of its obligations hereunder. 9.3 Except for assignments and licenses that both (i) are permitted by Section 9.1 and (ii) conform to the requirements of Section 9.2, neither CS Corp. nor Permitted Assignees and Licensees may assign or license any rights granted to CS Corp. herein, and any purported assignment or license of such rights that is not permitted shall be null and void. 9.4 For purposes hereof "assignment" and "license" shall be construed in their broadest sense and shall include any purported direct or indirect transfer or other disposition, voluntary or involuntary, of any of such rights, including without limitation any distribution upon dissolution, any merger or other reorganization to which CS Corp. or a Permitted Assignee or Licensee is a party unless the shareholders of such entity immediately before the merger or other reorganization retain the ability to elect a majority of the board of directors immediately after such merger or reorganization, any pledge or hypothecation of any of such rights, or the imposition of any lien upon such rights which is not fully and finally removed within 30 days following the date of such imposition, but does not include the sale of securities for cash or property. 10. Notices. Any notice, demand or other communication to be given hereunder by any party to another shall be in writing and delivered personally or sent by certified mail, postage prepaid, as follows: CS CORP.: The Charles Schwab Corporation 101 Montgomery Street San Francisco, CA 94104 Attention: Lawrence J. Stupski, President SCHWAB: Charles R. Schwab c/o Charles Schwab & Co., Inc. 101 Montgomery Street San Francisco, CA 94104 or to such other persons as may be designated in writing by the parties, by a notice given as aforesaid. 11. Joint and Several Liability. Holdings, Inc. and Schwab, Inc. join in all covenants of CS Corp. hereunder; and CS Corp., Holdings, Inc. and Schwab, Inc. each agree to be jointly and severally liable for all obligations of each of the others hereunder. Holdings, Inc. and Schwab, Inc. each acknowledge that its inclusion in the class of Permitted Assignees and Licensees is full and fair consideration for the liability that it is undertaking hereunder. 12. Miscellaneous. This Agreement shall be construed in accordance with the laws of California applicable to agreements made and to be performed entirely in that state. Section headings used herein are inserted for convenience only and are not part of this Agreement. None of the terms of this Agreement may be waived or modified except by an express agreement in writing signed by both parties. Nothing contained herein shall be construed to place the parties in the relationship of partners or joint venturers, and CS Corp. shall have no power to obligate or bind Schwab in any manner whatsoever. In any controversy hereunder the prevailing party shall be entitled to recover its reasonable attorneys' fees and expenses from the opposing party or parties. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and shall inure to the benefit of and shall be binding upon the parties, their respective heirs, executors, administrators, successors and permitted assigns. 13. Survival of Previous Actions; Effective Date. 13.1 This Agreement supersedes the original Assignment and License and the Amendment thereof; but all assignments, licenses, notices, waivers and consents previously effected by or given pursuant to either the original Assignment and License or the Amendment thereof, or both, shall survive and remain in full force and effect. 13.2 The Preamble to this Agreement and this Section 13 will become effective on the date of execution hereof as set forth in the paragraph next following. Sections 5.3, 5.5, 6.1 and 6.2 of this Agreement originated in the Amendment of the original Assignment and License and hence became effective as of July 30, 1987. Sections 5.1(a), 5.1(g) and 5.4 of this Agreement were revised in the Amendment of the original Assignment and License and hence became effective in their present form as of July 30, 1987, but the previous versions of those sections were effective from March 31, 1987 until July 30, 1987. All other portions of this Agreement became effective on March 31, 1987. IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the _____ day of _______________, 1988. The Charles Schwab Corporation /s/ Charles R. Schwab by /s/ Lawrence J. Stupski Charles R. Schwab Lawrence J. Stupski President Charles Schwab & Co., Inc. Schwab Holdings, Inc. by /s/ Lawrence J. Stupski by /s/ Charles R. Schwab Lawrence J. Stupski Charles R. Schwab President and Chairman and Chief Operating Officer Chief Executive Officer STATE OF CALIFORNIA ) ) ss. CITY AND COUNTY OF SAN FRANCISCO ) On this 25th day of January, 1988, before me, Sheila S. Providenza, the undersigned Notary Public, personally appeared Charles R. Schwab, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as Chairman for and on behalf of Charles Schwab & Co., Inc. and acknowledged to me that corporation executed it. WITNESS my hand and official seal. /s/ Sheila S. Providenza Notary Public ************************************* * SHEILA S. PROVIDENZA * * NOTARY PUBLIC-CALIFORNIA * * CITY & COUNTY OF * * SAN FRANCISCO * * My Commission Expires October 13, 1990. * ************************************* OFFICIAL SEAL <[PAGE> STATE OF CALIFORNIA ) ) ss. CITY AND COUNTY OF SAN FRANCISCO ) On this 25th day of January, 1988, before me, Sheila S. Providenza, the undersigned Notary Public, personally appeared Charles R. Schwab, personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instruments, and acknowledged to me that he executed the same. WITNESS my hand and official seal. /s/ Sheila S. Providenza Notary Public ************************************* * SHEILA S. PROVIDENZA * * NOTARY PUBLIC-CALIFORNIA * * CITY & COUNTY OF * * SAN FRANCISCO * * My Commission Expires October 13, 1990. * ************************************* OFFICIAL SEAL STATE OF CALIFORNIA ) ) ss. CITY AND COUNTY OF SAN FRANCISCO ) On this 25th day of January, 1988, before me, Sheila S. Providenza, the undersigned Notary Public, personally appeared Lawrence J. Stupski, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as President for and on behalf of The Charles Schwab Corporation, and acknowledged to me that corporation executed it. WITNESS my hand and official seal. /s/ Sheila S. Providenza Notary Public ************************************* * SHEILA S. PROVIDENZA * * NOTARY PUBLIC-CALIFORNIA * * CITY & COUNTY OF * * SAN FRANCISCO * * My Commission Expires October 13, 1990. * ************************************* OFFICIAL SEAL STATE OF CALIFORNIA ) ) ss. CITY AND COUNTY OF SAN FRANCISCO ) On this 25th day of January, 1988, before me, Sheila S. Providenza, the undersigned Notary Public, personally appeared Lawrence J. Stupski, personally known to me or proved to me on the basis of satisfactory evidence to be the person who executed the within instrument as President & C.O.O. for and on behalf of Schwab Holdings, Inc. and acknowledged to me that corporation executed it. WITNESS my hand and official seal. /s/ Sheila S. Providenza Notary Public ************************************* * SHEILA S. PROVIDENZA * * NOTARY PUBLIC-CALIFORNIA * * CITY & COUNTY OF * * SAN FRANCISCO * * My Commission Expires October 13, 1990. * ************************************* OFFICIAL SEAL EX-10 4 EXHIBIT 10.145 EXHIBIT 10.145 CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN RESTATED EFFECTIVE JANUARY 1, 1994 CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN RESTATED EFFECTIVE JANUARY 1, 1994 Table of Contents Section Page 1 Introduction and Purpose 1 2 Definitions 3 3 Participation 15 4 Employer Contributions 17 5 Salary Reduction Agreements and Rollover Contributions 25 6 Allocation of Contributions 31 7 Special ESOP Provisions 32 8 Investment of Contributions, Valuations and Participants' Cash Contribution Accounts 39 9 Retirement Dates 41 10 Eligibility for Payment of Accounts and Vested Interests 42 11 Method of Payment of Accounts and Withdrawals 46 12 Maximum Amount of Allocation 56 13 Voting Rights 58 14 Designation of Beneficiaries 62 15 Administration of the Plan 63 16 Expenses 66 17 Employer Participation 69 18 Amendment or Termination of the Plan 72 19 Top-Heavy Plan Requirements 75 20 General Limitations and Provisions 80 21 Application to Puerto Rico Employees 89 CHARLES SCHWAB PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN RESTATED EFFECTIVE JANUARY 1, 1994 SECTION 1. INTRODUCTION AND PURPOSE 1.1 The Plan Sponsor has established and maintains the Plan to enable each Participant to benefit, in accordance with the terms of the Plan, from contributions made by the Employer and from any increases in the value of the Plan assets through investment of such assets. The Plan is comprised of three parts: (i) a Section 401(k) plan, (ii) a profit sharing plan and (iii) an employee stock ownership plan. The purpose of the employee stock ownership plan portion of the Plan is to align Employees' interests with the interests of shareholders. It is anticipated that Employer contributions to the employee stock ownership plan will be invested primarily or entirely in Shares of The Charles Schwab Corporation, that the employee stock ownership plan may acquire such Shares of The Charles Schwab Corporation from time to time with the proceeds of one or more Exempt Loans, the repayment of which may be secured in part by a pledge of the Shares of The Charles Schwab Corporation acquired with those loan proceeds, and that Employer contributions to the employee stock ownership plan may be used in full or in substantial part to the payment of interest on, and retirement of principal of, such Exempt Loans. This Plan is a restatement of the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, which was initially effective as of October 1, 1983 and was most recently amended and restated, effective January 1, 1992. The effective date of this restatement is January 1, 1994. The rights of any person who terminated employment or who retired on or before the effective date of this restated Plan or any provision hereof, including his or her eligibility for benefits and the time and form in which benefits, if any, will be paid, shall be determined solely under the terms of the Plan provisions as in effect on the date of his or her termination of employment or retirement, unless such person is thereafter reemployed and again becomes a Participant. The rights of any other person shall be determined solely under the terms of this restated Plan, except as may otherwise be required by law. The Plan and Trust are intended to qualify as a plan and trust which are qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code. The Plan is intended to qualify in part as a profit sharing plan (as defined in Section 401(a)(27) of the Code) and in part as a stock bonus plan and an employee stock ownership plan (as defined by Section 4975(e)(7) of the Code and Section 407(d)(6) of the Act) designed to invest primarily in shares of stock of the Employer which meet the requirements for "qualifying employer securities" under Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act. All provisions of the Plan and Trust shall be construed accordingly. All Trust Fund assets acquired under the Plan as a result of debt incurred to purchase Shares, Employer contributions, income and other additions to the Trust Fund shall be administered, distributed, forfeited and otherwise governed by the provisions of the Plan. It is intended that the Trust associated with the Plan be exempt from federal income taxation pursuant to the provisions of Section 501(a) of the Code. Subject to the provisions of Section 16 of the Plan, the assets of the Plan shall be applied exclusively for the purposes of providing benefits to Participants and Beneficiaries under the Plan and for defraying expenses incurred in the administration of the Plan and its corresponding Trust. SECTION 2. DEFINITIONS When used herein the following terms shall have the following meanings: 2.1 "Account" means the account or accounts established and maintained on behalf of a Participant pursuant to (i) Section 6.1 with respect to the Participant's Cash Contribution Account and (ii) Section 7.1 with respect to the Participant's ESOP Account. 2.2 "Act" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. 2.3 "Actual Deferral Percentage" means the average of the ratios (calculated separately for each Employee) for each Plan Year of (a) the amount of Elective Contributions and Matching Contributions or Qualified Nonelective Contributions (if the Committee determines to take such Matching Contributions or such Qualified Nonelective Contributions into account when calculating Actual Deferral Percentage) on behalf of each Employee for such Plan Year to (b) the Employee's compensation (as defined in Treasury Regulation 1.415-2(d)(10)) while a Participant for such Plan Year. 2.4 "Affiliated Employer" means any corporation which is included in a controlled group of corporations (within the meaning of Section 414(b) of the Code) which includes the Plan Sponsor, any trade or business (whether or not incorporated) which is under common control with the Plan Sponsor (within the meaning of Section 414(c) of the Code), any organization included in the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Plan Sponsor and any other entity required to be aggregated with the Plan Sponsor pursuant to the Regulations under Section 414(o) of the Code; except that for purposes of applying the provisions of Sections 12 and 19 with respect to the limitations on contributions, Section 415(h) of the Code shall apply. 2.5 "Beneficiary" means the beneficiary or beneficiaries designated by a Participant pursuant to Section 14 to receive the amount, if any, payable under the Plan upon the death of such Participant. 2.6 "Board of Directors" means the board of directors of Charles Schwab & Co., Inc. 2.7 "Break in Service" means a Plan Year (or for purposes of determining membership in the Plan pursuant to Section 3, the Computation Period) during which an individual has not completed more than 500 Hours of Service, as determined by the Committee in accordance with the Regulations. A Break in Service shall be deemed to have commenced on the first day of the Plan Year in which it occurs. Solely for purposes of determining whether a Break in Service has occurred, an individual shall be credited with the Hours of Service which such individual would have completed but for a maternity or paternity absence, as determined by the Committee in accordance with this Section 2.7 and the Code and Regulations; provided, however, that the total Hours of Service so credited shall not exceed 501 Hours of Service and that the individual shall timely provide the Committee with such information as it shall require. Hours of Service credited for a maternity or paternity absence shall be credited at eight Hours of Service per day and shall be credited entirely (i) in the Plan Year or Computation Period in which the absence began if such Hours of Service are necessary to prevent a Break in Service in such Plan Year, or (ii) in the following Plan Year or Computation Period. For purposes of this Section 2.7, maternity or paternity absence shall mean an absence from work by reason of the individual's pregnancy, the birth of the individual's child or the placement of a child with the individual in connection with adoption of the child by such individual, or for purposes of caring for a child for the period immediately following such birth or adoption. 2.8 "Cash Contribution Account" means the account or accounts established and maintained on behalf of a Participant pursuant to Section 6.1 with respect to the Participant's Elective Contributions, Matching Contributions, Profit Sharing Contributions, Qualified Nonelective Contributions or Rollover Contributions. 2.9 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 2.10 "Committee" means the Administrative Committee of the Employer provided for in Section 15. For purposes of the Act, the Employer shall be the "named fiduciary" (with respect to the matters for which it is hereby responsible under the Plan) of the Plan, and the Employer shall be the "plan administrator" of the Plan within the meaning of Section 3(16)(A) of the Act. 2.11 "Compensation" means a Participant's W-2 compensation related to services rendered to the Employer, excluding (i) living allowances, (ii) travel or commuting allowances, (iii) reimbursements for financial planning, (iv) amounts that are paid as a result of participation in the Employer's Long-Term Incentive Plan, (v) employee referral awards, (vi) special incentive awards (other than regular bonus programs), (vii) reimbursements for relocation expenses, (viii) commissions (other than "dual commissions", commissions based on trading results that are paid to traders who are also salaried and commissions where the Participant's only form of remuneration is commissions), (ix) income items attributable to the taxable portion of employee benefits and any cash payments made as a result of an Employee's election not to receive insured benefits pursuant to the Company's Pre-Tax Contribution Plan, (x) amounts paid as short term disability benefits, (xi) any income items reflecting grants in aid, and (xii) compensation in excess of $150,000 (adjusted for cost of living to the extent permitted by Section 401(a)(17) of the Code and Regulations). For purposes of determining the whole percentage of Compensation for which a Participant may make a Salary Reduction Agreement, and not for any other purposes, subparagraph (ix) hereof shall be disregarded. Compensation shall be determined prior to reduction for any contributions pursuant to such Participant's election under Section 5.1, and any elective contributions made by the Employer on behalf of the Participant in the Plan Year that are not includable in gross income under Section 125 of the Code. Any Compensation paid to any Participant who is a member of the family of a five percent (5% ) owner or one of the ten most Highly Compensated Participants, as defined in Section 414(q)(6) of the Code, shall be treated as if it were paid to or on behalf of such five percent (5%) owner or Highly Compensated Participant. For purposes of the previous sentence, the term "family" means the Participant's spouse and any of the Participant's lineal descendants who have not attained age 19 before the end of the Plan Year. 2.12 "Computation Period" means a 12 consecutive month period beginning on the day an individual first performs an Hour of Service or first performs an Hour of Service following a Break in Service. Thereafter, the Computation Period shall be the Plan Year, commencing with the Plan Year that includes the day immediately following the last day of the Computation Period determined pursuant to the first sentence hereof. 2.13 "Contribution Percentage" means the average of the ratios (calculated separately for each Participant for each Plan Year) of (a)(i) Matching Contributions, if any, made by the Employer on behalf of a Participant and (ii) Elective Contributions, (if the Committee elects to take into account Elective Contributions when calculating the Contribution Percentage) to (b) the Employee's compensation while a Participant (as defined in Section 1.415-2(d)(10) of the Regulations) for such Plan Year. 2.14 "Deferred Retirement Date" shall have the meaning set forth in Section 9.2. 2.15 "Disability" means the inability to engage in any substantial gainful activity considering the Participant's age, education and work experience by reason of any medically determined physical or mental impairment that has continued without interruption for a period of at least six months and that can be expected to be of long, continued and indefinite duration. The determination of the Committee as to whether a Participant has a Disability shall be final, binding and conclusive. 2.16 "Effective Date" means October 1, 1983. 2.17 "Elective Contributions" means contributions made to the Trust Fund pursuant to a Participant's Salary Reduction Agreement entered into pursuant to Section 5.1, and which are considered tax deferred under Section 401(k) of the Code. 2.18 "Elective Contribution Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(a) with respect to his or her Elective Contributions and Qualified Nonelective Contributions. 2.19 "Employee" means any "regular employee" of the Employer, excluding (i) any person covered by any other pension, profit sharing or retirement plan to which any Employer or Affiliated Employer is required to contribute either directly or indirectly, (ii) any nonresident alien individual who received no earned income (within the meaning of Section 911(d)(2)) from the Employer which constitutes income from sources within the United States and (iii) any employee who is included in a unit of employees covered by a negotiated collective bargaining agreement which does not provide for his or her membership in the Plan. A director of the Employer is not eligible for membership in the Plan unless such director is also an Employee. A leased employee (within the meaning of Section 414(n) of the Code) is not eligible for membership in the Plan unless the Employer designates such individual as eligible for membership in the Plan. 2.20 "Employer" means Charles Schwab & Co., Inc. and any Participating Employer which adopts this Plan subject to the approval of the Board of Directors. 2.21 "ESOP Account" means the account established and maintained on behalf of a Participant pursuant to Section 7.1 with respect to his or her ESOP Contributions. 2.22 "ESOP Contributions" means the Employer contributions, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(c). 2.23 "ESOP/Profit Sharing Entry Date" means January 1 and July 1 of each calendar year. 2.24 "Exempt Loan" means any loan to the Plan or Trust not prohibited by Section 4975(c) of the Code and Section 406 of the Act because the loan meets the requirements set forth in Section 4975(d)(3) of the Code, Section 408(b)(3) of the Act and the Regulations promulgated thereunder, the proceeds of which loan are used within a reasonable time after receipt by the Trust Fund only for any or all of the following purposes: (a) to acquire Shares; (b) to repay the same Exempt Loan; or (c) to repay any previous Exempt Loan. 2.25 "Highly Compensated Participant" means any Participant who, during the relevant period is treated as a highly compensated employee under Section 414(q) of the Code. For purposes of determining which Employee is a Highly Compensated Participant, the look-back determination shall be made on the basis of the calendar year and the simplified method of Section 414(q)(12) of the Code shall be used by the Employer to the extent permissible under Code. The Plan shall comply with the procedures of Treasury Regulation 1.401(k)-1(f) to the extent applicable. For purposes of determining which Employee is a Highly Compensated Participant: (A) Highly Compensated Participant means a Participant who performs Service during the determination year and is described in one or more of the following groups: (1) An Employee who is a five percent (5%) owner, as defined in Section 416(i)(1)(A)(iii) of the Code, at any time during the determination year or the look-back year. (2) An Employee who receives compensation in excess of $75,000 (indexed in accordance with Section 415(d) of the Code) during the look-back year. (3) An Employee who receives compensation in excess of $50,000 (indexed in accordance with Section 415(d) of the Code) during the look-back year and is a Participant of the "top-paid" group for the look-back year. (4) An Employee who is an officer, within the meaning of Section 416(i) of the Code, during the look-back year and who receives compensation in the look-back year greater than fifty percent (50%) of the dollar limitation in effect under Section 415(b)(1)(A) for the calendar year in which the look-back year begins. (5) An Employee who is both described in subparagraphs 2, 3, or 4 above when these paragraphs are modified to substitute the determination year for the look-back year and one of the 100 employees who receive the most compensation from the Employer during the determination year. (B) For purposes of this Section: (1) The determination year is the Plan Year for which the determination of who is a Highly Compensated Participant is being made. (2) The look-back year is the calendar year ending with or within the determination year. (3) The "top-paid" group consists of the top twenty percent (20%) of Employees ranked on the basis of compensation received during the past calendar year. For purposes of determining the number of Employees in the top- paid group, Employees described in Section 414(q)(8) of the Code and Q & A 9(b) of Section 1.414(q)-1T of the Regulations are excluded. (4) The number of officers is limited to 50 (or, if lesser, the greater of 3 Employees or ten percent (10%) of Employees) excluding those Employees who may be excluded in determining the top-paid group. (5) When no officer has compensation in excess of fifty percent (50%) of the Section 415(b)(1)(A) limit, the highest paid officer is treated as highly compensated. (6) For purposes of this Section 2.25, the term "compensation" means compensation as defined in Section 415(c)(3) of the Code and Treasury Regulation Section 1.415- 2(d)(10), determined without reduction for any elective or salary reduction contributions to a cafeteria plan or cash or deferred arrangement. (7) Employers aggregated under Section 414(b), (c), (m), or (o) of the Code are treated as a single employer. (8) Highly Compensated Participants include a former Employee who had a separation year prior to the determination year and who was a Highly Compensated Participant for either (A) the determination year in which the Employee separated from Service or (B) any determination year ending on or after the Employee's 55th birthday. With respect to an Employee who separated from Service before January 1, 1987, an Employee will be included as a Highly Compensated Participant only if the Employee was a five percent (5%) owner or received Compensation in excess of $50,000 during (1) the determination year in which the Employee separated from Service (or the year preceding such separation year) or (2) any year ending on or after such Employee's 55th birthday (or the last year ending before such Employee's 55th birthday). 2.26 "Hours of Service" means hours during the applicable Computation Period in which an individual performs Service or is treated as performing Service and, except in the case of military service or as otherwise determined by the Committee, for which the Participant is directly or indirectly entitled to payment. For all purposes under the Plan, (i) an individual scheduled to work more than twenty hours per week shall be credited (under rules determined by the Committee, uniformly applicable to all individuals similarly situated and in accordance with the Regulations) with 190 Hours of Service for each calendar month in which the individual would otherwise be credited with one or more Hours of Service and (ii) an individual who is scheduled to work less than twenty hours per week shall be credited with Hours of Service for the applicable period in which such Hours of Service accrue in accordance with Labor Department Regulation 29 CFR section 2530.200b-2(c), which regulation is incorporated herein by reference. Hours of Service for reasons other than the performance of duties shall be credited in accordance with Labor Department Regulation 29 CFR section 2530.200b-2(b), which regulation is incorporated herein by reference. The term "Service" includes performance of duties (or periods which are treated as the performance of duties) for the Employer or for any Affiliated Employer (under rules determined by the Committee, uniformly applicable to all individuals similarly situated and in accordance with the Regulations) for which an individual is entitled to receive credit for "Service", including (i) vacation, (ii) holiday, (iii) absence authorized by the Employer for sickness or incapacity (including disability or leave of absence), (iv) layoff, (v) jury duty, (vi) if and to the extent required by the Military Selective Service Act, as amended or any other federal law, service in the Armed Forces of the United States and (vii) an approved leave of absence granted by the Employer to an individual on or after August 5, 1993 pursuant to the Family Medical Leave Act, but only if such individual returns to work for the Employer at the end of such approved leave. Service also includes periods of time for which back pay, irrespective of mitigation of damages, is awarded or agreed to by the Employer or any Affiliated Employer; provided that such award or agreement is not already credited as Service under either of the preceding two sentences. Service may also include any period of a Participant's prior employment by an organization upon such terms and conditions as the Committee may approve and subject to any required IRS approval. Notwithstanding the foregoing, (i) Hours of Service credited with respect to an individual's service with BankAmerica Corporation or a related corporation between January 11, 1983 and March 31, 1987 shall be considered Service only if such individual was employed by the Employer prior to November 24, 1993, (ii) Hours of Service credited with respect to an individual's service with BankAmerica Corporation or a related corporation prior to January 11, 1983 shall be considered Service, but only if such individual was employed by the Employer prior to April 1, 1987, (iii) Hours of Service credited with respect to service with Mayer & Schweitzer, Inc. prior to July 1, 1991 shall be considered Service, and (iv) Service credited with respect to service with The Rose Company prior to April 1, 1989 shall be considered Service. 2.27 "IRS" means the United States Internal Revenue Service. 2.28 "Labor Department" means the United States Department of Labor. 2.29 "Matching Contribution" means any Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(a). 2.30 "Matching Contribution Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(b) with respect to the Participant's Matching Contributions. 2.31 "Normal Retirement Date" shall have the meaning set forth in Section 9.1. 2.32 "Participant" means any Employee who has satisfied the eligibility requirements of Section 3 below. 2.33 "Participating Employer" means Charles Schwab & Co., Inc. or any other Affiliated Employer, the board of directors or equivalent governing body of which shall adopt the Plan and Trust Agreement by appropriate action with the written consent of the Board of Directors. By its adoption of this Plan, a Participating Employer shall be deemed to appoint Charles Schwab, & Co., Inc., the Committee and the Trustee its exclusive agent to exercise on its behalf all of the power and authority conferred by this Plan upon the Employer. The authority of Charles Schwab & Co., Inc., the Committee and the Trustee to act as such agent shall continue until the Plan is terminated as to the Participating Employer and the relevant Trust Fund assets have been distributed by the Trustee as provided in Section 17 of this Plan. 2.34 "Plan" means this Charles Schwab Profit Sharing and Employee Stock Ownership Plan as the same is stated herein and as it may be amended from time to time. 2.35 "Plan Sponsor" means The Charles Schwab Corporation. 2.36 "Plan Year" means the calendar year. 2.37 "Profit Sharing Contribution" means the Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(b)(ii). 2.38 "Profit Sharing Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(c) with respect to the Participant's Profit Sharing Contributions. 2.39 "Purchasing Agent" means the agent designated by the Trustee to enter into certain transactions with respect to Shares hereunder. 2.40 "Qualified Nonelective Contribution" means the Employer contribution, if any, made to the Plan on behalf of a Participant pursuant to Section 4.2(b)(i). 2.41 "Regulations" means the applicable regulations issued under the Code or the Act by the IRS, the Labor Department or any other governmental authority and any temporary rules or releases promulgated by such authorities pending the issuance of such regulations. 2.42 "Restated Effective Date" shall mean January 1, 1994. 2.43 "Retirement Date" means the Participant's Normal or Deferred Retirement Date which has become effective pursuant to Section 9 below. 2.44 "Rollover Subaccount" means the account established and maintained on behalf of a Participant pursuant to Section 6.2(d) with respect to the Participant's Rollover Contributions. 2.45 "Rollover Contribution" means any contribution made by an Employee pursuant to Section 5.6. 2.46 "Salary Reduction Agreement" means an agreement between a Participant and the Employer entered into pursuant to Section 5.1. 2.47 "Section 401(k) Entry Date" means April 1 and October 1 of each calendar year. 2.48 "Shares" means (i) with respect to Plan assets acquired with the proceeds of an Exempt Loan, the common stock issued by The Charles Schwab Corporation or any successor corporation thereto meeting the requirements of both Section 4975(e)(8) of the Code and Section 407(d)(5) of the Act for "qualifying employer securities," and (ii) with respect to Plan assets other than those acquired with the proceeds of an Exempt Loan, stock issued by The Charles Schwab Corporation or any successor corporation thereto, of any type, kind or class meeting the requirements of Section 407(d)(5) of the Act for "qualifying employer securities". All valuations of Shares, where such Shares are not readily tradable on an established securities market and where such valuations relate to activities carried on by the Plan, shall be made by one or more independent appraisers retained by the Committee, who meet the requirements, if any, of the Code and Regulations. To the extent and in the manner required by the Code and Regulations, all independent appraisers, if any, making appraisals pursuant to the foregoing sentence shall be registered with the IRS. 2.49 "Surviving Spouse" means the survivor of a Participant to whom such Participant was legally married on the date of the Participant's death. 2.50 "Suspense Subfund" means the subfund established under Section 7.3. 2.51 "Taxable Compensation" means the W-2 compensation paid to an individual for Service during any period under consideration. 2.52 "Taxable Year" means the calendar year. 2.53 "Total Break in Service" means a period of five or more consecutive Computation Periods in which a Participant incurs a Break in Service, with respect to a Participant who did not have a nonforfeitable right to any portion of his or her Profit Sharing Subaccount or ESOP Account prior to the beginning of the first such Computation Period. 2.54 "Trustee" means the Trustee selected by the Employer to hold the funds contributed by the Employer to provide benefits under the Plan or any successor or substitute. 2.55 "Trust Agreement" means the Charles Schwab Profit Sharing and Employee Stock Ownership Plan Trust Agreement, as it may from time to time be amended, and such additional and successor trust agreements as may be executed. 2.56 "Trust Fund" means the funds held by the Trustee from which payments to the Trustee are made to provide benefits under the Plan. 2.57 "Valuation Date" means the last day of each Plan Year or such interim periods as the Committee may designate from time to time. 2.58 "Vested Interest" means the portion of a Participant's Account which has become nonforfeitable pursuant to Section 10.3 below. 2.59 "Year of Eligibility Service" means a Computation Period during which an Employee completes at least 1,000 Hours of Service. 2.60 "Year of Service" means a Computation Period during which an individual completed at least 1,000 Hours of Service or satisfied any alternative requirement, as determined by the Committee from time to time in accordance with the Regulations. SECTION 3. PARTICIPATION 3.1 Commencement of Participation. (a) An Employee who is a Participant as of the date immediately preceding the Restated Effective Date shall continue to be a Participant of the Plan as of the Restated Effective Date. (b) An Employee who is not a Participant on the Restated Effective Date and who (A) is in Service on the Restated Effective Date or (B) commences Service on or after the Restated Effective Date shall be eligible to become a Participant of the Plan for purposes of: (i) Elective Contributions, Matching Contributions and Qualified Nonelective Contributions on the first Section 401(k) Entry Date coincident with or next following his or her commencement of Service; and (ii) Profit Sharing Contributions and ESOP Contributions on the first ESOP/Profit Sharing Entry Date coincident with or next following the date on which he or she completes a Year of Eligibility Service. (c) An Employee who is eligible to become a Participant, but declines to participate in the Plan, may become a Participant as of any subsequent Section 401(k) Entry Date or ESOP/Profit Sharing Entry Date. (d) An Employee who satisfies the requirements of Section 3.1(b)(ii) for participation but who terminates Service prior to becoming a Participant in the Plan and subsequently becomes an Employee again prior to incurring a Break in Service will become a Participant in the Plan for all purposes as of the first day on which such individual again becomes an Employee. 3.2 Cessation of Participation. A Participant shall cease to be a Participant upon the earliest to occur of (i) the Participant's retirement on his or her Retirement Date, (ii) the Participant's death or Disability or (iii) the Participant's termination of Service prior to his or her Retirement Date followed by a Break in Service. A Participant who, without any Break in Service, ceases to be an Employee for any reason, shall not cease to be a Participant, provided that, notwithstanding any other provision of the Plan, and except as provided in Section 4.3, no contribution shall be made for the benefit of such Participant, no contributions under the Plan shall be allocated, added or otherwise credited to the Account of such Participant, and no contributions, forfeitures or Shares released from a Suspense Subfund shall be allocated, added or otherwise credited to the Account of such Participant on or after the date on which such Participant ceases to be an Employee and before the first day of the Plan Year coincident with or preceding the date, if any, on which such Participant again resumes Service as an Employee. 3.3 Readmission After Cessation of Participation. A Participant who has incurred a Total Break in Service and subsequently returns to Service shall be treated as a new Employee for all purposes of the Plan. In all other cases, a former Participant who returns to Service following a Break in Service shall again become a Participant as of the first date of such former Participant's return to Service, except that if such former Participant is not then an Employee, such former Participant shall again become a Participant as of the first day on which such former Participant again becomes an Employee. 3.4 Waiver of Participation. An individual who has satisfied the requirements for participation set forth in Section 3.1 may permanently waive participation in the Plan, but only if such individual is on temporary transfer of employment to a Participating Employer from an Affiliated Employer that is not a Participating Employer. SECTION 4. EMPLOYER CONTRIBUTIONS 4.1 Elective Contributions. The Employer shall, subject to the limitations of Sections 5 and 12, contribute to the Trust Fund for each Plan Year on behalf of all Participants the total amount of Elective Contributions designated to be contributed pursuant to Salary Reduction Agreements under Section 5.1. Such contributions shall be paid in cash by the Employer to the Trustee as soon as practicable, but in no event later than 90 days from the date on which such amounts otherwise would have been payable to the Participant in cash. 4.2 Employer Contributions. (a) Subject to the limitations of Section 12, the Employer shall contribute Matching Contributions to the Trust Fund on behalf of all Participants for whom Elective Contributions have been made equal to a percentage of such Elective Contributions made for each such Participant. The percentage (and, if desired, a maximum dollar amount) of Matching Contributions shall be determined from time to time by the Board of Directors and communicated to the Participants. (b) Subject to the limitations of Section 12, for any Plan Year, the Board of Directors may designate (i) a percentage of the aggregate Compensation of all Participants or a fixed dollar amount to be contributed to the Plan as Qualified Nonelective Contributions on behalf of certain Participants who are not Highly Compensated Participants and may designate (ii) a percentage of the aggregate Compensation of all Participants or a fixed dollar amount to be contributed to the Plan as Profit Sharing Contributions on behalf of all Employees who are or would be Participants but for their election not to make Elective Contributions. (c) Subject to the limitations of Section 12, and the provisions of any applicable loan or contribution agreement, the Employer shall contribute to the Trust Fund for each Plan Year as ESOP Contributions such sum as the Board of Directors may, in its sole discretion, determine, which sum may be zero. All or any part of the contributions made under this Section 4.2(c) may be applied to repay any outstanding Exempt Loan. The Committee may, subject to any pledge or similar agreement, direct or determine the proportions of such contributions which are applied to repay each such Exempt Loan and, with respect to any particular Exempt Loan, the proportion of such contribution to be applied to repay principal and interest on such Exempt Loan. 4.3 Allocation of Matching Contributions, Profit Sharing Contributions and ESOP Contributions. Matching Contributions shall only be allocated to those Participants employed on the last day of the Plan Year. Profit Sharing Contributions and ESOP Contributions shall only be allocated to Participants who are members of the Allocation Group for the Plan Year. For purposes of Sections 4 and 7, the term "Allocation Group" means the group consisting of (i) each Participant who completed at least One Thousand (1,000) Hours of Service during the Plan Year and is employed by the Employer as of the last day of the Plan Year, and (ii) each Participant whose employment with the Employer terminated during the Plan Year by reason of Disability, death or retirement on or after the Participant's Retirement Date. Profit Sharing Contributions and ESOP Contributions shall be allocated among the Accounts of Participants who are members of the Allocation Group for the Plan Year in the same proportion that a Participant's Compensation during the Plan Year bears to the total Compensation during the Plan Year of all Participants who are members of the Allocation Group for such Plan Year. For purposes of the preceding sentence, Compensation earned by a Participant prior to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall not be taken into account. 4.4 Timing of Employer Contributions. (a) Any Profit Sharing Contributions, Qualified Nonelective Contributions and ESOP Contributions shall be deemed made on account of a Taxable Year if (i) the Board of Directors determines the amount of such contribution by appropriate action and announces the amount in writing to its Employees within 30 days after the end of such Taxable Year, (ii) the Employer designates such amount in writing as payment on account of such Taxable Year or (iii) the Employer claims such amount as a deduction on its federal tax return for such Taxable Year. (b) Profit Sharing Contributions and, subject to the provisions of any Exempt Loan, ESOP Contributions for any particular Taxable Year may be paid to the Trustee in installments, but in any event such contributions shall be paid no later than the due date for the Employer's federal income tax return for such Taxable Year. The Employer may, during any Taxable Year, make advance payments toward its contributions for such Taxable Year. Any income, earnings or appreciation earned by any amount contributed by the Employer prior to the end of the Plan Year shall be treated as part of the Profit Sharing Contributions or ESOP Contributions, as the case may be, for such Plan Year. On or about the date of such payment the Committee shall be advised of the amount of such payment upon which its allocation pursuant to Section 4.3 is to be calculated. 4.5 Forfeitures. Forfeitures of Profit Sharing Contributions and Shares attributable to ESOP Contributions (or ESOP Contributions) arising during the Plan Year pursuant to Section 10 shall be reallocated as Profit Sharing Contributions or ESOP Contributions, as the case may be, on the last day of the Plan Year in which such forfeiture occurs to all Participants entitled to receive Profit Sharing Contributions or Shares attributable to ESOP Contributions (or ESOP Contributions), as the case may be, in the same proportion as contributions are allocated pursuant to Sections 4.3 and 7.2; provided that forfeitures shall first be used to fund adjustments to Participants' Accounts to the extent required to correct operational errors, to the extent directed by the Committee. 4.6 Contribution Percentage Test. (a) Participants' Contribution Percentages must satisfy at least one of the following tests: (1) The Contribution Percentage for the Highly Compensated Participants shall not exceed the Contribution Percentage of all other Participants multiplied by 1.25; or (2) (A) The excess of the Contribution Percentage for the Highly Compensated Participants over the Contribution Percentage of all other Participants shall not be more than two percentage points and (B) the Contribution Percentage for Highly Compensated Participants shall not be more than the Contribution Percentage for all other Participants multiplied by 2. (b) All Matching Contributions and Elective Contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A)(ii)) are to be treated as made under a single plan; and if two or more plans are permissively aggregated such plans shall satisfy Sections 401(a)(4) and 410(b) as though they were a single plan in accordance with Section 401(m) of the Code and Section 1.401(m)-1 of the Regulations. For purposes of this Section 4.6, Matching Contributions are taken into account for a Plan Year only if (i) made on account of the Participant's Elective Contributions for the Plan Year, (ii) allocated to the Participant's Account during the Plan Year and (iii) paid to the Trust Fund prior to the end of the twelfth month following the close of the Plan Year. For purposes of determining whether the test of this Section 4.6 and Section 5.3 of this Plan are satisfied, the Actual Deferral Percentage and the Contribution Percentage shall be determined with reference to Section 1.401(m)-2(b) of the Regulations. Any excess over the amount permitted by Section 1.401(m)-2(b) of the Regulations shall be reduced by treating such excess as an excess Elective Contribution and by refunding excess Elective Contributions in the manner set forth in Section 5.5 hereof, but only for all those Highly Compensated Participants who are eligible for contributions pursuant to Section 4 and Section 5 hereof. (c) In applying the tests set forth in subsections (a) and (b) of this Section 4.6, the following rules shall apply. (1) In the case of an Employee who receives no Matching Contributions, the Matching Contributions that are to be included in determining the Participant's Contribution Percentage are zero; (2) In the case of a Highly Compensated Participant who is either a five percent (5%) owner or one of the ten most Highly Compensated Participants and is thereby subject to the family aggregation rules of Section 414(q)(6) of the Code, the Contribution Percentage for the "family" (which is treated as one Highly Compensated Participant) is the Contribution Percentage determined by combining the contributions and Compensation of all eligible family members. Except to the extent taken into account in the preceding sentence, the contributions and Compensation of all family members are disregarded in determining the Contribution Percentages for the Highly Compensated Participants and non-highly compensated Participants. For purposes of this Section 4.6, the term "family" means the spouse, lineal ascendants and descendants (and the spouses of such lineal ascendants and descendants). (3) The availability of Matching Contributions shall not discriminate in favor of Highly Compensated Participants. (4) In the case of a Highly Compensated Participant whose Contribution Percentage is determined under the family aggregation rules, the determination of the amount of excess aggregate contributions shall be reduced in accordance with the "leveling" method described in Section 1.401(m)-1(e)(2) of the Regulations and the excess aggregate contributions shall be allocated among the family members in proportion to the contributions of each family member. (5) The distribution of excess aggregate contributions will include the income allocable thereto and shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Participant. The income allocable to the excess aggregate contributions includes income for the Plan Year for which the excess aggregate contributions were made in accordance with Section 1.401(m) - 1(e)(3)(ii) of the Regulations. (6) A Participant shall include any Employee who is directly or indirectly eligible to receive an allocation of Matching Contributions and includes (i) an Employee who would be a Participant but for the failure to make required contributions and (ii) a Participant whose right to receive Matching Contributions has been suspended because of an election (other than certain one-time elections) not to participate. 4.7 Distribution of Excess Aggregate Contributions. (a) The Committee shall determine as of the end of the Plan Year, and at such other time or times in its discretion, whether one of the Contribution Percentages of Section 4.6 is satisfied for such Plan Year. If neither of the tests set forth in Section 4.6 is satisfied, the Committee shall distribute the excess aggregate contributions in the manner described in this Section 4.7. For purposes of this Section 4.7, "excess aggregate contributions" means, with respect to any Plan Year and with respect to any Participant, the excess of the aggregate amount of (i) Matching Contributions (and any earnings and losses allocable thereto prior to distribution) and (ii) the Elective Contributions (if the Regulations permit and the Committee elects to take into account Elective Contributions when calculating the Participant's Contribution Percentage) of Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions that could be made on behalf of Participants without violating the requirements of Section 4.6. The amount of each Highly Compensated Participant's excess aggregate contributions shall be determined by reducing the Matching Contributions of all Highly Compensated Participants whose Contribution Percentage as adjusted by this Section 4.7 are at the highest percentage rate for the Plan Year on a pro rata basis by one hundredth of one percent (0.01%). The Committee shall continue to utilize this procedure until one of the tests of Section 4.6 is satisfied. (b) If the Committee is required to distribute excess aggregate contributions for any Highly Compensated Participant for a Plan Year in order to satisfy the requirements of Section 4.6, then the Committee shall distribute such excess aggregate contributions with respect to such Highly Compensated Participants to the extent practicable before April 15th of the Plan Year next following the Plan Year for which such excess aggregate contributions were made, but in no event later than the end of the Plan Year following such Plan Year. For each of such Participants, the amounts so distributed shall be made in the following order of priority: (i) by distributing Matching Contributions and earnings thereon, to the extent necessary; and (ii) by distributing Elective Contributions (to the extent such amounts are included in the Contribution Percentage), and earnings thereon. All such distributions shall be made to Highly Compensated Participants on the basis of the respective portions of such amounts attributable to each such Highly Compensated Participant. No spousal consent shall be required of any married Participant who receives a refund of excess aggregate contributions. 4.8 Aggregate Limit for Contribution Percentage and Actual Deferral Percentage. (a) The sum of the Contribution Percentage and the Actual Deferral Percentage for Highly Compensated Participants for the Plan Year shall not exceed the "aggregate limit" defined in this Section 4.8. (b) The term "aggregate limit" means the greater of (1) or (2) below: (1) The sum of (A) the greater of the Actual Deferral Percentage for all Participants other than the Highly Compensated Participants or the Contribution Percentage for all Participants other than the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and (B) the lesser of such Actual Deferral Percentage or Contribution Percentage plus 2, but not greater than 2 multiplied by the lesser of such Actual Deferral Percentage or Contribution Percentage. (2) The sum of (A) the lesser of the Actual Deferral Percentage for all Participants other than the Highly Compensated Participants or the Contribution Percentage for all Participants other than the Highly Compensated Participants, for the Plan Year multiplied by 1.25 and (B) the greater of such Actual Deferral Percentage or Contribution percentage plus 2, but not greater than 2 multiplied by the greater of such Actual Deferral Percentage or Contribution Percentage. (c) If the aggregate limit is exceeded, the Committee shall determine whether to: (i) make Qualified Nonelective Contributions to permit the satisfaction of the test set forth in subsection (a) hereof; (ii) reduce the Contribution Percentage of the Highly Compensated Participants as set forth in Section 4.7; or (iii) reduce the Actual Deferral Percentage of the Highly Compensated Participants as set forth in Section 5.5. SECTION 5. SALARY REDUCTION AGREEMENTS AND ROLLOVER CONTRIBUTIONS 5.1 Salary Reduction Agreements. (a) A Participant may elect to make Elective Contributions in any Plan Year by entering into a written Salary Reduction Agreement with the Employer. Each Salary Reduction Agreement shall provide that a portion of the Participant's Compensation shall be paid through payroll deduction to the Trust Fund as an Elective Contribution pursuant to Section 4.1 rather than paid currently to the Participant. The Salary Reduction Agreement shall provide for Elective Contributions equal to any whole percentage between one percent (1%) and fifteen percent (15%) of a Participant's Compensation in any payroll period, not to exceed the limitation set forth in Section 402(g) of the Code (adjusted automatically for increases in accordance with the Regulations). Notwithstanding the foregoing provisions of this Section 5.1, the Committee may, but need not, adopt a procedure to enable Participants to make lump sum Elective Contributions under the Plan through payroll deductions. No Salary Reduction Agreement shall be effective unless the Participant has filed a written investment direction pursuant to Section 8.3. (b) A Salary Reduction Agreement will be taken into account for any Plan Year only if it relates to Compensation that would have been received by the Participant in the Plan Year (but for the deferral election). (c) In the event that the aggregate amount of Elective Contributions by a Participant exceeds the limitation described in subsection (a) of this Section 5.1, the amount of such excess, increased by any income and decreased by any losses attributable thereto, shall be refunded to the Participant no later than the April 15th of the calendar year following the calendar year for which the Elective Contributions were made. If a Participant also participates, in any calendar year, in any other plans subject to the limitations set forth in Section 402(g) of the Code and has made excess deferrals under this Plan when combined with the other plans subject to such limits, to the extent the Participant designates, in writing submitted to the Committee no later than the March 1 of the calendar year next following the calendar year for which the Elective Contributions were made, any Elective Contributions under this Plan as excess deferrals, the amount of such designated excess, increased by any income and decreased by any losses attributable thereto, shall be refunded to the Participant no later than the April 15 of the calendar year next following the calendar year for which the Elective Contributions were made. 5.2 Change or Suspension of Salary Reduction Agreements. Subject to Section 5.1, a Participant may enter into or change his or her Salary Reduction Agreement on each Section 401(k) Entry Date, effective as of the first day of the Section 401(k) Entry Date, in accordance with rules determined by the Committee. In addition, a Participant may also suspend his or her Salary Reduction Agreement at any time, in accordance with rules determined by the Committee. A Participant who suspends his or her Salary Reduction Agreement in accordance with this Section 5.2 may enter into a new Salary Reduction Agreement effective as of the next succeeding Section 401(k) Plan Entry Date. A Participant's most recent Salary Reduction Agreement shall continue unchanged from year to year unless the Participant notifies the Committee in writing of a change in such Salary Reduction Agreement in accordance with the rules determined by the Committee 5.3 Actual Deferral Percentage Test. (a) Participants' Elective Contributions must satisfy at least one of the following tests: (1) The Actual Deferral Percentage for the Highly Compensated Participants shall not exceed the Actual Deferral Percentage of all other Participants multiplied by 1.25; or (2) (A) The excess of the Actual Deferral Percentage for the Highly Compensated Participants over the Actual Deferral Percentage of all other Participants shall not be more than two percentage points, and (B) the Actual Deferral Percentage for the Highly Compensated Participants shall not be more than the Actual Deferral Percentage for all other Participants multiplied by 2. (b) All Elective Contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A)(ii)) are to be treated as made under a single plan; and if two or more plans are permissively aggregated, such plans shall satisfy Sections 401(a)(4) and 410(b) as though they were a single plan in accordance with Section 401(k) and Section 1.401(k)-1 of the Regulations. (c) In applying the tests set forth in subsections (a) and (b) of this Section 5.3, the following rules shall apply: (1) In the case of a Participant who makes no Elective Contributions, the Elective Contributions that are to be included in determining the Participant's Actual Deferral Percentage are zero; (2) In the case of a Highly Compensated Participant who is either a five percent (5%) owner or one of the ten most Highly Compensated Participants and is thereby subject to the family aggregation rules of Section 414(q)(6) of the Code, the Actual Deferral Percentage for the "family" (which is treated as one Highly Compensated Participant) is the greater of (1) the Actual Deferral Percentage determined by combining the contributions and Compensation of all eligible family members who are highly compensated without regard to family aggregation, and (2) the Actual Deferral Percentage determined by combining the contributions and Compensation of all eligible family members. Except to the extent taken into account in the preceding sentence, the contributions and Compensation of all family members are disregarded in determining the Actual Deferral Percentages for the Highly Compensated Participants and non-highly compensated Participants. For purposes of this Section 5.3, the term "family" means the spouse, lineal ascendants and descendants (and the spouses of such lineal ascendants and descendants). (3) In the case of a Highly Compensated Participant whose Actual Deferral Percentage is determined under the family aggregation rules, the determination of the amount of excess contributions shall be reduced in accordance with the "leveling" method described in Section 1.401(k)-1(f)(2) of the Regulations and the excess aggregate contributions shall be allocated among the family members in proportion to the contributions of each family member. (4) The distribution of excess contributions will include the income attributable thereto and shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Participant. The income allocable to the excess contributions includes income for the Plan Year for which the excess contributions were made in accordance with 1.401(k) - 1(f)(4)(ii) of the Regulations. 5.4 Amendment or Revocation of Salary Reduction Agreement by Committee. The Committee shall determine as of the end of the Plan Year, and at such other time or times in its discretion, whether one of the Actual Deferral Percentage tests of Section 5.3 will be satisfied for such Plan Year. In the event that neither of such Actual Deferral Percentage Tests is satisfied, the Committee may amend or revoke the Salary Reduction Agreement of any Participant at any time if it determines that such an amendment or revocation is necessary to ensure that at least one of the Actual Deferral Percentage tests of Section 5.3 will be satisfied for any Plan Year. The determination of whether it is necessary to amend or revoke any Salary Reduction Agreement shall be made pursuant to Section 5.3 and the procedure for such amendment or revocation shall be determined pursuant to Section 5.5(a). 5.5 Distribution of Excess Contributions. (a) If neither of the tests set forth in Section 5.3 are satisfied, the Committee shall in its discretion, to the extent permissible under the Code and the Regulations, refund the excess contributions in the manner described in Section 5.5(b). For purposes of this Section 5.5, "excess contributions" means, with respect to any Plan Year, the excess of the aggregate amount of Elective Contributions (and any earnings and losses allocable thereto prior to distribution) made by Highly Compensated Participants for such Plan Year, over the maximum amount of such Elective Contributions that could be made by such Highly Compensated Participants without violating the requirements of Section 5.3. (b) If required in order to comply with the provisions of Subsection 5.3 and the Code, the Committee shall refund excess contributions for a Plan Year. The distribution of such excess contributions shall be made to Highly Compensated Participants, to the extent practicable, before the March 15th of the Plan Year next following the Plan Year for which such excess contributions were made, but in no event later than the end of the Plan Year next following such Plan Year. Any such distribution shall be made to each Highly Compensated Participant by reducing the Elective Contributions of all Highly Compensated Participants whose Elective Contributions, as amended by this Section 5.5, are at the highest percentage rate for the Plan Year on a pro rata basis by one hundredth of one percent (0.01%). The Committee shall continue to utilize this procedure until one of the tests of Section 5.3 is satisfied. Matching Contributions attributable to Elective Contributions returned to a Participant shall be distributed as provided in Section 4.6. 5.6 Rollover Contributions. (a) A Participant may make a Rollover Contribution to the Plan in accordance with rules established by the Committee uniformly applied consisting of an eligible rollover distribution, as defined in Section 11.8(b), from a plan qualified under Section 401(a) of the Code or an individual retirement account qualified under Section 408(a) of the Code (no part of which is attributable to any source other than an eligible rollover distribution from a qualified plan under Section 401(a) of the Code); provided such eligible rollover distribution is in cash and contributed to the Plan on or before the 60th day after the day in which such Participant received such eligible rollover distribution. If a Participant elects to make a Rollover Contribution, the Committee may require such evidence, assurances, opinions and certifications, including a statement from the previous plan that such plan was a qualified plan, that the Committee may deem necessary to establish to its satisfaction that the amounts to be contributed qualify as an eligible rollover distribution and will not affect the qualification of the Plan or the tax- exempt status of the Trust under Sections 401(a) and 501(a) of the Code, respectively. Except as otherwise permitted by Section 5.7, in no event shall any assets be transferred to this Plan from any profit sharing, pension or retirement plan that would cause this Plan to become a "transferee" plan (within the meaning set forth in Section 401(a)(11)(B) of the Code). (b) Any Rollover Contribution shall be allocated to the appropriate Participant's Rollover Contribution Subaccount which shall be established and separately accounted for. A Participant shall have at all times a nonforfeitable right in the amount credited to his or her Rollover Contribution Subaccount. (c) Each request by a Participant to make a Rollover Contribution shall be subject to review by the Committee which shall make a case by case determination that each Rollover Contribution meets the requirements set forth in Section 5.6(a), and such other requirements or conditions as the Committee may, from time to time and in its sole discretion, impose; provided, however, that any determination made by the Committee pursuant to this Section 5.6 shall not have the effect of discriminating in favor of Participants who are officers, shareholders or who are Highly Compensated Participants. 5.7 Trustee-to-Trustee Transfer of Assets. Notwithstanding anything in Section 5.6 to the contrary, in the event of an acquisition by the Employer or the Plan Sponsor of a company which maintains a plan and trust which are qualified under Sections 401(a) and 501(a) of the Code, respectively, the Board of Directors may (but shall not be required to) authorize a "trustee-to-trustee" transfer of assets from such qualified plan into the Plan and Trust Fund. The Trustee may require such evidence, assurances, opinions and certifications, including a statement from the acquired company's plan that such plan and trust are qualified under Sections 401(a) and 501(a) of the Code, which the Trustee may deem necessary to establish to its satisfaction that the amounts to be transferred will not affect the qualification of the Plan or the tax-exempt status of the Trust under Sections 401(a) and 501(a) of the Code, respectively. SECTION 6. ALLOCATION OF CONTRIBUTIONS 6.1 Establishment of Cash Contribution Account. The Committee shall establish and maintain or cause to be established and maintained with respect to each Participant a Cash Contribution Account showing his or her interest under the Plan and in the Trust Fund and all relevant data pertaining thereto. Each Participant shall be furnished with a written statement of his or her Cash Contribution Account at least once annually and upon any distribution to him or her. In maintaining the Cash Contribution Accounts under the Plan, the Committee can conclusively rely on the valuations of the Trust Fund in accordance with the Plan. The establishment and maintenance of, or allocations and credits to, the Cash Contribution Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits, except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of the Trust Fund. 6.2 Establishment of Subaccounts. Each Participant's Cash Contribution Account shall contain each of the following applicable subaccounts therein: (a) All Elective Contributions on behalf of a Participant under Section 4.1 and Qualified Nonelective Contributions on behalf of a Participant under Section 4.2(b)(i) shall be credited to the Participant's Elective Contribution Subaccount. (b) All Matching Contributions on behalf of a Participant under Section 4.2(a) shall be allocated and credited to the Participant's Matching Contribution Subaccount. (c) All Profit Sharing Contributions on behalf of a Participant under Section 4.2(b)(ii) shall be allocated and credited to the Participant's Profit Sharing Subaccount. (d) All Rollover Contributions on behalf of a Participant under Section 5.6 shall be allocated and credited to the Participant's Rollover Contribution Subaccount. SECTION 7. SPECIAL ESOP PROVISIONS 7.1 Investment of ESOP Accounts. The ESOP Accounts of all Participants shall be invested exclusively in Shares, except for cash or cash equivalent investments held (a) for the limited purpose of making Plan distributions to Participants and Beneficiaries, (b) pending the investment by the Purchasing Agent of contributions or other cash receipts in Shares, (c) pending use to repay an Exempt Loan, (d) for purposes of paying, under the terms described in the Plan or Trust Agreement, fees and expenses incurred with respect to the Plan or Trust and not paid for by the Participating Employers or (e) in the form of de minimis cash balances. Neither any Participating Employer nor the Purchasing Agent, the Committee or the Trustee shall have any responsibility or duty to time any transaction involving Shares in order to anticipate market conditions or changes in stock value, nor shall any such person have any responsibility or duty to sell Shares held in the ESOP Accounts (or otherwise to provide investment management for Shares held in the ESOP Accounts) in order to maximize return or minimize loss. Participating Employer contributions made in cash, and other cash received by the Trustee, may be used by the Purchasing Agent to acquire Shares from shareholders of the Employer or directly from the Employer. 7.2 Allocation to ESOP Accounts. (a) Subject to the provisions of Section 4, the ESOP Account maintained for each Participant will be credited as of the last day of each Plan Year with the Participant's allocable share of: (i) Shares purchased by the Purchasing Agent using cash contributed by or on behalf of the Participating Employer employing such Participant (or contributed directly to the Trust Fund) and (ii) Shares released from the Suspense Subfund pursuant to Section 7.3 and allocable to the contribution made by or on behalf of such Participating Employer pursuant to Section 7.4. (b) Shares attributable to ESOP Contributions shall be allocated among the Accounts of Participants who are members of the Allocation Group for the Plan Year in the same proportion that a Participant's Compensation during the Plan Year bears to the total Compensation during the Plan Year of all Participants who are members of the Allocation Group for such Plan Year. For purposes of the preceding sentence, Compensation earned by a Participant prior to the Participant's entry into the Plan pursuant to Section 3.1(b)(ii) shall not be taken into account. (c) Shares contributed directly to the Trust Fund for a Plan Year shall be allocated under Section 7.2(a)(i) in the same proportion as Shares purchased by the Trust Fund and allocated under Section 7.2(b). 7.3 Suspense Subfund for ESOP Accounts. Shares acquired by the Participants' ESOP Accounts through an Exempt Loan shall be added to and maintained in the Suspense Subfund and shall thereafter be released from the Suspense Subfund and allocated to Participants' ESOP Accounts as provided in Sections 7.3 and 7.4. Shares acquired for the Trust Fund with the proceeds of an Exempt Loan shall be released from the Suspense Subfund as the Exempt Loan is repaid, in accordance with the provisions of this Section 7.3. (a) For each Plan Year until the Exempt Loan is fully repaid, the number of Shares released from the Suspense Subfund shall equal the number of unreleased Shares immediately before such release for the current Plan Year multiplied by the "Release Fraction." As used herein, the term "Release Fraction" shall mean a fraction, the numerator of which is the amount of principal and interest paid on the Exempt Loan for such current Plan Year and the denominator of which is the sum of the numerator plus the principal and interest to be paid on such Exempt Loan for all future years during the term of such Exempt Loan (determined without reference to any possible extensions or renewals thereof). For purposes of computing the denominator of the Release Fraction, if the interest rate on the Exempt Loan is variable, the interest to be paid in subsequent Plan Years shall be calculated by assuming that the interest rate in effect as of the end of the applicable Plan Year will be the interest rate in effect for the remainder of the term of the Exempt Loan. Notwithstanding the foregoing, in the event such Exempt Loan shall be repaid with the proceeds of a subsequent Exempt Loan (the "Substitute Loan"), such repayment shall not operate to release all such Shares in the Suspense Subfund, but, rather, such release shall be effected pursuant to the foregoing provisions of this Section 7.3(a) on the basis of payments of principal and interest on such Substitute Loan. (b) If required by any pledge or similar agreement, or if permitted by such pledge or agreement and required by the Committee pursuant to a one-time, irrevocable designation (which shall be made, if at all, in connection with the making of an Exempt Loan) by the Committee, then, in lieu of applying the provisions of Section 7.3(a) hereof with respect to an Exempt Loan, Shares shall be released from the Suspense Subfund as the principal amount of such Exempt Loan is repaid (without regard to interest payments), provided the following three conditions are satisfied: (i) The Exempt Loan shall provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payments of such amounts for ten years; (ii) The interest portion of any payment shall be disregarded only to the extent it would be treated as interest under standard loan amortization tables; and (iii) If the Exempt Loan is renewed, extended or refinanced, the sum of the expired duration of the Exempt Loan and the renewal, extension or new Exempt Loan period shall not exceed ten years. (c) If at any time there is more than one Exempt Loan outstanding, then separate accounts may be established under the Suspense Subfund for each such Exempt Loan. Each Exempt Loan for which a separate account is maintained may be treated separately for purposes of the provisions governing the release of Shares from the Suspense Subfund under this Section 7.3 (including for purposes of determining whether Section 7.3(a) or Section 7.3(b) governs the release of Shares from any particular Suspense Subfund) and for purposes of the provisions governing the application of Participating Employer contributions to repay an Exempt Loan under Section 4.2. (d) All Shares released from the Suspense Subfund during any Plan Year shall be allocated among Participants as prescribed by Section 7.4. 7.4 Disposition of Shares Released from Suspense Subfund. (a) Shares released from the Suspense Subfund for a Plan Year in accordance with Section 7.3 shall be held in the Trust Fund on an unallocated basis until allocated by the Committee as of last day of the Plan Year. Shares released from the Suspense Subfund on account of a payment for a Plan Year of principal or interest on an Exempt Loan, to the extent payment is made with contributions for such Plan Year, shall be allocated under Section 7.2(a)(ii) in the same proportion as Shares purchased with contributions under Section 7.2(b). (b) (i) Shares released from the Suspense Subfund on account of the payment for a Plan Year of principal or interest on an Exempt Loan to the extent such payment is made with dividends paid on Shares allocated to ESOP Accounts, shall be allocated in the same proportion as dividends used to pay principal or interest on such Exempt Loan would have been allocated under Section 7.9(b) had such dividends not been so used; and (ii) Subject to Section 4.2, Shares released from the Suspense Subfund on account of the payment of principal or interest on an Exempt Loan, to the extent such payment is made with dividends on Shares not allocated to Accounts, shall be allocated to those ESOP Accounts and in the same proportion as Shares released pursuant to Section 7.4(b)(i); provided that Shares so released shall be otherwise allocated if necessary to satisfy the requirements of the Code (other than Section 404(k)) and any Regulations thereunder. (c) All Shares in the Trust Fund, other than the Shares held in the Suspense Subfund as of the last day of any Plan Year, must be allocated to ESOP Accounts as of the last day of any Plan Year. 7.5 Limitations on Allocations to ESOP Accounts. Notwithstanding the foregoing provisions of this Section 7: (a) If more than one-third of all ESOP Contributions for a Plan Year which are deductible only under Section 404(a)(9) of the Code would be allocated, in the aggregate, to Participants described in Section 414(q) of the Code, then the Committee may reduce such allocations pro rata in an amount sufficient to ensure that such ESOP Contributions will be deductible with respect to such Plan Year; and (b) Any contributions which are prevented from being allocated due to the restriction contained in Section 7.5(a) shall be allocated as of the last day of the Plan Year pursuant to Sections 7.2 and 7.4 as though those Participants described in Section 414(q) of the Code did not participate in the Plan. 7.6 Acquisition of Shares. (a) Notwithstanding the foregoing provisions of this Section 7, in the event that Shares are acquired in a transaction to which Section 1042 of the Code applies, then, in accordance with the Regulations, such Shares shall not be allocated, directly or indirectly, to prohibited individuals as defined in Section 409(n)(1) of the Code for the duration of the nonallocation period (as defined in Section 409(n)(3)(C) of the Code). (b) If Shares are prevented from being allocated due to the prohibition contained in Section 7.6(a), the allocation of Shares attributable to ESOP Contributions (or ESOP Contributions) otherwise provided under Section 7.2 shall be adjusted to reflect such result. 7.7 Effect of Change in Plan Sponsor's Capitalization. Any Shares received by the Trustee as a result of a stock split, dividend, conversion, or as a result of a reorganization or other recapitalization of the Plan Sponsor shall be allocated as of the day on which the Shares are received by the Trustee in the same manner as the Shares to which they are attributable are then allocated. 7.8 Trustee and Committee Discretion to Engage in Transactions in Shares. Neither the Purchasing Agent, the Trustee nor the Committee shall be required to engage in any transaction, including, without limitation, directing the purchase or sale of Shares, which it determines in its sole discretion may subject itself, its Participants, the Plan, any Participating Employer, or any Participant to liability under federal or other state laws. 7.9 Valuation of ESOP Accounts. (a) Subject to the requirements of Section 7.9(b), the fair market value of the assets of the ESOP Accounts shall be determined as of each Valuation Date, in accordance with generally accepted valuation methods and practices including, but not limited to, in the case of Shares, the use of one or more independent appraisers. (b) The value of a Participant's ESOP Account as of any Valuation Date shall equal the sum of: (i) The aggregate value (as determined under Section 7.9(a)) of all Shares and dividends on Shares previously allocated to such Participant's ESOP Account as of such Valuation Date; and (ii) Subject to Section 7.9(c), the aggregate value (as determined under Section 7.10(a)) of dividends, if any, received during the Plan Year on Shares allocated to such Participant's ESOP Account. (iii) Such Participant's allocable portion (determined in accordance with the rules set forth in Section 7.4 for determining Participant's allocable portion of Shares released from the Suspense Subfund) of the earnings, if any, on all amounts contributed to the Trust Fund for purposes other than the repayment of an Exempt Loan. (c) Except as provided in Section 7.7, dividends payable, if any, with respect to Shares held by the Participant's ESOP Account will be, in the discretion of the Committee and in conformity with the terms of the Shares on which such dividends are paid, (i) used for the purpose of repaying one or more Exempt Loans, (ii) distributed from the Trust Fund to Participants or their Beneficiaries not later than 90 days after the close of the Plan Year in which they are paid to the Trust Fund, (iii) paid directly to such Participants or their Beneficiaries, (iv) retained in the Trust Fund and allocated pursuant to Section 7.9(b), or (v) paid or utilized in a combination of any or all of the foregoing four options. (d) The Committee shall establish accounting procedures for the purpose of making the allocations, valuations and adjustments to Participant's ESOP Accounts in accordance with the provisions of the Plan. From time to time, the Committee may modify its accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the ESOP Accounts of Participants in accordance with the provisions of the Plan. 7.10 Role of Purchasing Agent. (a) All purchases of Shares made by the Trust Fund shall be made by the Purchasing Agent. The Trustee shall forward to the Purchasing Agent all amounts contributed to the employee stock ownership plan, and all amounts to be invested in Shares pursuant to participant investment directions given pursuant to Sections 8.3, 8.4 and 8.5. Amounts to be invested in Shares shall be invested in Shares in the amount, in the manner and at the price determined by the Purchasing Agent in its sole discretion, provided such price shall be the fair market value of such Shares at the time of purchase. The Purchasing Agent shall in its sole discretion select the broker-dealer through which the purchase of such Shares shall be executed. The Purchasing Agent shall also invest any cash dividends received on any Shares which are allocated to Participants' Accounts and held as part of the Plan as provided in Section 5.05(c) of the Trust Agreement. (b) The Purchasing Agent shall sell Shares only at the direction of the Trustee, which shall issue such instructions only at the direction of the Committee; provided that such Committee direction shall not be required for any sales of Shares required pursuant to the participant investment directions given pursuant to Sections 8.3, 8.4 or 8.5, or pursuant to the provisions of Section 13.5 or 13.6. SECTION 8. INVESTMENT OF CONTRIBUTIONS, VALUATIONS AND PARTICIPANTS' CASH CONTRIBUTION ACCOUNTS 8.1 Delivery of Contributions to Trust Fund. All monies, securities or other property contributed to Participants' Cash Contribution Accounts shall be delivered to the Trustee under the Trust Fund, to be managed, invested, reinvested and distributed in accordance with the Plan and the Trust Fund. 8.2 Participants' Right to Select Investments. Each Participant shall have the right to invest his or her Cash Contribution Account among one or more investment funds selected by the Company, which may include a fund established for investment in Shares. 8.3 Participant Investment Election. As of any date permitted by the Committee, a Participant may, in accordance with the rules of the Committee uniformly applied, specify the percentage (in minimum multiples as may be determined from time to time by the Committee) of contributions which are made to the Participant's Cash Contribution Account that shall be invested in investment funds selected by the Committee. An investment election may be made separately with respect to (i) the aggregate of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount and (ii) the Participant's Profit Sharing Subaccount. 8.4 Change in Investment Election for Future Contributions. Any investment direction specified by a Participant shall be deemed to be a continuing direction until changed. A Participant may change an investment direction as to future contributions made by such his or her Cash Contribution Account as of any day permitted by the Committee in accordance with the rules of the Committee uniformly applied. 8.5 Change in Investment Election for Prior Contributions. As of any date permitted by the Committee, a Participant may change the percentages (in minimum multiples as may be determined from time to time by the Committee) in which the investment of the portion of his or her Cash Contribution Account attributable to prior contributions shall be allocated among the funds maintained by the Trustee. Such changes of investment allocation may be made separately with respect to (i) the aggregate of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount, and (ii) the Participant's Profit Sharing Subaccount. 8.6 Valuation of Cash Contribution Accounts. (a) As of each Valuation Date, Participants' Cash Contribution Accounts shall be valued pursuant to the terms of the Plan. Such valuation shall be conclusive and binding upon all persons having an interest in the Trust Fund. (b) The Committee shall adjust the value of each Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, maintained under Participants' Cash Contribution Accounts as of each Valuation Date to reflect the effect of income received and accrued, realized and unrealized profits and losses, and all other transactions of the preceding period. Such adjustments shall be made with respect to the period since the next preceding Valuation Date by (i) deducting from each such Subaccount the total of all payments made from such Subaccount during such period, (ii) adding to or deducting from, as the case may be, each such Subaccount such proportion of each item of income, profit or loss as the amount in such Subaccount as of the next preceding Valuation Date bears to the total of the amounts in all of such Participants' Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, as of the preceding Valuation Date and (iii) adding contributions to each such Elective Contribution Subaccount, Matching Contribution Subaccount, Profit Sharing Subaccount, or Rollover Contribution Subaccount, as the case may be, pursuant to Sections 4 and 5 of the Plan. In making such allocations, the Committee can conclusively rely on the valuations of the Subaccounts by the Trustee in accordance with the Plan and the Trust. SECTION 9. RETIREMENT DATES 9.1 Normal Retirement Date. The Normal Retirement Date of a Participant shall be his or her 65th birthday. Upon attainment of his or her Normal Retirement Date, a Participant shall have a nonforfeitable right to 100% of his or her Account. 9.2 Deferred Retirement Date. A Participant who remains in Service after his or her Normal Retirement Date may retire on a Deferred Retirement Date which shall be the first day of the month coincident with or next following his or her termination of Service or as specified in a written application to the Committee. SECTION 10. ELIGIBILITY FOR PAYMENT OF ACCOUNTS AND VESTED INTERESTS 10.1 Participants' Right to Account Upon Termination Due to Retirement, Death or Disability. (a) A Participant shall have a nonforfeitable right to his or her Account upon the occurrence of any of the following events while employed by the Employer: (i) attainment of his or her Retirement Date; (ii) his or her death; or (iii) his or her Disability. (b) Upon the termination of Service of any Participant on or after his or her Retirement Date or by reason of his or her death or Disability ("Terminated Participant"), the Terminated Participant (or, in the event of the Participant's death, his or her Beneficiary) shall be entitled to an amount equal to the Terminated Participant's Account, including any subsequent contribution allocated to the Terminated Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service is terminated. The Participant's Account shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Participant's termination of Service. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. 10.2 Participants' Right to Account Upon Other Termination of Service. Upon the termination of Service of any Participant prior to his or her Retirement Date for any reason other than death or Disability, the Terminated Participant shall be entitled to receive an amount equal to the sum of (i) 100% of the Participant's Elective Contribution Subaccount, Matching Contribution Subaccount, and Rollover Contribution Subaccount and (ii) the Participant's Vested Interest in his or her Profit Sharing Subaccount and ESOP Account, including the Participant's Vested Interest in any subsequent contribution allocated to the Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service terminated. The Participant's Account shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Valuation Date immediately following the Participant's termination of Service. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. If such Terminated Participant's Vested Interest is less than 100 percent, the non-vested balance of such Participant's Profit Sharing Subaccount and ESOP Account shall be forfeited and reallocated pursuant to Section 4.5 as of the last day of the earlier of (i) the Plan Year in which the Participant's Account is distributed, or (ii) the Plan Year in which the Participant incurs a Total Break in Service. 10.3 Vesting Schedule for Determining Vested Interests. For all purposes of this Plan, a Participant's Vested Interest in his or her Profit Sharing Subaccount and ESOP Account shall consist of (i) the Participant's percentage of his or her Profit Sharing Subaccount and (ii) the percentage of the Participant's ESOP Account, both as determined from the following vesting schedule on the basis of the number of Years of Service which the Participant has completed as of the date of the Participant's termination of Service. VESTING SCHEDULE Years of Service Percentage Less than three years 0% Three years but less than four years 20% Four years but less than five years 40% Five years but less than six years 60% Six years but less than seven years 80% Seven years or more 100% 10.4 Breaks in Service. If a Participant's Service is terminated prior to his or her Retirement Date for any reason other than the Participant's death or Disability prior to completing three Years of Service, and such Participant incurs a Total Break in Service, such Participant shall not be entitled to any benefit attributable to amounts allocated to the Participant's Profit Sharing Subaccount or ESOP Account prior to such Total Break in Service. If a Participant returns to Service, Years of Service before such return shall be counted, in addition to Years of Service following such return, in determining the Participant's Vested Interest in the amount credited to the Participant's Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return to Service. If such Participant does not complete one Year of Service following his or her return, then the Participant shall not be entitled to any further benefit under the Plan and the non-vested balance of any Profit Sharing Contribution or ESOP Contributions credited or recredited to such Participant's Profit Sharing Subaccount or ESOP Account subsequent to the Participant's return shall be forfeited and reallocated pursuant to Section 4.5 upon the Participant's termination of Service. All forfeitures shall occur in conformity with the ordering rules of Section 54.4975-11(d) of the Regulations. 10.5 Participant's Right to Restoration of Account Upon Return to Service. If a Terminated Participant who had a vested interest in such Participant's Profit Sharing Subaccount or ESOP Account returns to Service prior to incurring a Total Break in Service, the non-vested balance of the Terminated Participant's Account, if any, forfeited pursuant to Section 10.2 shall be recredited to such Participant's Account, provided that, not later than the fifth anniversary of the first date on which the Participant is subsequently employed, such Participant repays the full amount of any distribution made to the Participant upon his or her prior termination of Service. Any amount so repaid, together with any non-vested portion of such Participant's Account recredited pursuant to this Section 10.5, shall be invested in the Trust Fund. If such Participant fails to make a repayment of any distributed amounts pursuant to this Section 10.5, the non-vested portion of such Participant's Account, if any, shall not be recredited. 10.6 Participant's Right to Account Upon Death After Termination of Service. Subject to the provisions of Section 10, if a Terminated Participant dies before payment of the full value of his or her Account from the Trust Fund, an amount equal to the current value of the unpaid portion of the Participant's Vested Interest in his or her Account, including any subsequent contribution allocated to the Terminated Participant's Account pursuant to Sections 6 or 7 with respect to the Plan Year in which the Participant's Service is terminated, shall be distributable, in accordance with the methods and rules of distribution described in Section 11, as soon as practicable following the Participant's death. The value of the Participant's Account shall be determined as of the Valuation Date coincident with or immediately preceding the date of distribution of the Participant's Account. 10.7 Amendment of Vesting Schedule. If the vesting schedule contained in Section 10.3 is amended, each Participant who has completed at least three (3) Years of Service may elect, during the election period specified in this Section, to have his or her vested percentage determined without regard to such amendment. For purposes of this Section, the election period shall begin as of the date on which the amendment changing the vesting schedule is adopted, and shall end on the latest of the following dates: (i) the date occurring sixty (60) days after the Plan amendment is adopted; (ii) the date which is sixty (60) days after the day on which the Plan amendment becomes effective; (iii) the date which is sixty (60) days after the day the Participant is issued written notice of the Plan amendment by the Committee; or (iv) such later date as may be specified by the Committee. The election provided for in this Section shall be made in writing and shall be irrevocable when made. SECTION 11. METHOD OF PAYMENT OF ACCOUNTS AND WITHDRAWALS 11.1 Methods of Payment. Any benefit payable under the Plan, except as otherwise provided in Section 11.2 shall be payable as soon as practicable following the last day of the calendar month in which falls a Participant's termination of Service (or other event requiring a distribution under the Plan), in one lump sum payment from the Trust Fund, provided that the Participant may elect to direct the Committee to directly transfer all or any portion of his or her "eligible rollover distribution" (as defined in Section 11.8 below) to another tax-qualified plan pursuant to Section 401(a)(31) of the Code. A Participant who has no Vested Interest in his or her Account upon his or her termination of Service will be deemed to have received a full distribution of his or her Account as of such date. A Participant may also elect to receive a distribution of his or her Account as soon as practicable following the first anniversary of the last day of the calendar month in which occurs such termination of Service (or other event requiring a distribution under the Plan), or as soon as practicable following the Participant's Normal Retirement Date. 11.2 Commencement of Payment. Notwithstanding any other provision of the Plan to the contrary, (i) if a Participant has a Vested Interest in his or her Account with a value of $3,500 or less it shall be distributed in one lump sum as soon as is administratively feasible following the last day of the calendar month in which such Participant's termination of employment occurs, and (ii) if a Participant has a Vested Interest in his or her Account with a value of more than $3,500 it shall not commence to be distributed without the consent of the Participant before the Participant's Normal Retirement Date. In the absence of receipt of such consent by the Committee, payment of the benefit to such Participant shall commence as soon as practicable after the Participant's attainment of his or her Normal Retirement Date, which benefit shall be in an amount equal to the value of the Participant's distributable Account as of the Valuation Date coincident with or immediately following the Participant's attainment of his or her Normal Retirement Date. In any case where distribution of any benefit amount from the Participant's Cash Contribution Account is to be deferred, the Committee shall either (i) establish or cause to be established a special account for the benefit of the former Participant, to be invested by the Trustee in a fixed investment account established by the Trustee or (ii) cause all amounts in the Participant's Cash Contribution Account deferred by the Participant to be invested at the Participant's election in the same manner as the normal Cash Contribution Accounts maintained for Participants under to the Plan. 11.3 Special Rules For Distribution of Shares. (a) Distribution of a Participant's Vested Interest from his or her Account which is invested in Shares will be made entirely in whole Shares, with the value of any fractional interest in Shares paid in cash. Any cash or other property in a Participant's ESOP Account will be used by the Purchasing Agent to acquire Shares, valued as of the last day of the calendar month in which occurs (i) the Participant's election to receive a distribution of his or her Account pursuant to Section 11.1, (ii) the Participant's termination of Service, in the case of a distribution pursuant to Section 11.2(i), or (iii) the Participant's Normal Retirement Date (or the Participant's death, if earlier), in the case of a distribution pursuant to Section 11.2(ii) to a Participant who failed to consent to a distribution prior to his or her Normal Retirement Date (the "Share Conversion Date"). Notwithstanding the foregoing, if applicable corporate charter or bylaw provisions restrict ownership of substantially all outstanding Shares to Employees or to a plan or trust described in Section 401(a) of the Code, then any distribution of a Participant's Vested Interest in the Participant's ESOP Account shall be in cash. When a distribution consists in whole or in part of Shares, and if such Shares consists of more than one class of securities, the distribution of such Shares shall consist of substantially the same proportion of each such class of Shares as such classes of Shares represent proportions of the Participant's Account. If the record date for dividends payable with respect to Shares distributable to a Participant occurs following the Share Conversion Date, such dividends shall not be considered attributable to such Shares, but shall be considered as earnings of the Fund and allocated among Participants' Accounts pursuant to Section 8.6(b). (b) Notwithstanding anything in Section 11 to the contrary, in the discretion of the Committee, Section 11.1 may not apply to Shares held in a Participant's ESOP Account until the close of the Plan Year in which any Exempt Loan used to acquire such Shares is repaid in full. (c) If at the time of distribution, Shares distributed from the Trust Fund that were acquired with the proceeds of an Exempt Loan are not treated as "readily tradable on an established market" within the meaning of Section 409(h) of the Code and Regulations, such Shares shall be subject to a put option in the hands of a Qualified Holder by which such Qualified Holder may sell all or any part of such Shares to the Trust. Should the Trust decline to purchase all or any part of such Shares, the Employer shall purchase those Shares that the Trust declines to purchase. The put option shall be subject to the following conditions: (i) The term "Qualified Holder" shall mean the Participant or Beneficiary receiving the distribution of such Shares, any other party to whom the Shares are transferred by gift or reason of death, or any trustee of an individual retirement account (as defined under Code Section 408) to which all or any portion of the distributed Shares is transferred pursuant to a tax-free "rollover" transaction satisfying the requirements of Sections 402 and 408 of the Code. (ii) During the 60-day period following any distribution of such Shares, a Qualified Holder shall have the right to require the Trust or the Employer to purchase all or a portion of the distributed Shares held by the Qualified Holder. The purchase price to be paid for any such Shares shall be their fair market value determined as of the Valuation Date coinciding with or immediately preceding the exercise of the put option under this Section 11.3(c)(ii), provided that in the case of a transaction between the Plan and a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, such fair market value shall be determined as of the date of the transaction. (iii) If a Qualified Holder shall fail to exercise such put option, the put option shall temporarily lapse upon the expiration of the 60-day period. As soon as practicable following the last day of the Plan Year in which the 60-day option period expires, the Employer shall notify the non- electing Qualified Holder (if he or she is then a shareholder of record) of the valuation of the Shares as of that date. During the 60-day period immediately following receipt of such valuation notice, the Qualified Holder shall again have the right to require the Employer to purchase all or any portion of the distributed Shares. The purchase price to be paid therefor shall be based on the valuation of the Shares as of the Valuation Date coinciding with or immediately preceding the exercise of the option under this Section 11.3(c)(iii), provided that in the case of a transaction between the Plan and a "disqualified person" within the meaning of Section 4975(e)(2) of the Code, such fair market value shall be determined as of the date of the transaction. (iv) The foregoing put options under Section 11.3(c)(ii) and (iii) hereof shall be effective solely against the Employer and shall not obligate the Plan or Trust in any manner. (v) Except as otherwise required or permitted by the Code, the put options under this Section 11.3(c) shall satisfy the requirements of Section 54.4975-7(b) of the Treasury Regulations to the extent, if any, that such requirements apply to such put options. If a Qualified Holder exercises a put option under this Section 11.3(c), payment for the Shares shall be made in substantially equal annual payments over a period beginning not later than 30 days after the exercise of the put option and not exceeding five years (provided that adequate security and reasonable interest are provided with respect to unpaid amounts). Except as provided in this Section 11.3(c) or in Section 11.2, no shares acquired with the proceeds of an Exempt Loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held by or distributed from the Plan. The rights and protections set forth in this Section 11.3(c) shall be non-terminable. 11.4 Payments to Surviving Spouse or Beneficiary. If a Participant or former Participant dies before the commencement of his or her benefits under the Plan, such Participant's or former Participant's Vested Interest in his or her Account is payable in full to his or her Surviving Spouse. If such Participant has no Surviving Spouse, he or she may designate a Beneficiary pursuant to Section 14. A Participant may with the written consent of his or her spouse elect to designate a Beneficiary other than or in addition to his or her spouse. The written consent of the spouse must acknowledge the effect of such election and must be witnessed by a representative of the Plan or a notary public. Any such election may not be changed without spousal consent. Such an election or revocation must be made in accordance with the procedures developed by the Committee in accordance with the Code and Regulations. 11.5 Latest Date for Commencement of Benefits. (a) Payments will commence no later than 60 days following the latest of the close of the Plan Year in which: (i) the Participant attains his or her Normal Retirement Date, (ii) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan or (iii) the Participant terminates his or her Service with the Employer. (b) Notwithstanding the provisions of the foregoing sentence, if the amount payable cannot be ascertained, or, subject to the provisions of Section 20.6, the Participant cannot be located after reasonable efforts, a payment retroactive to the date determined under the foregoing sentence may be made not later than 60 days after the earliest date on which the amount of such payment can be ascertained under the Plan or the date on which the Participant is located (whichever is applicable). (c) Notwithstanding any other provision of the Plan, benefits payable to a Participant shall commence no later than the later of April 1st of the calendar year following the calendar year in which such Participant attains age 70 1/2. (d) If a Participant dies before benefits have commenced, distributions to any Surviving Spouse or Beneficiary shall be made as soon as administratively feasible, but not later than five years after such Participant's death. In the event that payment is made to the Participant's Surviving Spouse, such distribution shall not commence later than the date on which such Participant would have attained age 70 1/2 (or, in either case, on any later date prescribed by Regulations). If the Participant's Surviving Spouse dies after such Participant's death but before distribution has been made to such Surviving Spouse, this Section 11.5(d) shall be applied to require payment of any benefits as if such Surviving Spouse were the Participant. (e) Pursuant to Regulations, any benefit paid to a child shall be treated as if paid to a Participant's Surviving Spouse if such amount would become payable to such Surviving Spouse on the child's attaining majority, or other designated event permitted by Regulations. 11.6 Redirection of Investment of ESOP Account. Effective March 1, 1990, upon both attaining age 50 and completing five Years of Service, a Participant shall be permitted to direct the Plan to transfer all or any portion of the Vested Interest in the Participant's ESOP Account to the Participant's Cash Contribution Account. Under rules prescribed by the Committee, such directions shall be permitted during semi-annual periods, to be determined by the Committee, effective as soon as administratively feasible, but not later than 30 days from the date on which such direction is given (except that, in the case of an individual who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, such direction shall be effective as of the first day of the seventh month next following the month in which such direction is given), and shall be made in ten percent (10%) increments of the Participant's Vested Interest in his or her ESOP Account. In the event that the Participant's Account does not provide at least three investment options to the Participant other than investment in Shares, the Committee shall provide diversification options to any Participant required to be given such diversification options under Section 401(a)(28)(B) of the Code in a manner consistent with the Code. Notwithstanding the foregoing, the ability to make transfers may be restricted by the Committee to the extent necessary to comply with any applicable federal securities laws (including Rule 144); provided, however, that in no event shall a Participant be prevented from transferring any amount necessary in order to meet the diversification requirements set forth in Section 401(a)(28)(B) of the Code. 11.7 Hardship Withdrawals. (a) A Participant who is an Employee may elect to withdraw all or any portion of the Vested Interest in his or her Cash Contribution Account attributable to Elective Contributions (but excluding any earnings on Elective Contributions accruing after December 31, 1988), Profit Sharing Contributions (if, and only if, the withdrawal is occasioned by a life threatening illness to the Participant) by giving written notice thereof to the Committee specifying such date, which shall not be less than 30 days following the date such notice is given to the Committee. Such notice shall designate that the hardship withdrawal shall be withdrawn from the investment funds in which the Participant has directed investment of the Participant's Cash Contribution Account. (b) The Committee may authorize a hardship withdrawal only for: (i) medical expenses described in Section 213(d) of the Code incurred or immediately anticipated by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code); (ii) the purchase (excluding mortgage payments) of a principal residence of the Participant; (iii) the payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant or the Participant's spouse, children, or dependents; or (iv) the need to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage of the Participant's principal residence. (c) A hardship withdrawal may be authorized only to the extent necessary to satisfy the hardship. A distribution will be deemed to be necessary to satisfy the hardship only if the distribution is not in excess of the amount of the immediate and heavy financial need of the Participant and such Participant's tax obligations as a result of such distribution and the Employee certifies in writing that such a hardship exists (and the Committee has no knowledge to the contrary); provided that the Committee may set stricter standards for making such determination on a nondiscriminatory basis; and provided further that the Participant must obtain the written consent of his or her spouse to the extent required by law. The Committee's decision shall be final and binding on the Participant. (d) In the event that a Participant's Vested Interest is less than 100% at the time of making a withdrawal from his Profit Sharing Subaccount pursuant to Section 11.7(a), the Participant's Vested Interest in his or her Profit Sharing Subaccount at any relevant time thereafter shall be equal to an amount ("X") determined by the following formula: X = P [AB + (R x D)] - (R x D). For purposes of applying the formula: P is the Participant's Vested Interest at the relevant time, AB is the balance of the Participant's Profit Sharing Subaccount at the relevant time; D is the amount distributed to the Participant pursuant to Section 11.7(a); and R is the ratio of the Participant's Profit Sharing Subaccount balance at the relevant time to the Participant's Profit Sharing Subaccount balance immediately after the distribution pursuant to Section 11.7(a). 11.8 Direct Rollovers to Another Qualified Plan or IRA. (a) This Section 11.8 applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section 11.8, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (c) An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (d) A distributee includes a Participant or former Participant. In addition, the Participant's or former Participant's Surviving Spouse and the Participant's or former Participant's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the Surviving Spouse, spouse or former spouse. (e) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (f) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Regulations is given, provided that: (1) the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 11.9 Certain Securities Law Restrictions. Any distribution of Shares pursuant to this Section 11 shall be subject to all applicable laws, rules and regulations and to such approvals by stock exchanges or governmental agencies as may be deemed necessary or appropriate by the Board of Directors. Each distributee may be required to give the Employer a written representation that such distributee will not be involved in a violation of state or federal securities laws, including the Securities Act of 1933, as amended; the form of such written representation will be prescribed by the Board of Directors. SECTION 12. MAXIMUM AMOUNT OF ALLOCATION 12.1 Section 415 Limitations. Annual additions to a Participant's Account with respect to any Plan Year may not exceed the limitations set forth in Section 415 of the Code, which are incorporated herein by reference. For these purposes, (i) "annual additions" shall have the meaning set forth in Section 415(c)(2) of the Code, as modified elsewhere in the Code and the Regulations, (ii) the limitation year shall mean the Plan Year unless any other twelve consecutive month period is designated pursuant to a written resolution adopted by the Employer, (iii) "compensation" shall have the meaning set forth in Section 1.415-2(d)(11)(ii), and (iv) "annual additions" shall include annual additions under all other defined contribution plans maintained by the Employer or any affiliated Employer. If the requirements of Section 7.5(a) are satisfied, the term "annual additions" shall not include any amounts credited to the Participant's Account (i) resulting from rollover contributions, (ii) due to Participating Employer contributions relating to interest payments on an Exempt Loan deductible under Section 404(a)(9)(B) of the Code, or (iii) attributable to a forfeiture of Shares acquired with the proceeds of an Exempt Loan. If a Participant in the Plan also participates in any defined benefit plan (as defined in Sections 414(j) and 415(k) of the Code) maintained by the Employer or any Affiliated Employer, in the event that in any Plan Year the sum of the Participant's Defined Benefit Fraction (as defined in Section 415(e)(2) of the Code) and the Participant's Defined Contribution Fraction (as defined in Section 415(e)(3) of the Code) exceed 1.0, the benefit under such defined benefit plan or plans shall be reduced in accordance with the provisions of that plan or those plans, so that the sum of such fractions with respect to the Participant will not exceed 1.0. If this reduction does not ensure that the limitation set forth in this Section 12.1 is not exceeded, then the Annual Addition to any defined contribution plan, other than the Plan, shall be reduced in accordance with the provisions of that plan but only to the extent necessary to ensure that such limitation is not exceeded. 12.2 Refund or Forfeiture of Amounts in Excess of Section 415 Limits. (a) In the event that amounts which would otherwise be allocated to a Participant's Account under the Plan must be reduced by reason of the limitations of Section 12.1, then such reduction shall be made in the following order or priority, but only to the extent necessary: (i) first the Participant's Profit Sharing Contributions shall be forfeited and reallocated pursuant to this Section 12.2; and then (ii) the Participant's Matching Contributions shall be forfeited and reallocated pursuant to this Section 12.2; and then (iii) the Participant's Elective Contributions shall be refunded to the Participant; and then (iv) Shares allocated to the Participant's Account attributable to ESOP Contributions shall be forfeited and reallocated pursuant to this Section 12.2. (b) Forfeitures arising under the Plan and allocable to such Participant in respect of such Plan Year shall be reallocated to the Accounts of other Participants as of the end of the Plan Year for which such reduction is made in the manner provided under Section 4.5 above. (c) If, with respect to any Plan Year, there is an excess contribution on account of the limitations contained in this Section 12.2, and such excess cannot be fully allocated in accordance with Section 12.2(b) because of the limitations prescribed in this Section 12, the amount of such excess which cannot be so allocated shall be held in suspense and allocated in the succeeding Plan Year prior to any other contributions by the Employer for such Plan Year. SECTION 13. VOTING RIGHTS 13.1 Voting of Shares in General. Except as otherwise required by the Act, the Code and the Regulations, all voting rights of Shares held in Participants' Accounts shall be exercised by the Purchasing Agent only as directed by the Participants or their Beneficiaries in accordance with the provisions of this Section 13. 13.2 Voting of Allocated Shares. (a) If any Participating Employer has a registration- type class of securities (as defined in Section 409(e)(4) of the Code or any successor statute thereto), then, with respect to all corporate matters submitted to shareholders, all Shares (including fractional interests in Shares) allocated and credited to the Accounts of Participants shall be voted only in accordance with the directions of such Participants as given to the Purchasing Agent. Any allocated Shares with respect to which Participants are entitled to vote pursuant to this Section 13.2 and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. (b) If no Participating Employer has a registration-type class of securities (as defined in Section 409(e)(4) of the Code or any successor statute thereto), then, only with respect to corporate matters relating to a corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such other similar transaction that Regulations require, all Shares allocated and credited to the Accounts of Participants shall be voted only in accordance with the directions of such Participants as given to the Purchasing Agent. Any allocated Shares with respect to which Participants are entitled to vote pursuant to this Section 13.2 and for which such directions are not received by the Purchasing Agent shall not be voted by the Purchasing Agent. The Purchasing Agent shall vote all Shares held in the Trust Fund allocated to the Accounts of Participants from whom voting instructions are not required to be solicited under Section 13.2 only as the Purchasing Agent directs in the Purchasing Agent's sole discretion in accordance with the Act, after the Purchasing Agent determines such action to be in the best interests of the Participants and their Beneficiaries. 13.3 Mechanics of Voting Allocated Shares. If Participants are entitled under Section 13.2 to direct the vote with respect to allocated Shares, then, at least 30 days before each annual or special shareholders' meeting of the Employer (or, if such schedule cannot be met, as early as practicable before such meeting), the Committee shall furnish to each Participant a copy of the proxy solicitation material sent generally to shareholders, together with a form requesting confidential instructions concerning the manner in which the Shares allocated to such Participant's Account (including fractional Shares to 1/1000th of a Share) are to be voted. Upon timely receipt of such instructions, the Purchasing Agent (after combining votes of fractional Shares to give effect to the greatest extent possible to Participants' instructions) shall vote the Shares as instructed. The instructions received by the Purchasing Agent from each Participant shall be held by the Purchasing Agent in strict confidence and shall not be divulged or released to any person, including, without limitation, any officers or Employees of any Participating Employer, or of any other Employer. The Trustee, the Employer, the Purchasing Agent and the Committee shall not make recommendations to Participants on whether to vote or how to vote. If voting instructions for Shares allocated to any Participants are not timely received for a particular shareholders' meeting, such Shares shall not be voted. 13.4 Voting of Unallocated Shares. The Purchasing Agent shall vote unallocated Shares held in the Trust Fund in the same proportions as the Shares for which Participant voting has been received, provided the Purchasing Agent determines that such action is consistent with its fiduciary obligations under the Act. 13.5 Tender or Exchange of Allocated Shares. The Committee shall notify each Participant of each tender or exchange offer for the Shares and utilize its best efforts to distribute or cause to be distributed to each Participant in a timely manner all information distributed to shareholders of the Employer in connection with any such tender or exchange offer. Each Participant shall have the right from time to time with respect to the Shares allocated to the Participant's Account (including fractional Shares to 1/1000th of a Share) to instruct the Purchasing Agent in writing as to the manner in which to respond to any tender or exchange offer which shall be pending or which may be made in the future for all Shares or any portion thereof. A Participant's instructions shall remain in force until superseded in writing by the Participant. The Purchasing Agent shall tender or exchange whole Shares only as and to the extent so instructed. If the Purchasing Agent does not receive instructions from a Participant regarding any tender or exchange offer for Shares, the Purchasing Agent shall have no discretion in such matter and shall not tender or exchange any such Shares in response thereto. Unless and until Shares are tendered or exchanged, the individual instructions received by the Purchasing Agent from Participants shall be held by the Purchasing Agent in strict confidence and shall not be divulged or released to any person, including, without limitation, any officers or Employees of any Participating Employer, or of any other Employer; provided, however, that the Purchasing Agent shall advise the Employer, at any time upon request, of the total number of Shares not subject to instructions to tender or exchange. 13.6 Tender or Exchange of Unallocated Shares. The Purchasing Agent shall tender unallocated Shares held in the Trust Fund in proportion to the ratio that (A) the number of Shares with respect to which Participant instructions in favor of the tender have been received bears to (B) the number of shares with respect to which Participant instructions for or against the tender have been received, provided the Purchasing Agent determines that such action is consistent with its fiduciary obligations under the Act. Neither the Purchasing Agent, the Committee nor the Trustee shall have the discretion or power to sell, convey or transfer any unallocated Shares held in the Participant's Accounts in response to a tender or exchange offer unless a court of competent jurisdiction determines that the Purchasing Agent is authorized to sell, convey or transfer any unallocated Shares held in the Accounts in response to any tender or exchange offer. In exercising any discretion or power, the Purchasing Agent shall consider, to the extent permitted by applicable law, including the Regulations, not only the potential increase in value, if any, in the Accounts of the Participants as a result of a tender or exchange of the unallocated Shares, but also the impact of any change in the management or control of the Employer in the long run, including but not limited to whether Participants will receive larger or smaller employee benefits than at present under the Plan. 13.7 Voting of Deceased Participant's Shares. If this Section 13 applies to Shares allocated to the Account of a deceased Participant, such Participant's Beneficiary shall be entitled to direct the manner in which to respond to any tender or exchange offer as if such Beneficiary were the Participant. SECTION 14. DESIGNATION OF BENEFICIARIES 14.1 Designation of Beneficiary. Each Participant shall file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his or her death. A Participant may from time to time revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. A Participant's Beneficiary designation shall not be effective to the extent that payments to the Surviving Spouse are required pursuant to Section 11, and in no event shall it be effective as of a date prior to such receipt. 14.2 Failure to Designate Beneficiary. If no such Beneficiary designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant, the payment of the amount, if any, payable under the Plan upon his or her death shall be made to the Participant's Surviving Spouse, if any; or if the Participant has no Surviving Spouse, then to the Participant's children, if any, in equal shares; or if the Participant has no children, to the Participant's parents, if any, in equal shares; or if the Participant has no parents, to the Participant's brothers and sisters, if any, in equal shares. If the Participant has no brothers or sisters, payment shall be made to the Participant's estate. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Trustee to pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Trust Fund therefor. SECTION 15. ADMINISTRATION OF THE PLAN 15.1 The Committee. The Committee shall have general responsibility for the administration, interpretation and construction of the Plan. The Committee shall be responsible for establishing and maintaining Plan records, including responsibility for compliance with the Actual Deferral Percentage and Actual Contribution Percentage tests described in Sections 4.6 and 5.3, and the Committee shall be responsible for complying with the reporting and disclosure requirements of the Act. The Committee shall report to the Board of Directors, or to a committee of the Board of Directors designated for that purpose, periodically as shall be specified by the Board of Directors or such designated committee, with regard to the matters for which it is responsible under the Plan. 15.2 The Trustee. Except as otherwise provided in the Trust Agreement or the Plan, the Trustee may act only as directed by the Committee, the Employer or any other party, as applicable. The Trustee shall have responsibility under the Plan for the management and control of the assets of the Plan. The Committee shall periodically review the performance and methods of the Trustee. The Employer or the Committee shall have the power to appoint, remove or change the Trustee and, to the extent that the Trust Fund is invested in assets other than Shares, shall have the power to appoint or remove one or more investment advisers and to delegate to such adviser authority and discretion to manage (including the power to acquire and dispose of) the assets of the Plan, provided that (i) such adviser with such authority and discretion shall be either a bank or a registered investment adviser under the Investment Advisers Act of 1940, and shall acknowledge in writing that it is a fiduciary with respect to the Plan and (ii) the Committee shall periodically review the investment performance and methods of each adviser(s) with such authority and discretion. The Committee shall establish investment standards and policies and communicate the same to the Trustee. If annuities are to be purchased under the Plan, the Committee shall determine what contracts should be made available to terminated Participants or purchased by the Trust Fund. 15.3 Committee's Responsibility for Entering into Exempt Loans and Valuation of Shares. The Committee shall have responsibility for directing the Trustee as to whether and under what terms it shall enter into an Exempt Loan and for directing the Purchasing Agent whether and under what terms it shall purchase or otherwise dispose of Shares. In the event that there is no generally recognized market for Shares, the Committee shall be the named fiduciary with responsibility for determining the fair market value of the Shares, provided, that any such determination shall be in accordance with applicable Regulations, if any, and the Committee shall, in making such determination, retain an independent appraiser to make such valuation on behalf of the Committee in accordance with Section 7.9. 15.4 Committee's Power to Engage Outside Experts. The Committee may arrange for the engagement of such legal counsel, who may be counsel for the Employer, and make use of such agents and clerical or other personnel as they each shall require or may deem advisable for purposes of the Plan. The Committee may rely upon the written opinion of such counsel and the accountants engaged by the Committee and may delegate to any such agent of said Committee its authority to perform any act hereunder, including without limitation, those matters involving the exercise of discretion, provided that such delegation shall be subject to revocation at any time at the discretion of said Committee. The Committee shall engage such certified public accountants, who may be accountants for the Employer, as it shall require or may deem advisable for purposes of the Plan. 15.5 Composition of Committee. The Committee shall consist of at least three members, each of whom shall be appointed by, shall remain in office at the will of, and may be removed, with or without cause, by the Board of Directors. Any member of said Committee may resign at any time. No member of said Committee shall be entitled to act on or decide any matter relating solely to himself or any of his or her rights or benefits under the Plan. The members of the Committee shall not receive any special compensation for serving in their capacities as members of such Committee but shall be reimbursed for any reasonable expenses incurred in connection therewith. Except as otherwise required by the Act, no bond or other security need be required of the Committee or any member thereof in any jurisdiction. Any member of the Committee, or any agent to whom said Committee delegates any authority, and any other person or group of persons, may serve in more than one fiduciary capacity (including service both as a Trustee and administrator) with respect to the Plan. 15.6 Actions of Committee. The Committee shall elect or designate its own chairman, establish its own procedures and the time and place for its meetings and provide for the keeping of minutes of all meetings. A majority of the members of the Committee shall constitute a quorum for the transaction of business at a meeting of the Committee. Any action of the Committee may be taken upon the affirmative vote of a majority of the members of the Committee at a meeting or, at the direction of its Chairman, without a meeting, by mail, telephone or facsimile, provided that all of the members of the Committee are informed by mail or telephone of their right to vote on the proposal and of the outcome of the vote thereon. 15.7 Disbursement of Plan Funds. The Committee shall cause to be kept full and accurate accounts of receipts and disbursements of the Plan, shall cause to be deposited all funds of the Plan to the name and credit of the Plan in such depositories as may be designated by the Committee, shall cause to be disbursed the monies and funds of the Plan when so authorized by the Committee and shall generally perform such other duties as may be assigned to them from time to time by the Committee. 15.8 Application for Benefits. Each Participant or Beneficiary believing himself eligible for benefits under the Plan shall apply for such benefits by completing and filing with the Committee an application for benefits on a form supplied by the Committee. Before the date on which benefit payments commence, each such application must be supported by such information and data as the Committee deems relevant and appropriate. Evidence of age, marital status (and, in the appropriate instances, health, death or disability) and location of residence shall be require of all applicants for benefits. All claims for benefits under the Plan shall, within a reasonable period of time, be decided by one or more persons designated in writing by the chairman of the Committee. 15.9 Denied Claims for Benefits. In the event that any claim for benefits is denied in whole or in part, the Participant or Beneficiary whose claim has been so denied shall be notified of such denial in writing by the Committee. The notice advising of the denial shall specify the reason or reasons for denial, make specific reference to pertinent Plan provisions, describe any additional material or information necessary for the claimant to perfect the claim (explaining why such material or information is needed) and shall advise the Participant or Beneficiary, as the case may be, of the procedure for the appeal of such denial. All appeals shall be made by the following procedure: (a) The Participant or Beneficiary whose claim has been denied shall file with the Committee a notice of desire to appeal the denial. Such notice shall be filed within sixty (60) days of notification by the Committee of claim denial, shall be made in writing and shall set forth all of the facts upon which the appeal is based. Appeals not timely filed shall be barred. (b) The Committee shall, within thirty (30) days of receipt of the Participant's or Beneficiary's notice of appeal, establish a hearing date on which the Participant or Beneficiary may make an oral presentation to the Committee in support of his or her appeal. The Participant or Beneficiary shall be given not less than ten (10) days' notice of the date set for the hearing. (c) The Committee shall consider the merits of the claimant's written and oral presentations, the merits of any facts or evidence in support of the denial of benefits and such other facts and circumstances as the Committee shall deem relevant. If the claimant elects not to make an oral presentation, such election shall not be deemed adverse to the claimant's interest, and the Committee shall proceed as set forth below as though an oral presentation of the contents of the claimant's written presentation had been made. (d) The Committee shall render a determination upon the appealed claim which determination shall be accompanied by a written statement as to the reasons therefor. The determination so rendered shall be binding on all parties. (e) For all purposes under the Plan, such decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons as to participation and benefit eligibility, the Employee's amount of Compensation and any other matter of fact or interpretation relating to the Plan. 15.10 Indemnification. To the maximum extent permitted by law, no member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member of the Committee or on his or her behalf in the Committee member's capacity as a member of such Committee nor for any mistake of judgment made in good faith, and the Employer shall indemnify and hold harmless, directly from its own assets (including the proceeds of any insurance policy the premiums of which are paid from the Employer's own assets), each member of the Committee and each other officer, employee or director of the Employer to whom any duty or power relating to the administration or interpretation of the Plan or to the management and control of the assets of the Plan may be delegated or allocated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Employer) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or willful misconduct. The Employer shall advance funds for legal expenses to the extent permitted by the Act. 15.11 Agent for Service of Process. The Committee or such other person as may from time to time be designated by the Committee shall be the agent for service of process under the Plan. SECTION 16. EXPENSES 16.1 Payment of Plan Expenses. The expenses incurred in the management and administration of the Plan shall be paid from the Trust Fund, except to the extent the Employer, in its sole discretion, may choose to pay such expenses from time to time; provided that any Trustee expenses paid to The Charles Schwab Trust Company shall be payable solely by the Employer. Such expenses shall include (i) the fees and expenses of any employee and of the Trustee for the performance of their duties under the Plan and Trust Fund (including but not limited to obtaining investment advice, record keeping services and legal services), (ii) the expenses incurred by the members of the Committee in the performance of their duties under the Plan (including reasonable compensation for any legal counsel, certified public accountants, consultants and agents, and cost of services rendered with respect to the Plan) and (iii) all other proper charges and disbursements of the Trustee or the members of the Committee (including settlements of claims or legal actions approved by counsel to the Plan). 16.2 Expenses Attributable to Investment of Plan Assets and Taxes. Brokerage fees, transfer taxes and any other expenses incident to the purchase or sale of securities by the Trustee shall be deemed to be part of the cost of such securities, or deducted in computing the proceeds therefrom, as the case may be. Expenses attributable to investments of the Trust Fund shall be paid out of the Trust Fund, except to the extent the Employer, in its sole discretion, may choose to pay such expenses from time to time; provided that expense entirely attributable to any one investment or to any one investment fund shall be allocated pro rata in accordance with Account balances among Accounts invested in such investment or investment fund. Taxes, if any, of any and all kinds whatsoever which are levied or assessed on any assets held or income received by the Trustee shall be paid out of the Trust Fund. SECTION 17. EMPLOYER PARTICIPATION 17.1 Adoption of Plan by Affiliated Employer. Any Affiliated Employer may adopt the Plan and the Trust Fund by resolution of its board of directors or equivalent governing body provided that (i) the Board of Directors has not expressly disallowed participation by such Affiliated Employer in the Plan; (ii) the Affiliated Employer has not previously expressly declined to participate in the Plan; or (iii) the Affiliated Employer is not precluded from participating in the Plan by a legally binding written document that precludes such participation; and provided further that the Board of Directors consents to such adoption. Any Affiliated Employer which so adopts the Plan shall be deemed to appoint Charles Schwab & Co., Inc., the Committee and the Trustee its exclusive agents to exercise on its behalf all of the power and authority conferred under the Plan or the Trust Agreement. This authority shall continue until the Plan is terminated and the relevant Trust Fund assets have been distributed. 17.2 Termination of Participation by Participating Employer. A Participating Employer may terminate its participation in the Plan by giving the Committee prior written notice specifying a termination date which shall be the last day of a month at least 60 days subsequent to the date such notice is received by the Committee. The Board of Directors may terminate any Participating Employer's participation in the Plan, as of any termination date specified by the Committee, for the failure of the Participating Employer to make proper contributions or to comply with any other provision of the Plan. 17.3 Effect of Termination of Participation by Participating Employer. Upon termination of the Plan as to any Participating Employer, such Participating Employer shall not make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or with respect to any Participants then employed by such Participating Employer, except as provided in this Section 17. To the maximum extent permitted by the Act, any rights of Participants no longer employed by such Participating Employer and of former Participants and their Beneficiaries and Surviving Spouses and other eligible survivors under the Plan shall be unaffected by such termination and any transfer, distribution or other disposition of the assets of the Plan as provided in this Section 17 shall constitute a complete discharge of all liabilities under the Plan with respect to such Participating Employer's participation in the Plan and any Participant then employed by such Participating Employer. The interest of each such Participant who is in Service with such Participating Employer as of the termination date is the amount, if any, credited to his or her Account after payment of or provision for expenses and charges and appropriate adjustment of the Accounts of all such Participants for expenses and charges as described in Section 16, and all forfeitures shall be nonforfeitable as of the termination date, and upon receipt by the Committee of IRS approval of such termination, the full current value of such amount shall be paid from the Trust Fund in the manner described in Section 17.4 or transferred to a successor employee benefit plan which is qualified under Section 401(a) of the Code; provided, however, that in the event of any transfer of assets to a successor employee benefit plan the provisions of Section 17.4 will apply. No advances against such payments shall be made prior to such receipt of approval, but after such receipt the Committee, in its sole discretion, may direct the Trustee to make one or more advances in accordance with Section 11.1. All determinations, approvals and notifications referred to above shall be in form and substance and from a source satisfactory to the Committee. To the maximum extent permitted by the Act, the termination of the Plan as to any Participating Employer shall not in any way affect any other Participating Employer's participation in the Plan. 17.4 Limitations on Transfer of Plan Assets to Successor Plan. No transfer of the Plan's assets and liabilities to a successor employee benefit plan (whether by merger or consolidation with such successor plan or otherwise) shall be made unless each Participant would, if either the Plan or such successor plan then terminated, receive a benefit immediately after such transfer which (after taking account of any distributions or payments to such Participants as part of the same transaction) is equal to or greater than the benefit such Participant would have been entitled to receive immediately before such transfer if the Plan had then been terminated. The Committee may also request appropriate indemnification from the employer or employers maintaining such successor plan before making such a transfer. 17.5 Shares Allocated to Suspense Fund Excluded from Transfer of Plan Assets to Successor Plan. Notwithstanding any provision of this Section 17 to the contrary, any Shares allocated to a Suspense Subfund shall not be transferred to a successor employee benefit plan except as is required or permitted by the Committee in accordance with the terms of an Exempt Loan and the Regulations. SECTION 18. AMENDMENT OR TERMINATION OF THE PLAN 18.1 Amendment, Suspension or Termination of Plan. (a) Subject to the provisions of Section 18.1(b) and (c) hereof, the board of directors of the Plan Sponsor reserves the right at any time to suspend or terminate the Plan, any contributions thereunder, or any other agreement or arrangement forming a part of the Plan, in whole or in part and for any reason, and to adopt any amendment or modification thereto, all without the consent of any Participating Employer, Participant, Beneficiary, Surviving Spouse or other eligible survivor. Subject to the provisions of Section 18.1(b) and (c) hereof, the Board of Directors reserves the right at any time to amend or modify the Plan. Each Participating Employer by its adoption of the Plan shall be deemed to have delegated this authority to the Board of Directors. (b) The Board of Directors shall not make any amendment or modification which would (i) retroactively impair any rights to any benefit under the Plan which any Participant, Beneficiary, Surviving Spouse or other eligible survivor would otherwise have had at the date of such amendment by reason of the contributions theretofore made or (ii) make it possible for any part of the funds of the Plan (other than such part as is required to pay taxes, if any, and administration expenses as provided in Section 16) to be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries and Surviving Spouses and other eligible survivors under the Plan prior to the satisfaction of all liabilities with respect thereto. (c) The Board of Directors shall not amend Sections 4.2(b)(ii) and 4.2(c) of the Plan more than once every six months, other to comport with changes in the Code, the Act or the rules thereunder. 18.2 Power to Retroactively Amend, Suspend or Terminate Plan Provisions. Subject to the provisions of Section 18.1, any amendment, modification, suspension or termination of any provision of the Plan may be made retroactively if necessary or appropriate to qualify or maintain the Plan as a plan meeting the requirements of Sections 401(a) of the Code or any other applicable provision of law (including the Act) as now in effect or hereafter amended or adopted and the Regulations issued thereunder. 18.3 Notice of Amendment, Suspension or Termination. Notice of any amendment, modification, suspension or termination of the Plan shall be given by the Board of Directors or the board of directors of the Plan Sponsor, as the case may be, to the Trustee and all Participating Employers. 18.4 Effect of Termination of Plan. Upon termination of the Plan, no Participating Employer shall make any further contributions under the Plan and no amount shall thereafter be payable under the Plan to or with respect to any Participant except as provided in this Section 18, and to the maximum extent permitted by the Act, transfers or distributions of the assets of the Plan as provided in this Section 18 shall constitute a complete discharge of all liabilities under the Plan. The provisions of the Plan which are necessary for the operation of the Plan and the distribution or transfer of the assets of the Plan shall remain in force. Upon receipt by the Committee of IRS approval of such termination, the full current value of such adjusted amount, and the full value of each account described in Sections 6.2 and 7.1 above, shall be paid from the Trust Fund to each Participant and former Participant (or, in the event of the death of a Participant or former Participant, to the Surviving Spouse or Beneficiary thereof) in any manner of distribution specified in Section 11 above, including payments which are deferred until the Participant's termination of Service, as the Committee shall determine. Without limiting the foregoing, any such distribution may be made in cash or in property, or both, as the Committee in its sole discretion may direct. All determinations, approvals and notifications referred to above shall be in form and substance and from a source satisfactory to the Committee. 18.5 Partial Termination of Plan. In the event that any governmental authority, including without limitation the IRS, determines that a partial termination (within the meaning of the Act) of the Plan has occurred or if there is a complete discontinuance of Employer contributions then (i) the interest of each Participant affected thereby in his or her Account shall become nonforfeitable as of the date of such partial termination or complete discontinuance of contributions and (ii) the provisions of Sections 18.2, 18.3 and 18.4 above, which in the opinion of the Committee are necessary for the execution of the Plan and the allocation and distribution of the assets of the Plan, shall apply. 18.6 Trust for Exclusive Benefit of Participant. In no event shall any part of the Trust Fund (other than such part as is required to pay taxes, if any, and administration expenses as provided in Section 16 above) be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries and Surviving Spouses under the Plan. SECTION 19. TOP-HEAVY PLAN REQUIREMENTS 19.1 Top-Heavy Plan - In General. For any Plan Year for which this Plan is a Top-Heavy Plan, the provisions of this Section 19 shall apply notwithstanding any other provisions of the Plan. 19.2 Effect of Top-Heavy Status. Each Participant who (i) is a Non-Key Employee and (ii) is employed on the last day of the Plan Year, shall be entitled to have contributions allocated to his or her Account of not less than three percent (3%) of the Participant's Compensation (the "Minimum Contribution Percentage") regardless of (i) whether such Non-Key Employee has completed a Year of Service, and (ii) the amount of such Non-Key Employee's Compensation; provided, however, that the minimum contribution percentage for any Plan Year shall not exceed the percentage at which contributions are made under the Plan for the Plan Year for the Key Employee for whom such percentage is the highest for such Plan Year. For this purpose, such percentage shall be determined by dividing the contributions made for such Key Employee by so much of his or her Compensation (which solely for this purpose includes Elective Contributions made by the Employer for the Key Employee) for the Plan Year as does not exceed $150,000 (adjusted automatically for increases in accordance with the Regulations). Contributions taken into account under this Section 19.2 shall include contributions under this Plan and under all other defined contribution plans (as defined in Section 414(i) of the Code) required to be included in an Aggregation Group; provided, however, that such contributions shall not include (i) contributions to any defined contribution plan in the required aggregation group if such contributions enable such a defined contribution plan to meet the requirements of Sections 401(a)(4) or 410 of the Code or (ii) contributions under the Social Security Act or any other federal or state law. 19.3 Maintenance of Defined Benefit Plan in Addition to Plan. In the event that the Plan is a Top-Heavy Plan for any Plan Year and the Employer also maintains a defined benefit plan (within the meaning of Section 414 of the Code) which provides benefits on behalf of Participants, then one of the two following provisions shall apply: (1) If the Plan is a Top-Heavy Plan for any Plan Year but would not be a "Top-Heavy Plan" for the Plan Year if "90 percent" were substituted for "60 percent" in Section 19.4(a), then Section 19.2 shall be applied for such Plan Year by substituting "four percent" for "three percent." (2) If a Top-Heavy Plan would continue to be a "Top-Heavy Plan" for the Plan Year if "90 percent" were substituted for "60 percent", then the denominator of the defined contribution plan fraction shall be calculated for such Plan Year by substituting "1.0" for "1.25", except with respect to any Participant who is not entitled to an allocation of Employer contributions and does not receive any accruals under any defined benefit plan (within the meaning of Section 414(j) of the Code) maintained by the Employer. In the event that another defined contribution plan or a defined benefit plan maintained by the Employer provides contributions or benefits on behalf of Participants, the Committee shall take such other plan into account as a part of this Plan to the extent required by the Code and in accordance with the Regulations. In addition, in the event that the Plan is a Top- Heavy Plan (irrespective of whether (1) or (2) applies), all contributions shall be vested according to the vesting schedule in Section 10.3 hereof. 19.4 Definitions. (a) "Top-Heavy Plan" means this Plan for any Plan Year if, as of the Determination Date, (i) the present value of the Accounts of all Participants who are Key Employees (excluding former Key Employees) exceeds 60 percent of the present value of all Participants' Accounts (excluding former Key Employees) or (ii) the Plan is required to be in an Aggregation Group which for such Plan Year is a Top-Heavy Group. In determining whether the Plan constitutes a Top-Heavy Plan, the Committee shall make the following adjustments: (i) When more than one plan is aggregated, the Committee shall determine separately for each plan as of any Determination Date, the present value of accrued benefits of all Participants and the value of Accounts of all Participants. (ii) Any such determination shall include the present value of distributions made to former Participants under the applicable plan (including a terminated plan) during the five-year period ending on the Determination Date, unless reflected in the value of the accrued benefits or the Accounts of such former Participants as of the Determination Date. (iii) Any such determination shall include any Rollover Contribution from any other plan as follows: (A) If the Rollover Contribution is initiated by the Employee and made to or from a plan maintained by a corporation which is not an Affiliated Employer, the plan providing the distribution shall include such distribution in the value of such accrued benefit or Account. (B) If the Rollover Contribution is not initiated by the Employee or made from a plan maintained by an Affiliated Employer, the plan accepting the distribution shall include such distribution in the value of such accrued benefit or Account. (b) "Determination Date" means for any Plan Year the last day of the next preceding Plan Year. (c) "Aggregation Group" means all plans maintained by the Employer or any Affiliated Employer which are required to be aggregated or permitted to be aggregated. For purposes of this Section 19.4(c), (i) The group of plans that are required to be aggregated (the "required aggregation group") includes each plan of the Employer or any Affiliated Employer in which a Key Employee is a Participant, and each other plan of the Employer or any Affiliated Employer which enables a plan in which a Key Employee is a Participant to meet the requirements of Sections 401(a)(4) or 410 of the Code; and (ii) The group of plans that are permitted to be aggregated (the "permissive aggregation group") includes the required aggregation group plus one or more plans of the Employer or any Affiliated Employer that is not part of the required aggregation group and that the Committee certifies as constituting a plan within the permissive aggregation group. Such plan or plans may be added to the permissive aggregation group only if the permissive aggregation group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code. (d) "Top Heavy Group" means the Aggregation Group, if as of any Determination Date, the sum of (i) the present value of the accrued benefits of all Participants who are Key Employees under all defined benefit plans (within the meaning of Section 414(j) of the Code) included in the Aggregation Group plus (ii) the aggregate value of the Accounts of all Participants who are Key Employees under all defined contribution plans (within the meaning of Section 414(i) of the Code) included in the Aggregation Group exceeds 60 percent of the sum of (i) the present value of the accrued benefits for all Participants (excluding former Key Employees), under all such defined benefit plans plus (ii) the aggregate value of the Accounts of all Participants (excluding former Key Employees) under all such defined contribution plans. If the Aggregation Group that is a Top- Heavy Group is a required aggregation group, each plan in the Aggregation Group will be a Top-Heavy Plan. If the Aggregation Group that is a Top-Heavy Group is a permissive aggregation group, only those plans that are part of the required aggregation group will be treated as a Top-Heavy Plan. If the Aggregation Group is not a Top-Heavy Group, no plan within such Aggregation Group will be a Top-Heavy Plan. For purposes of Section 19.4(a), the present value of accrued benefits under any defined benefit plan and the value of Accounts under any defined contribution plan shall be determined as of the Valuation Date that is coincident with the Determination Date in accordance with the Regulations. (e) "Key Employee" means any Employee or former Employee who, at any time during the Plan Year preceding the Determination Date or during any of the four preceding Plan Years, is or was one of the following: (i) An officer of the Employer or any Affiliated Employer having annual compensation (within the meaning of Section 414(q)(7)) greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Code for any Plan Year (as adjusted for increases in the cost of living in accordance with the Regulations). For purposes of the preceding sentence there shall be treated as officers for any such Plan Year no more than the lesser of: (A) 50 Employees, or (B) the greater of three Employees or 10 percent of the Employees of the Employer or any Affiliated Employer; (ii) One of the ten Employees owning (or considered as owning within the meaning of Section 318 of the Code) more than a five percent (5%) interest and one of the largest interests in the Employer or any Affiliated Employer. An Employee will not be considered such an owner for any Plan Year if the Employee's compensation (within the meaning of Section 414(q)(7)) is less than $30,000 (as adjusted for increases in the cost of living in accordance with the Regulations); for purposes of determining ownership pursuant to Section 19.4(e)(ii) the aggregation rules of Section 4.14(b), (c) and (m) of the Code apply. (iii) Any person who owns (or considered as owning within the meaning of Section 318 of the Code) more than a five percent interest in the Employer; (iv) Any person having compensation (within the meaning of Section 414(q)(7)) of more than $150,000, and owning (or considered as owning within the meaning of Section 318 of the Code) more than a one percent interest in the Employer. For purposes of this Section 19.4(e), a Beneficiary of a Key Employee shall be treated as a Key Employee and the interests inherited by such Beneficiary shall be treated the same as if owned by the Key Employee. (f) "Non-Key Employee" means any "Non-Key Employee" as defined in Section 416(i)(2) of the Code and the Regulations promulgated thereunder. SECTION 20. GENERAL LIMITATIONS AND PROVISIONS 20.1 Exclusive Benefit of Participants and Beneficiaries. In no event shall any part of the funds of the Plan be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Beneficiaries under the Plan except as permitted under Section 403(c) of the Act. Upon the transfer by a Participating Employer of any money to the Trustee, all interest of the Participating Employer therein shall cease and terminate. 20.2 No Rights to Continued Employment. Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Employer or any Affiliated Employer or affect the right of the Employer or any Affiliated Employer to dismiss any employee. The adoption and maintenance of the Plan shall not constitute a contract between the Employer and any employee or be consideration for, or an inducement to or condition of, the employment of any employee. 20.3 Trust Sole Source of Benefits. The Trust Fund shall be the sole source of benefits under the Plan and, except as otherwise required by the Act, the Employer and the Committee assume no liability or responsibility for payment for such benefits, and each Participant, Surviving Spouse, Beneficiary or other person who shall claim the right to any payment under the Plan shall be entitled to look only to the Trust Fund for such payment and shall not have any right, claim or demand therefor against the Employer, the Committee, or any Participant thereof, or any employee or director of the Employer. 20.4 Risk of Decrease in Assets. Each Participant, Beneficiary and Surviving Spouse shall assume all risk in connection with any decrease in the value of the assets of the Trust Fund and the Participants' Accounts or special accounts and neither the Employer nor the Committee shall be liable or responsible therefor. 20.5 Incapacity of Participant or Beneficiary. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, or has died, then any payment due such person or his or her estate shall be made to his or her duly appointed legal representative. Any such payment shall be a complete discharge of the liability of the Plan and the Trust Fund therefor. 20.6 Antialienation; Qualified Domestic Relations Orders. (a) Except insofar as may otherwise be required by law or pursuant to the terms of a Qualified Domestic Relations Order, as set forth in this Section 20.5, no amount payable at any time under the Plan and the Trust Fund shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind nor in any manner be subject to the debts or liabilities of any person, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void. If any person shall attempt to, or shall, alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any amount payable under the Plan and Trust Fund, or any part thereof, or if by reason of his or her bankruptcy or other event happening at any such time such amount would be made subject to his or her debts or liabilities or would otherwise not be enjoyed by such person, then the Committee, if it so elects, may direct that such amount be withheld and that the same or any part thereof be paid or applied to or for the benefit of such person. (b) Upon receipt of notification of any judgment, decree or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony payments, or marital property rights of a spouse, former spouse, child, or other dependent of a Participant and which is made pursuant to a state domestic relations law (including a community property law) (herein referred to as a "domestic relations order"), the Committee shall (i) notify the Participant and any prospective Alternate Payee named in the order of the receipt and date of receipt of such domestic relations order and of the Plan's procedures for determining the status of the domestic relations order as a Qualified Domestic Relations Order, and (ii) within a reasonable period after receipt of such order, determine whether it constitutes a Qualified Domestic Relations Order. The Plan's procedures for the determination of whether a domestic relations order constitutes a Qualified Domestic Relations Order shall be set forth by the Committee in writing, shall provide for the notification of each person specified in that order as entitled to payment of benefits under the Plan (at the address included in the domestic relations order) of such procedures promptly upon receipt by the Committee of such domestic relations order, and shall permit the prospective Alternate Payee to designate a representative for receipt of copies of notices that are sent to the prospective Alternate Payee with respect to a domestic relations order. (c) During any period in which the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined (by the Committee, by a court of competent jurisdiction, or otherwise), including the period beginning on the date of the Committee's receipt of the order, the Committee shall segregate in a separate account in the Plan or in an escrow account held by a Trustee the amounts, if any, which would have been payable to the Alternate Payee during such period if the order had been determined to constitute a Qualified Domestic Relations Order, provided that if no payments would otherwise be made under the Plan to the Alternate Payee or to the Participant or a Beneficiary of the Participant while the status of the order as a Qualified Domestic Relations Order is being determined, no segregation into a separate or escrow account shall be required. If a domestic relations order is determined to be a Qualified Domestic Relations Order within eighteen (18) months of the date of its receipt by the Committee (or from the beginning of any other period during which the issue of its being a Qualified Domestic Relations Order is being determined by the Committee) the Committee shall cause to be paid to the persons entitled thereto the amounts, if any, held in the separate or escrow account referred to above in one lump sum. If a domestic relations order is determined not be a Qualified Domestic Relations Order, or if the status of the domestic relations order as a Qualified Domestic Relations Order is not finally resolved within such eighteen month period, the Committee shall cause the separate account or escrow account balance to be returned, with interest thereon, to the Participant's Account or to be paid to the person or persons to whom such amount would have been paid if there had been no such domestic relations order, whichever shall apply. Any subsequent determination that such domestic relations order is a Qualified Domestic Relations Order shall be prospective in effect only. (d) (i) Benefits payable to an Alternate Payee shall be payable in one lump sum and in no event shall such benefits continue beyond the lifetime of the Alternate Payee. Such payment may be made at the time specified in the Qualified Domestic Relations Order irrespective of whether the Participant has attained the "earliest retirement age" (within the meaning of Section 414(p)(4)(B) of the Code). In particular, no Alternate Payee shall have the right with respect to any benefit payable by reason of a Qualified Domestic Relations Order to (A) designate a beneficiary with respect to amounts becoming payable under the Plan, (B) elect a method of benefit distribution providing for benefits continuing beyond the Alternate Payee's lifetime, (C) provide survivorship benefits to a spouse or dependent of such Alternate Payee or to any other person, spouse, dependent or other person, or (D) transfer rights under the Qualified Domestic Relations Order by will or by state law of intestacy. (ii) None of the payments, benefits or rights of any Alternate Payee shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Alternate Payee. No Alternate Payee shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he or she may expect to receive, contingently or otherwise, under the Plan. (iii) Alternate Payees shall not have any right to (A) borrow money under any Participant loan provisions under the Plan, (B) exercise any Participant investment direction rights or privileges under the Plan, (C) exercise any other election, privilege, option or direction rights of the Participant under the Plan except as specifically provided in the Qualified Domestic Relations Order, or (D) receive communications with respect to the Plan except as specifically provided by law, regulation or the Qualified Domestic Relations Order. (iv) Each Alternate Payee shall advise the Committee in writing of each change of his or her name, address or marital status, and of each change in the provisions of the Qualified Domestic Relations Order or any circumstance set forth therein which may be material to the Alternate Payee's entitlement to benefits thereunder or the amount thereof. Until such written notice has been provided to the Committee, the Committee shall be (A) fully protected in not complying with, and in conducting the affairs of the Plan in a manner inconsistent with, the information set forth in the notice, and (B) required to act with respect to such notice prospectively only, and then only to the extent provided for in the Qualified Domestic Relations Order. The Committee shall not be required to modify or reverse any payment, transaction or application of funds occurring before the receipt of any notice that would have affected such payment, transaction or application of funds, nor shall the Committee or any other party be liable for any such payment, transaction or application of funds. (v) Except as specifically provided for in the Qualified Domestic Relations Order, an Alternate Payee shall have no right to interfere with the exercise by the Participant or by any Beneficiary of their respective rights, privileges and obligations under the Plan. (e) For purposes of this Plan, a Qualified Domestic Relations Order means any judgment, decree, or order (including approval of a property settlement agreement) which has been determined by the Committee in accordance with procedures established under the Plan, to constitute a qualified domestic relations order within the meaning of Section 414(p)(1) of the Code and Alternate Payee means any person entitled to current or future payment of benefits under the Plan pursuant to a Qualified Domestic Relations Order. 20.7 Inability to Locate Participant or Beneficiary. If the Committee cannot ascertain the whereabouts of any person to whom a payment is due under the Plan, and if, after five years from the date such payment is due, a notice of such payment due is mailed to the last known address of such person, as shown on the records of the Committee or the Employer, and within three months after such mailing such person has not made written claim therefor, the Committee, if it so elects, may direct that such payment and all remaining payments otherwise due to such person be canceled on the records of the Plan and the amount thereof applied to reduce the contributions of the Employer, and upon such cancellation, the Plan and the Trust Fund shall, to the maximum extent permitted by the Act, have no further liability therefor except that, in the event such person later notifies the Committee of his or her whereabouts and requests the payment or payments due to such person under the Plan, the amount so applied shall be paid to him or her as provided in Section 11. All elections, designations, requests, notices, instructions, and other communications from the Employer, a Participant, Beneficiary, Surviving Spouse or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by the Committee, shall be mailed or delivered to such location as shall be specified by the Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by the Committee at such location. 20.8 Failure to Receive IRS Approval. Notwithstanding any other provision herein, if this Plan shall not be approved by the IRS under the provisions of the Code and the Regulations for any reason (including failure to comply with any condition for such approval imposed by the IRS) contributions made after the restatement of this Plan and prior to such denial shall be returned, without any liability to any person, within one year after the date of denial of such approval. 20.9 Contributions Conditioned on Deductibility. Notwithstanding any other provision herein, all contributions to the Trust Fund are expressly conditioned upon their deductibility under Section 404 of the Code and the Regulations, and in the event of the final disallowance of the deduction for any contribution, in whole or in part, then such contribution (to the extent the deduction is disallowed) shall upon direction of the Committee, which shall be given in conformity with the provisions of the Act, be returned, without liability to any person, within one year after such final disallowance. 20.10 Mistake of Fact. Notwithstanding any other provisions herein, if any contribution is made by a mistake of fact, such contribution shall upon the direction of the Committee, which shall be given in conformity with the provisions of the Act, be returned, without liability to any person, within one year after the payment of such contribution. 20.11 Communications with Committee. All elections, designations, requests, notices, instructions, and other communications from the Employer, a Participant, Beneficiary, Surviving Spouse or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by such Committee, shall be mailed by first-class mail or delivered to such location as shall be specified by such Committee, and shall be deemed to have been given and delivered only upon actual receipt thereof by such Committee at such location. 20.12 Communications with Participants and Beneficiaries. All notices, statements, reports and other communications from the Employer or the Committee to any Employee, Participant, Surviving Spouse, Beneficiary or other person required or permitted under the Plan shall be deemed to have been duly given when delivered to, or when mailed by first-class mail, postage prepaid and addressed to, such Employee, Participant, Surviving Spouse, Beneficiary or other person at his or her address last appearing on the records of the Committee. 20.13 Prior Service Credit. Upon such terms and conditions as the Committee may approve, and subject to any required IRS approval, benefits may be provided under the Plan to a Participant with respect to any period of the Participant's prior employment by any organization, and such benefits (and any Service credited with respect to such period of employment under Section 2.25) may be provided for, in whole or in part, by funds transferred, directly or indirectly (including a rollover from an individual retirement account), to the Trust Fund from an employee benefit plan of such organization which qualified under Section 401(a) of the Code. 20.14 Gender and Number. Except where otherwise required by the context, whenever used in the Plan the masculine gender includes the feminine and the singular shall include the plural. 20.15 Headings. The captions preceding the Sections of the Plan have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions of the Plan. 20.16 Governing Law. The Plan and all rights thereunder shall be governed by and construed in accordance with the Act and, to the extent not inconsistent therewith, the laws of the State of California. 20.17 Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 20.18 Heirs, Assigns and Personal Representatives. The Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and Beneficiary, present and future and all persons for whose benefit there exists any QDRO with respect to any Participant (except that no successor to the Plan Sponsor shall be considered a Plan Sponsor unless that successor adopts the Plan). 20.19 Reliance on Data and Consents. The Plan Sponsor, the Employer, each participating Employer, the Board of Directors, the Committee, the Trustee, all fiduciaries with respect to the Plan, and all other persons or entities associated with the operation of the Plan, the management of its assets, and the provision of benefits thereunder, may reasonably rely on the truth, accuracy and completeness of all data provided by any Participant, Surviving Spouse, Beneficiary, and Alternate Payee, including, without limitation, data with respect to age, health and marital status. Furthermore, the Plan Sponsor, the Employer, each participating Employer, the Board of Directors, the Committee, the Trustee, and all fiduciaries with respect to the Plan may reasonably rely on all consents, elections and designations filed with the Plan or those associated with the operation of the Plan and its corresponding Trust by any Participant, Surviving Spouse, Beneficiary, Alternate Payee, or any representative of any such person, without duty to inquire into the genuineness of any such consent, election or designation. None of the aforementioned persons or entities associated with the operation of the Plan, its assets and the benefits provided under the Plan shall have any duty to inquire into any such data, and all may rely on such data being current to the date of reference, it being the duty of the Participants, Surviving Spouses, Beneficiaries and Alternate Payees to advise the appropriate parties of any change in such data. SECTION 21. APPLICATION TO PUERTO RICO EMPLOYEES 21.1 Modifications Applicable to Puerto Rico. The provisions of this Section shall govern the application of the provisions of the Plan to Participants who are employed by the Company in and are residents of the Commonwealth of Puerto Rico ("Puerto Rico Participants"): (a) Notwithstanding Section 2.25, the definition of "Highly Compensated Participant" shall be a Puerto Rico Participant employed by the Company who receives Compensation that exceeds the Compensation paid to two thirds of the Puerto Rico Participants, as provided in Section 165(e) of the Puerto Rico Income Tax Act; (b) The following shall apply in lieu of the second sentence of Section 5.1(a) hereof: The Salary Reduction Agreement shall provide for Elective Contributions equal to any whole percentage between one percent (1%) and ten percent (10%) of a Participant's Compensation in any payroll period, not to exceed $7,000 in any calendar year; (c) The Actual Deferral Percentage Test set forth in Section 5.3 shall be applied separately with respect to Puerto Rico Participants. For purposes of applying the Actual Deferral Percentage Test to Puerto Rico Participants, the definition of Highly Compensated Employee contained in subparagraph (a) hereof shall be used; and (d) For purposes of applying subparagraphs (b) and (c) of this Section 21.1, the definition of Compensation contained in Section 2.11 shall be applied without regard to clause (xii) thereof. In all other respects, the terms of this Plan shall apply to Puerto Rico Participants. EX-10 5 EXHIBIT 10.146 EXHIBIT 10.146 ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN The Annual Executive Individual Performance Plan provides for discretionary bonuses to executive officers (other than the Chairman, Vice Chairman and President) based on their individual contribution to the attainment of the Company's performance objectives. Such payments will be determined by the Compensation Committee of the Board of Directors (the "Committee") upon the recommendation of the Chairman and President. The amount available for payments under the Plan will be equal to the sum of the target bonuses for each Participant determined pursuant to the Corporate Executive Bonus Plan, multiplied by a percentage determined pursuant to a Corporate Performance Funding Matrix to be determined by the Committee, less all payments made under the Corporate Executive Bonus Plan for such year (other than payments made to the President and the Vice Chairman). The Committee has the discretion to pay out less than the total amount funded under the Plan, and, in determining corporate performance for purposes of applying the Funding Matrix, has the discretion to exclude items of income and expense that the Committee determines, in its discretion, to be extraordinary (such as the impact of mergers and acquisitions during the year and other one-time nonoperating items). Amounts payable pursuant to the Plan are generally paid in the year following the year in which they are earned; however, a recipient who is eligible to participate in The Charles Schwab Corporation Deferred Compensation Plan may defer payments pursuant to the terms of that plan. The Plan is administered by the Committee, which makes all decisions regarding the operation of the Plan and payments thereunder. The Committee may amend or terminate the Plan at any time and for any reason without stockholder approval. EX-10 6 EXHIBIT 10.147 EXHIBIT 10.147 THE CHARLES SCHWAB CORPORATION CORPORATE EXECUTIVE BONUS PLAN THE CHARLES SCHWAB CORPORATION CORPORATE EXECUTIVE BONUS PLAN I. Purposes The purposes of this Corporate Executive Bonus Plan (the "Plan") are: (a) to provide greater incentive for key executives continually to exert their best efforts on behalf of The Charles Schwab Corporation (the "Company") by rewarding them for services rendered with compensation that is in addition to their regular salaries; (b) to attract and to retain in the employ of the Company persons of outstanding competence; and (c) to further the identity of interests of such employees with those of the Company's shareholders through a strong performance-based reward system. II. Form of Awards 1. Incentive compensation awards under this Plan shall be granted in cash, less any applicable withholding taxes. III. Determination of Awards 1. Incentive awards for participants other than the President shall be determined quarterly according to a Corporate Performance Payout Matrix that shall be adopted at the beginning of each year by the Compensation Committee of the Board of Directors (the "Committee"). The Management Committee Corporate Performance Payout Matrix shall use net revenue growth and consolidated pretax profit margin as the financial performance criteria to determine awards. Awards shall be defined by reference to a target percentage of base salary determined, from time to time, by the Committee. Payouts described in this subsection shall be calculated and paid on a quarterly basis, based on year-to-date performance compared with the comparable period in the preceding year. 2. With respect to payments made pursuant to Section III.1, the amount of base salary included in the computation of incentive awards shall not exceed 250% of the base salary in effect for the officer holding the same or substantially similar position on March 31, 1995. In addition, the maximum target incentive percentage shall be 100% of base salary for the Vice Chairman and 50% of base salary for the remaining participants (other than the President), and the maximum award for such individuals shall be 300% of the individual's target award. 3. Incentive awards for the President shall be determined in accordance with a Corporate Performance Payout Matrix that shall be adopted at the beginning of each year by the Committee. The Committee shall determine the President's award each year, up to the maximum amount defined by the matrix for a given level of performance. This matrix may, if the Committee deems appropriate, differ from that described in Subsection III.1. However, the performance criteria shall be the same as referred to above. Payouts for the President shall be made on an annual basis, based on the Company's results for the full year. 4. The maximum award payable for the President under this plan shall be no more than 500% of his target incentive award. The target incentive amount shall be determined each year by the Committee, but may not exceed 300% of base salary. The amount of base salary taken into account for purposes of computing the target incentive award may not exceed 250% of the President's base salary as of March 31, 1995. IV. Administration 1. Except as otherwise specifically provided, the Plan shall be administered by the Committee. The Committee members shall be appointed pursuant to the Bylaws of the Company, and the members thereof shall be ineligible for awards under this Plan for services performed while serving on said Committee. 2. The decision of the Committee with respect to any questions arising as to interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be, in its sole and absolute discretion, final, conclusive and binding. V. Eligibility for Awards 1. Awards under the Plan may be granted by the Committee to those employees who have contributed the most in a general way to the Company's success by their ability, efficiency, and loyalty, consideration being given to ability to succeed in more important managerial responsibility in the Company. This is intended to include the President and Chief Operating Officer, Vice Chairman, Executive Vice Presidents, and from time to time, certain other officers having comparable positions. No award may be granted to a member of the Company's Board of Directors except for services performed as an employee of the Company. 2. Except in the event of retirement, death, or disability, to be eligible for an award an employee shall be employed by the Company as of the date awards are calculated and approved by the Committee under this Plan. 3. For purposes of this Plan, the term "employee" shall include an employee of a corporation or other business entity in which this Company shall directly or indirectly own 50% or more of the outstanding voting stock or other ownership interest. VI. Awards 1. The Committee shall determine each year the payments, if any, to be made under the Plan. Awards for any calendar year shall be granted not later than the end of the first quarter of the calendar year, and payments pursuant to the Plan shall be made as soon as practicable after the close of each calendar quarter (or, in the case of the President, as soon as practicable after the close of each calendar year). 2. Upon the granting of awards under this Plan, each participant shall be informed of his or her award by his or her direct manager and that such award is subject to the applicable provisions of this Plan. VII. Deferral of Awards 1. A participant in this Plan who is also eligible to participate in The Charles Schwab Corporation Deferred Compensation Plan may elect to defer payments pursuant to the terms of that plan. VIII. Recommendations and Granting of Awards 1. Recommendations for awards shall be made to the Committee by the Chief Executive Officer and, with respect to participants other than the President and Vice Chairman, the President. 2. Any award shall be made in the sole discretion of the Committee, which shall take final action on any such award. No person shall have a right to an award under this Plan until final action has been taken granting such award. IX. Amendments and Expiration Date While it is the present intention of the Company to grant awards annually, the Committee reserves the right to modify this Plan from time to time or to repeal the Plan entirely, or to direct the discontinuance of granting awards either temporarily or permanently; provided, however, that no modification of this plan shall operate to annul, without the consent of the beneficiary, an award already granted hereunder; provided, also, that no modification without approval of the stockholders shall increase the maximum amount which may be awarded as hereinabove provided. X. Miscellaneous All expenses and costs in connection with the operation of this Plan shall be borne by the Company and no part thereof shall be charged against the awards anticipated by the Plan. Nothing contained herein shall be construed as a guarantee of continued employment of any participant hereunder. This Plan shall be construed and governed in accordance with the laws of the State of California. EX-10 7 EXHIBIT 10.148 EXHIBIT 10.148 SUMMARY OF INDIVIDUAL BONUS PLAN FOR RONALD W. READMOND For 1995, in addition to participation in the Corporate Executive Bonus Plan and the Annual Executive Individual Performance Plan, Mr. Readmond, Executive Vice President of the Corporation will have the opportunity to receive an additional bonus, which may not exceed 166.66 percent of base salary, depending upon the satisfaction of objectives described in Mr. Readmond's 1995 business plan, as determined by the Compensation Committee of the Board of Directors, based on the recommendation of the Chairman and the President. EX-10 8 EXHIBIT 10.149 EXHIBIT 10.149 EMPLOYMENT AGREEMENT This Agreement is made and entered into as of March 31, 1995 by and between The Charles Schwab Corporation, a Delaware Corporation (hereinafter referred to as the "Company"), and Charles R. Schwab, an individual hereinafter referred to as the "Executive") effective March 31, 1995. WITNESSETH: WHEREAS, the Company desires to reward the Executive for his continuing contribution to the Company and provide additional security for the Executive and to provide an inducement to the Executive to remain with the Company and not to engage in competition with it. NOW THEREFORE, in consideration of the mutual obligations herein contained, the parties hereto, intending to be legally bound hereby, covenant and agree as follows: 1. EMPLOYMENT (a) The Company hereby employs the Executive to render services to the Company in the positions of Chairman of the Board and Chief Executive Officer, in the capacity defined in the By-laws of the Company, as may be amended from time to time. The Executive shall perform such duties commensurate with his position and shall have full authority and responsibility, subject to the control of the Board of Directors, for the overall strategic direction, management, and leadership of the Company. (b) Throughout the term of this Agreement, the Executive shall devote his full business time and undivided attention to the business and affairs of the Company and its subsidiaries, except for reasonable vacations and except for illness or incapacity, but nothing in the Agreement shall preclude the Executive from devoting reasonable periods required for serving, as appropriate, on Boards of Directors of other companies, and from engaging in charitable and public service activities provided such activities do not materially interfere with the performance of his duties and responsibilities under this Agreement. 2. TERM This Agreement shall commence on March 31, 1995, and shall continue through March 31, 2000, subject to the terms and conditions herein set forth. Beginning on March 31, 1996, and on each subsequent anniversary of this date, one year shall be added to the term of the Agreement, unless, prior to such anniversary, the Company or the Executive has notified the other party hereto that such extension will not become effective. 3. COMPENSATION For services rendered by the Executive during the term of this Agreement, and for his performance of all additional obligations of employment, the Company agrees to pay the Executive and the Executive agrees to accept the following salary, other compensation, and benefits: (a) Base Salary. During the term of this Agreement, the Company shall pay the Executive in periodic installments, a base salary at the annual rate of $800,000, such base salary to be reviewed on March 31, 1996, and on each subsequent anniversary, taking into account, among other things, individual performance, competitive practice, and general business conditions. (b) Annual Incentive. In addition to the base salary provided in Section 3(a) above, the Executive shall be eligible to receive an annual incentive award based upon the Company's attainment of pre-established performance targets relative to specified performance standards. The performance standards upon which annual incentive payments will be earned shall be defined to include consolidated pretax profit margin (defined as net income before taxes, divided by net revenue) and annual net revenue percentage growth of the Company. For each fiscal year during the term of this Agreement, the Executive's incentive opportunity shall be computed as the amount of total cash compensation earned pursuant to the formula-based matrix, which shall be adopted each year by the Compensation Committee of the Board of Directors of the Company, minus the Executive's actual base salary paid during that year. For the 1995 fiscal year, the target total annual cash compensation amount (including base salary) is $3,500,000; therefore, the incentive target is $2,700,000 for achieving specified pretax profit margin and revenue growth objectives. The formula-based matrix, as amended at the sole discretion of the Board of Directors, shall be the sole basis for determining the Executive's annual incentive award. For each calendar year for which this Agreement is in effect, beginning with the calendar year 1996, the interior values in the formula-based matrix shall be increased by a fraction, based on the U.S. Consumer Price Index (for all consumers, as published by the Bureau of Labor Statistics); provided that no interior value shall be increased above $12 million. The fractional increase shall be the CPI for that year divided by the CPI for calendar year 1995. The Compensation Committee of the Board shall annually review and approve the performance standards and targets with respect to the Executive's incentive opportunity, which review and approval shall be completed no later than the 90th day of the Company's fiscal year for which such incentive opportunity may be earned. (c) Long-Term Incentive. The Executive will be considered for stock options in accordance with the Company's 1992 Stock Incentive Plan, as amended, or any successor thereto ("Stock Option Program") and any other long-term incentives offered to other executives of the Company from time to time during the term of this Agreement. (d) Benefits. The Executive shall be entitled to participate, as long as he is an employee of the Company, in any and all of the Company's present or future employee benefit plans, including without limitation pension plans, thrift and savings plans, insurance plans, and other benefits that are generally applicable to the Company's executives; provided, however, that the accrual and/or receipt by the Executive of benefits under and pursuant to any such present or future employee benefit plan shall be determined by the provisions of such plan. (e) Perquisites. The Executive will be provided such additional perquisites as are customary for senior level executives of the Company provided that each perquisite is approved by the Board of Directors. (f) Business Expenses. The Executive will be reimbursed for all reasonable expenses incurred in connection with the conduct of the Company's business upon presentation of evidence of such expenditures, including but not limited to travel expenses incurred by the Executive in the performance of his duties, security for the Executive, his family, and principal residence, professional organization dues, and club initiation fees, dues and expenses. (g) Any annual incentive award earned by Executive under this Section 3 shall be paid as soon as reasonably practical after the end of the Company's fiscal year end; provided, however, that if any such payment would be nondeductible to the Company under Internal Revenue Code Section 162(m), then any nondeductible amounts shall be deferred from year to year until the payment of such amounts is deductible by the Company. 4. TERMINATION OF EMPLOYMENT (a) Resignation. Notwithstanding Section 2 hereof, this Agreement may be terminated by the Executive at any time upon six (6) months written notice of resignation by the Executive to the Company, and in such event any payments pursuant to Section 3 and 4 of this Agreement shall automatically terminate (except for the Company's obligations relating to voluntary termination under its compensation and benefit plans, as specified in the various plan documents, and the Executive's obligations set forth in Section 5). Subsequent payments may be made to the Executive as provided pursuant to Section 6 of this Agreement. (b) Termination by the Company Other Than for Cause. Termination of executive by the Company other than for Cause, as defined in Section 4(c) below, shall cause the Company to make payments to the Executive hereunder pursuant to the provisions of this Section 4(b). Such a termination shall require at least sixty (60) business days' prior notice and must be signed by at least three-fourths (3/4) of all the non-employee members of the Board of Directors. Notwithstanding anything to the contrary contained in the Stock Option Program or any agreement or document related thereto, the Executive's total outstanding and unvested shares and/or options under the Stock Option Plan shall at the date of termination be deemed to be 100% vested. No further grants of stock or options shall be made under the Plan after such termination. With respect to base salary and annual incentive compensation, the Company's obligation shall be to pay the Executive, according to the terms of this Agreement and for a period of thirty-six (36) months, an amount equal to the annual salary and incentive paid to the Executive [at the bonus level for the year prior to which such termination occurs unless performance of the Company as defined in the matrix referenced in Section 3(b) is better in the year of termination, in which event such bonus shall be based on the matrix calculation as described in Section 3(b)], such annual amounts to be paid in equal monthly installments. During the 36-month severance payment period, the Executive shall be entitled to all payments, benefits and perquisites as provided for in this Agreement, and office space and secretarial support comparable to that provided to the Executive during his employment by the Company. The Executive shall be entitled to all payments and benefits as provided for in this Section for a period of thirty-six (36) months. If the Board of Directors fails to reelect the Executive to a position comparable to that described in Section 1(a) of this Agreement or, without terminating the Executive's employment, removes the Executive from his position for reasons other than Cause, substantively reduces the Executive's duties and responsibilities, reduces his pay and/or benefits, forces relocation, or requires excessive travel, then the Executive may, by notice to the Company, treat such action or removal as a termination of the Executive by the Company pursuant to this Section 4(b). In the event of the Executive's death before the completion of the payments pursuant to this Section 4(b), the remaining payments hereunder shall be made to the beneficiary or beneficiaries designated by the Executive to the Company in writing or, absent such a designation, to his estate. (c) Termination by the Company for Cause. The Company may terminate the Executive's employment for Cause if the Executive has committed a felonious act, or the Executive, in carrying out his duties hereunder has been willfully and grossly negligent or has committed willful and gross misconduct resulting, in either case, in material harm to the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. In the event of termination of the Executive by the Company for Cause, the Executive shall no longer be entitled to receive any payments or any other rights or benefits under this Agreement. (d) Disability. In the event the Executive's employment terminates due to total and permanent disability (for the purposes of this Agreement "disability" shall have the same meaning as applies under the Company's Long- Term Disability Plan), he will continue to receive the same base salary and benefits which he was receiving prior to such disability for 36 months, offset by payments under the Company's Long-Term Disability Plan. In addition, he shall receive a pro-rated annual incentive payment for the year in which his employment is terminated, based on the formula described in Section 3(b). (e) Death. In the event of the death of the Executive during the term of this Agreement, the rights and benefits under employee benefit plans and programs of the Company, including life insurance, will be determined in accordance with the terms and conditions of such plans and programs as in effect on his date of death. In such event, the Company shall pay in a lump sum to the Executive's estate an amount equal to five times the then current rate of the Executive's base salary, and no further payments shall be required pursuant to this Agreement. (f) Change in Control. In the event of a change in control of the Company, as set forth below, the Executive may at any time and in his complete discretion during a 24-month period following a change in control, elect to terminate his employment with the Company. For purposes of this Agreement, a "change in control" shall mean a change in ownership of the Company that would be required to be reported in response to Item 1(a) of a Current Report on Form 8-K pursuant to the Securities and Exchange Act of 1934 ("Exchange Act"), as in effect on the date hereof, except that any merger, consolidation or corporate reorganization in which the owners of the capital stock entitled to vote in the election of directors of the Employer or the Company ("Voting Stock") prior to said combination, own 75% or more of the resulting entity's Voting Stock shall not be considered a change in control for the purposes of this Agreement; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as that term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company is or becomes the beneficial owners (as that is used in Section 13(d) of the Exchange Act), directly or indirectly, of 30% or more of the Voting Stock of the Company or its successor; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company ("Incumbent Board") cease for any reason to constitute at least a majority thereof; provided, however, that any person becoming a director of the Company after the beginning of the period whose election was approved by a vote of at least three-quarters of the directors comprising the incumbent Board shall, for the purposes hereof, be considered as though he were a member of the incumbent Board; or (iii) there shall occur the sale of all or substantially all of the assets of the Company. Notwithstanding anything in the foregoing to the contrary, no change in control of the Company shall be deemed to have occurred for purposes of this Agreement by virtue of any transaction which results in the Executive, or a group of persons which includes the Executive acquiring, directly or indirectly, more than 30 percent of the combined voting power of the Company's outstanding securities. If any of the events constituting a change in control shall have occurred during the term hereof, the Executive shall be entitled to the privilege provided in subparagraph (f) herein to terminate his employment. Any termination by the Executive pursuant to this Section shall be communicated by a written "Notice of Termination." If, following a change in control, the Executive shall for any reason voluntarily terminate his employment during the 24-month period following a change in control, then the Company shall pay base salary up to the date of termination and a prorated annual incentive award based on the calculated bonus for the year in which termination occurred, as defined in Section 3(b), in a lump sum on the thirtieth (30th) day following the Date of Termination. 5. COVENANT NOT TO COMPETE (a) As a material inducement to the Company's entering into this Agreement, the Executive agrees that during the term of this Agreement, he will not become associated with, render service to or engage in any other business competitive with any existing or contemplated business of the Company or its subsidiaries, except that the Executive may serve as a member of the board of directors of other companies or organizations, provided that he provides written notice to the Board of each significant activity, and that he will do nothing inconsistent with his duties and responsibilities to the Company. (b) If the Executive voluntarily resigns from the employ of the Company prior to the expiration of the term of this Agreement, he specifically agrees that for a period of five (5) years commencing with the date of his voluntary resignation he will not engage in or perform any services either on a full-time or a part-time or on a consulting or advisory basis for any business organization that is in competition with the Company at the time such services are being performed by Executive, with the exception that this Section 5(b) shall not apply in the event the Executive resigns voluntarily following a change in control of the Company as defined in Section 4(f). (c) The Executive will not at any time, whether while employed by the Company or after voluntary or involuntary termination or after retirement, reveal to any person, firm or entity any trade or business secrets or confidential, secret, or privileged information about the business of the Company or its subsidiaries or affiliates except as shall be required in the proper conduct of the Company's business. 6. CONSULTING ARRANGEMENT Following a voluntary termination of employment pursuant to Section 4(a) and 4(f), or an involuntary termination subsequent to a change in control of the Company, for any reason but during a 24-month period following a change in control as defined in Section 4(f), after the Executive ceases to render services as the Chief Executive Officer, he may in his sole discretion elect to act as a consultant to the Company for a period of five (5) years. During this period of consulting services, the Executive shall, at reasonable times and places, taking into account any other employment or activities he may then have, hold himself available to consult with and advise the officers, directors, and other representatives of the Company. As compensation therefore, the Executive shall be entitled to receive, and Company shall pay, an annual amount equal to seventy-five percent (75%) of his annual base salary rate in effect immediately prior to his termination of employment, but in no event an annual amount to exceed $1,000,000, for each year of such period, payable in equal monthly installments. 7. WITHHOLDING All amounts payable hereunder which are or may become subject to withholding under pertinent provisions of law or regulation shall be reduced for applicable income and/or employment taxes required to be withheld. 8. MISCELLANEOUS (a) This Agreement supersedes any prior agreements or understandings, oral or written, with respect to employment of the Executive and constitutes the entire Agreement with respect thereto; provided, however, that nothing contained herein shall supercede that certain Assignment and License Agreement entered into as of March 31, 1987, as amended. This Agreement cannot be altered or terminated orally and may be amended only by a subsequent written agreement executed by both of the parties hereto or their legal representatives, and any material amendment must be approved by a majority of the voting shareholders of the Company. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of California. (c) This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. In that this constitutes a personal service agreement, it may not be assigned by the Executive and any attempted assignment by the Executive in violation of this covenant shall be null and void. (d) For the purpose of this Agreement, the phrase "designated beneficiary or beneficiaries" shall include the estates of such beneficiaries in the event of their death before the receipt of all payments under this Agreement and shall also include any alternate or successor beneficiaries designated in writing to the Company by the Executive. (e) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions, which shall remain in full force and effect. (f) The Section and Paragraph headings contained herein are for reference purposes only and shall not in any way affect the meanings or interpretation of this Agreement. (g) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrators award in any court having jurisdiction. The expense of such arbitration shall be borne by the Company. (h) Any notices, requests or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. Company: ATTEST THE CHARLES SCHWAB CORPORATION By: /s/ Mary B. Templeton By: /s/ Luis E. Valencia --------------------- ------------------------------ Corporate Secretary Title: Executive Vice President - Human Resources ------------------------------------------ Executive: /s/ Charles R. Schwab ------------------------------ Charles R. Schwab EX-10 9 EXHIBIT 10.150 Exhibit 10.150 REIMBURSEMENT AGREEMENT THIS AGREEMENT is made as of December 19, 1994 between THE CHARLES SCHWAB CORPORATION, a Delaware corporation (the "Company"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association (the "Bank"), as letter of credit issuing bank (hereinafter, together with any successor thereto in such capacity, called the "Issuing Bank"). WITNESSETH: WHEREAS, the Company is desirous that the Issuing Bank from time to time issue irrevocable Letters of Credit in accordance with the terms of each Application delivered by the Company to the Issuing Bank, as defined below, in an aggregate amount not to exceed $100,000,000, for the account of the Company and for the benefit of certain investment funds (each a "Beneficiary"), the assets of which are managed by a Company affiliate; WHEREAS, the Company has no equity investment interest in any Beneficiary; WHEREAS, notwithstanding that the Company will not receive any direct benefit or other recompense from any Beneficiary as consideration for providing financial support and credit enhancement to, or for the benefit of, such Beneficiary so as to conserve, protect and/or restore the capital position of such Beneficiary, the Company believes it is in its best interest to provide the support and credit enhancements as contemplated in this Agreement, in order to preserve and retain its goodwill and favorable business reputation; WHEREAS, the Issuing Bank is willing to issue the Letters of Credit on the terms and conditions set forth herein and on the further condition that the representations, warranties, covenants, and events of default contained in those certain Credit Agreements, each dated as of June 30, 1994, (the form of which as set forth in Exhibit A) among the Company and certain commercial lending institutions (as amended, modified or supplemented from time to time collectively the "Credit Agreements") be incorporated by reference herein; NOW THEREFORE, in consideration of the foregoing and for other valuable consideration, the parties hereto agree as follows: 1. DEFINITIONS; FINANCIAL TERMS. 1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the following terms shall have the meanings indicated for purposes of this Agreement (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" and "Affiliates" mean, when used with respect to any Person, respectively, (a) any Person which, directly or indirectly, controls, is controlled by, or is under common control with, such first person, and (b) all such Persons. As used herein, "control" means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise). "Agreement" means this Agreement, as the same may at any time be amended or modified and in effect. "Application" means an Application and Agreement for Standby Letter of Credit in the form attached hereto as Exhibit B. "Availability" shall have the meaning assigned to such term under Section 7.1 of this Agreement. "Beneficiary" has the meaning given to that term in the preamble. "Business Day" means any day on which banks are open for business in California. "Cash Collateral" means cash, certificates of deposit issued by the Issuing Bank and money market deposits deposited by the Company with the Issuing Bank. "Credit Agreements" has the meaning given such term in the preamble. "Company" has the meaning given to that term in the preamble hereto. "Effective Date" has the meaning given to that term in Section 8. "Event of Default" means any of the events described in Section 9. "Expiry Date" has the meaning given to that term in Section 2.1(a). "Extended Expiry Date" has the meaning given to that term in Section 2.1(b). "Issuance Date" has the meaning given such term in Section 2.1(a). "Issuing Bank" has the meaning given to that term in the preamble hereto. "Letter(s) of Credit" means the Letters of Credit issued by the Issuing Bank pursuant to clause (a) of Section 2.1 and each Substitute Letter of Credit. "Letter of Credit Availability" means, at any time, the excess of (i) the Letter of Credit Commitment over (ii) the sum of (a) the then Letters of Credit Outstanding plus (b) the aggregate amount of all Reimbursement Obligations paid by the Company to the Issuing Bank prior to such time pursuant to this Agreement. "Letters of Credit Commitment" means the Issuing Bank's aggregate commitment in an amount equal to $100,000,000 under this Agreement to make credit available to the Company by means of the issuance of Letters of Credit. "Letter of Credit Fee" means the Letter of Credit fee payable by a Beneficiary as provided in the letter agreement between the Issuing Bank and each Beneficiary of a Letter of Credit. "Letters of Credit Outstanding" means, at any time, an amount equal to the sum of (a) the aggregate Stated Amount at such time of all Letters of Credit then outstanding and undrawn (as such aggregate Stated Amount shall be adjusted, from time to time, as a result of drawings, the issuance of Letters of Credit, the cancellation or reduction of Letters of Credit, or otherwise), plus (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations. "Obligations" means all obligations of the Company to the Issuing Bank under or in connection with this Agreement or any other documents executed pursuant hereto, including the Reimbursement Obligation, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due. "Payment Demand" means any demand for payment including, without limitation, any draft and any other documents presented under and as required by the terms of a Letter of Credit. "Person" and "Persons" mean, respectively, (a) an individual or a corporation, partnership, trust (including a business trust), incorporated or unincorporated association, joint venture, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind, and (b) any two or more of any of the foregoing, collectively. "Reference Rate" means, at any time, the rate of interest then most recently announced by the Issuing Bank at San Francisco, California as its Reference Rate. The Reference Rate is set by the Issuing Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some credits. Each change in the Reference Rate shall take effect at the opening of business on the day specified in Bank's public announcement of a change in the its Reference Rate. "Reimbursement Account" has the meaning given to that term in Section 2.2 hereof. "Reimbursement Obligation(s)" has the meaning given to such term in Section 2.2. "Relevant Taxes" means all taxes other than taxes on the net income of the Issuing Bank. "SEC" means the Securities and Exchange Commission. "Stated Amount" means the "Stated Amount" as defined in each Letter of Credit. "Stated Expiry Date" means the Expiry Date stated in each Letter of Credit. "Substitute Letter of Credit" means a Letter of Credit issued by the Issuing Bank pursuant to clause (c) of Section 2.1 hereof in substitution for any Letter of Credit previously issued by the Issuing Bank pursuant hereto, as amended from time to time in accordance herewith. "Termination Date" means August 1, 1995. "Unmatured Event of Default" means any event or condition which with the lapse of time or giving of notice to the Company, or both, would constitute an Event of Default. "Upfront Fee" means the Upfront Fee payable by a Beneficiary as provided in the letter agreement between the Issuing Bank and each Beneficiary of a Letter of Credit. 1.2 Financial Terms. Unless otherwise defined or the context otherwise requires, all financial and accounting terms shall be defined in accordance with generally accepted accounting principles. 2. LETTER OF CREDIT. 2.1 (a) Issuance of Letter of Credit. The Company may request at any time and from time to time prior to the Termination Date, subject to the terms and conditions of this Agreement, by delivery to the Issuing Bank of a completed Application for each Letter of Credit, that, the Issuing Bank issue and the Issuing Bank agrees to issue Letters of Credit in such form as may be requested by Company and approved by the Issuing Bank (the date of each such issuance is called an "Issuance Date"). Each Letter of Credit shall be effective immediately upon the delivery thereof to the respective Beneficiary and shall expire on the date (the "Expiry Date") which is the earlier of (i) the Stated Expiry Date of each Letter of Credit, (ii) 4:00 p.m. (Los Angeles time) on the Termination Date or (iii) the date on which the Issuing Bank honors a drawing thereunder for the then Stated Amount of such Letter of Credit. Each Letter of Credit requested shall by its terms: (i) be issued in a Stated Amount which does not exceed (or would not exceed) the then Letter of Credit Availability; (ii) be stated to expire on its Stated Expiry Date which shall be no later than the Termination Date; and (iii) prior to its Stated Expiry Date (i) terminate immediately upon notice to the Issuing Bank thereof from the Beneficiary thereunder that all obligations covered thereby have been terminated, paid, or otherwise satisfied in full, or (ii) reduce in part immediately and to the extent the Beneficiary thereunder has notified the Issuing Bank thereof that the obligations covered thereby have been paid or otherwise satisfied in part. So long as no Event of Default has occurred and is continuing and prior to the Termination Date, the Company may request the Issuing Bank, in accordance with the terms of Section 2.1(b) of this Agreement, to extend the Stated Expiry Date of a Letter of Credit for an additional period not to exceed the Termination Date. (b) Extensions of Letters of Credit. The Company shall have the right to request that the Issuing Bank extend the then current Stated Expiry Date (the "Extended Expiry Date"), which request may be conditioned upon terms and conditions which are different from the terms and conditions of this Agreement in effect on the Issuance Date. The Company shall make such extension request no later than the earlier of 20 days prior to the Stated Expiry Date of the applicable Letter of Credit and the Expiration Date. The Issuing Bank shall, no later than 15 Business Days after receiving such request, notify the Company of its acceptance or rejection of such request, which acceptance may be conditioned upon terms and conditions which are different from the terms and conditions of this Agreement in effect on the Issuance Date or the terms and conditions proposed by the Company in making an extension request. No extension of the Stated Expiry Date shall be effective without the express written consent of the Bank. The Company acknowledges and agrees that the Issuing Bank may grant or deny any request for an extension of the Expiry Date as the Issuing Bank, in the Issuing Bank's sole and unfettered discretion, deems appropriate. (c) Delivery of Amendment and Substitute Letters of Credit. Provided that the Company and the Issuing Bank have agreed to the extension of the initial or Extended Expiry Date, all as set forth in clause (b) of this Section 2.1, the Issuing Bank shall deliver to the Beneficiary either (x) an amendment to the then outstanding Letter of Credit, extending the term of the then outstanding Letter of Credit to the relevant Extended Expiry Date, or (y) in exchange for the then outstanding Letter of Credit, a Substitute Letter of Credit, dated the date of issuance thereof, in an amount equal to the amount of the then outstanding Letter of Credit, and having a term expiring (unless sooner surrendered pursuant to the provisions of this Section 2.1) on the relevant Extended Expiry Date. 2.2 Letter of Credit Drawings. The Company hereby authorizes the Issuing Bank to honor and pay Payment Demands under, or purporting to be under, and conforming with the terms of each Letter of Credit. The Company agrees to reimburse the Issuing Bank on the later of either four days after, or upon demand of, any payment made by the Issuing Bank under the Letters of Credit pursuant to any such Payment Demand, with interest on the amount so paid by the Issuing Bank from and including the date paid by the Issuing Bank to but not including the date the Issuing Bank is reimbursed therefor, at a rate per annum equal to the Reference Rate in effect from time to time plus two percent (2.00%); provided, however, that if any payment shall be reimbursed to the Issuing Bank on the same date payment is made by the Issuing Bank, interest at the rate herein provided shall be payable on the amount so paid for one (1) day. Such reimbursement to the Issuing Bank shall be made by a transfer of immediately available funds into an account (No. 1233183980) maintained at the Issuing Bank (the "Reimbursement Account"). The Company's obligations under this Section 2.2 shall be referred to as the "Reimbursement Obligation." 2.3 Unconditional Reimbursement Obligations. Subject to the proviso in Section 2.4, the payment by the Company of the Reimbursement Obligation under this Agreement shall be absolute, unconditional, and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including, without limiting the generality of the foregoing, the following circumstances: (a) any lack of validity or enforceability of the Letter of Credit, this Agreement, or any other instrument, document, or agreement issued or entered into in connection therewith; (b) the existence of any claim, set off, defense or other right of the Company against the Issuing Bank or any other person or entity, whether in connection with this Agreement or otherwise; or (c) any statement, certification, or other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever, except where any circumstance described in this subsection (c) involves a fraudulent Payment Demand under a Letter of Credit made by any employee or person under the direct control of the Issuing Bank. 2.4 Correspondence at Company's Risk. All directions and correspondence relating to the Letter of Credit are to be sent at the Company's risk and the Issuing Bank does not assume any responsibility for any inaccuracy, interruption, error, or delay in transmission or delivery by mail, telegraph or cable, provided that the Company shall not bear the risk of any such inaccuracy, interruption, error, or delay which occurs while any such correspondence is under the direct control of the Issuing Bank. 2.5 Law Governing the Letter of Credit. Subject to the laws, customs and practices of the trade in the area where the Beneficiary is located, the Letter of Credit will be subject to, and performance under the Letter of Credit by the Issuing Bank, its correspondents and the Beneficiary will be governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as may be amended or replaced from time to time by subsequent Congresses of the International Chamber of Commerce. The Application and this Agreement shall be governed by and construed under the laws of the State of California. 2.6 Trustee in Bankruptcy; Receiver. The Issuing Bank may receive, accept and pay, as complying with the terms of the Letter of Credit, any Payment Demand, otherwise in order, which may be signed by the trustee in bankruptcy, or the receiver for any of the property of, the Beneficiary. 3. FEES; LOAN ACCOUNT. 3.1 Upfront Fee. In consideration of the Issuing Bank's issuance of the Letter of Credit, the Issuing Bank shall receive from the Beneficiary the Upfront Fee. 3.2 Letter of Credit Fee. In consideration of the Issuing Bank's issuance of the Letter of Credit, the Issuing Bank shall receive from the Beneficiary the Letter of Credit Fee. 3.3 Method of Calculating Fees. The Letter of Credit Fee shall be computed on the basis of a year consisting of 360 days and paid for actual days elapsed. 3.4 Loan Account. Principal and interest due and owing in connection with any Reimbursement Obligation pursuant to Section 2.2, and all other sums owing to the Issuing Bank hereunder shall be evidenced by entries in the books and records maintained by the Issuing Bank. Each payment on and any other credits with respect to principal, interest and all other sums owing to the Issuing Bank hereunder shall be evidenced by entries in such books and records. The Company hereby agrees that such records shall be presumptive evidence of the amounts owed, absent manifest error on the part of the Issuing Bank. The Issuing Bank will provide the Company with written advices of credit and debit, together with quarterly summary statements, showing calculation of any amounts due. 4. LETTER OF CREDIT - ISSUING BANK'S INDEPENDENT OBLIGATION. The Issuing Bank's obligation to honor a conforming Payment Demand under each outstanding Letter of Credit is a separate obligation of the Issuing Bank and is independent of the Company's obligations to the Issuing Bank with respect to the Letters of Credit Outstanding including, without limitation, the Company's obligations under Sections 2.2 and 2.3 hereof. 5. PAYMENTS. 5.1 General Payment Procedures. Except as otherwise provided in this Agreement, all payments to be made by the Company to the Issuing Bank, whether on account of a Reimbursement Obligation or other amounts at any time owing hereunder or in connection herewith, shall be made to the Issuing Bank at its address specified in or for the purpose of this Agreement, for the account of the Issuing Bank, in immediately available funds. All payments to be made by the Company to the Issuing Bank in respect of payments made under or in respect of the outstanding Letters of Credit, including, without limitation, interest thereon pursuant to Section 2.2, shall be made to the Issuing Bank by payment in immediately available funds into the Reimbursement Account. All amounts payable by the Company to the Issuing Bank shall be made to the Reimbursement Account not later than noon, San Francisco time, on the date due and funds received on any day after the time specified herein shall be deemed to have been received by the Issuing Bank on the next succeeding Business Day. 5.2 Net Payments. All payments by the Company of any amounts in respect of a payment or disbursement made by the Issuing Bank in respect of the outstanding Letters or Credit, including interest thereon, and in respect of all other amounts payable hereunder shall be made free without setoff of counterclaim and free and clear of and without withholding or deduction for any taxes, fees or other charges of any nature whatsoever imposed by any taxing authorities. 5.3 Setoff. Upon the occurrence of any Event of Default, the Issuing Bank is hereby authorized at any time and from time to time without notice to the Company (any such notice being expressly waived by the Company) and, to the fullest extent permitted by law, to set off, to exercise any banker's lien or any right of attachment or garnishment and apply any and all balances, credits, deposits (general or special, time or demand, provisional or final), accounts or monies at any time held and other indebtedness at any time owing by the Issuing Bank to or for the account of the Company (and not its Affiliates) against any and all of the obligations of the Company now or hereafter existing under or in connection with this Agreement or the outstanding Letters of Credit. The rights of the Issuing Bank under this Section 5.3 are in addition to, in augmentation of, and do not derogate from or impair other rights and remedies (including, without limitation, other rights of setoff) which any such party may have. 6. REPRESENTATION AND WARRANTIES. 6.1 Incorporation by Reference. As of any Issuance Date and so long as the Letter of Credit Commitment hereunder remains in full force and effect, the Company hereby makes all the representations and warranties contained in Paragraph 5 of the Credit Agreements. All of such representations and warranties together with related definitions and ancillary provisions are incorporated into this Agreement by reference as if such terms were set forth in this Agreement in full, without regard to any expiration of any commitment thereunder and without regard to the final payment in full of any obligations of the Company thereunder. The following terms in the Credit Agreements shall have the meanings specified below for purposes of this Agreement, including without limitation, Sections 6, 7 and 9 hereof. "Advance" means each Letter of Credit and/or Reimbursement Obligation. "Agreement" means this Agreement, each Application, each Letter of Credit, any Substitute Letter of Credit, and any other document delivered in connection with this Reimbursement Agreement. "Bank" means the Issuing Bank. "Borrower" means the Company. "Borrowing Advice" means the Application. "Credit" shall mean the Letter of Credit Commitment under the Reimbursement Agreement. "Date of Advance" means Issuance Date. "Loan" shall mean the Reimbursement Agreement, the Letter of Credit, any Substitute Letter of Credit under the Reimbursement Agreement and other documents delivered in connection with the Reimbursement Agreement. 6.2 Investment Company Act. The Company represents and warrants to the Issuing Bank that the execution of this Agreement by the Company and performance of its obligations hereunder do not violate Section 17(a) and 17(d) of the Investment Company Act of 1940, as amended. 7. INCORPORATION BY REFERENCE OF COVENANTS. The Company covenants and agrees that, from and after the date hereof and thereafter until all obligations of the Company hereunder are paid in full and this Agreement is terminated, it will: 7.1 Available Credit. As long as there are any outstanding Reimbursement Obligations or Letters of Credit Outstanding, maintain aggregate unutilized Credit, as defined in the Credit Agreements, or in lieu thereof, under any other credit facility or maintain cash balances (which other facility or balance requirement must be reasonably acceptable to the Issuing Bank) in an amount not less than $100,000,000 or such reduced amount equal at all times to the Letters of Credit Outstanding, as agreed by the Issuing Bank and the Company ("Availability"). 7.2 SEC Reporting. The Company will provide Issuing Bank with a Memorandum prepared by counsel to the Beneficiaries describing the content of conversations between such counsel and the staff of the Securities and Exchange Commission, subject to the condition that the Issuing Bank treat the Memorandum as a confidential document that should not be given any distribution or dissemination other than as may be required to effect the transactions contemplated under this Agreement, the Letter of Credit and related documents. 7.3 Incorporation by Reference. Duly keep, perform and observe each and every covenant set forth in Paragraph 6 and Paragraph 7 of the Credit Agreements. To the extent Paragraph 6 or 7 of the Credit Agreements is hereafter amended the Issuing Bank reserves the right to consent to such Amendment's incorporation herein by reference. In the absence of the Bank's consent, such covenant as in effect on the Effective Date shall remain in full force and effect. All of such covenants, together with related definitions and ancillary provisions, are hereby incorporated into this Agreement by reference, mutatis mutandis, as if such terms were set forth in this Agreement in full, without regard to any termination of such Credit Agreements, without regard to any expiration of any commitment thereunder and without regard to the final payment in full of any obligations of the Company or any other person or entity thereunder. If an event is the subject of both a covenant incorporated herein by reference and another covenant set forth in this Agreement, the Company shall comply with the covenant which imposes on it the stricter requirement. To the extent that any covenant incorporated herein by reference is inconsistent with the other terms of this Agreement, the terms of this Agreement shall control. If the Credit Agreements terminates, any commitment thereunder expires or any obligations of the Company thereunder are paid in full and any covenant incorporated herein by reference requires the Company to obtain the consent of any agent, lender or lenders, then, for the purpose of this Agreement, the Company shall be required to obtain the consent of the Issuing Bank. 8. CONDITIONS PRECEDENT 8.1 Effective Date. This Agreement shall become effective upon satisfaction of each of the following conditions precedent (the "Effective Date"): (a) Default. No Event of Default or Unmatured Event of Default shall have occurred and be continuing. (b) Warranties. The warranties contained in Section 6 hereof shall be true and correct. (c) Certification. The Company shall have delivered to the Issuing Bank a certificate of the Company's president or chief financial officer as to the matters set out in Sections 8.1(a) and (b). (d) Delivery of Documents. The Company shall have delivered or caused to be delivered to the Issuing Bank: (i) Company Resolutions. A copy, duly certified by the Company's secretary or assistant secretary, of (i) the resolutions of the Company's Board of Directors authorizing the Company's application for the letters of credit and the execution and delivery of agreements to effectuate such authorization, (ii) all documents evidencing other corporate action, and (iii) all approvals or consents, if any, with respect to this Agreement. (ii) Company Incumbency. A certificate of the Company's secretary or assistant secretary, dated the Issuance Date, certifying the names of the Company's officers authorized to sign this Agreement and all other documents or certificates to be delivered hereunder, together with the true signatures of such officers. (iii) Legal Opinion. An opinion of Howard, Rice, Nemerovski, Canady, Robertston, Falk & Rabkin, counsel to the Company, in the form of Exhibit C attached hereto, addressed to the Issuing Bank and dated the date hereof. (iv) Legal Opinion regarding Investment Company Act of 1940. An opinion of Mary B. Templeton, General Counsel, Senior Vice President and Corporate Secretary to the Company, in the form of Exhibit D attached hereto, addressed to the Issuing Bank, and dated the date hereof. (v) Beneficiary Approval. A copy, duly certified by each Beneficiary's secretary or assistant secretary of resolutions authorizing the use of a Letter of Credit as contemplated herein, and the payment of the Upfront Fee and Letter of Credit Fee. (e) Upfront Fee. Each Beneficiary will have executed and delivered a letter agreement agreeing to pay the Upfront Fee and Letter of Credit Fee and the Issuing Bank shall have received from each Beneficiary the Upfront Fee. 8.2 Issuance Date. The obligation of the Issuing Bank to issue a Letter of Credit is subject, to the satisfaction of each of the following conditions on each Issuance Date: (a) Effective Date. The Effective Date shall have occurred. (b) Default. No Event of Default or Unmatured Event of Default shall have occurred and be continuing. (c) Warranties. The warranties contained in Section 6 hereof shall be true and correct. 8.3 Condition Subsequent. As a condition subsequent, the Company shall deliver within 20 Business Days of the Effective Date resolutions of the Company ratifying Company's (i) delivery of Applications for Letters of Credit under this Agreement to the Issuing Bank; and (ii) execution of and performance under this Agreement. 9. EVENTS OF DEFAULT AND REMEDIES. Each of the following shall constitute an Event of Default under this Agreement: 9.1 Non-Payment of Reimbursement Obligation. Default in the payment when due of a Reimbursement Obligation. 9.2 Credit Agreements. The Credit Agreements shall be terminated or cease to be enforceable against the Company unless another credit facility has been established or the Company maintains sufficient cash balances equivalent in amount to Letters of Credit Outstanding which facility or balance requirement is reasonably acceptable to Issuing Bank. 9.3 Availability. The Company shall fail to maintain the Availability under the Credit Agreements, or under any other credit facility or maintain cash balances in an amount equivalent to Letters of Credit Outstanding which other facility or balance requirement is reasonably acceptable to the Issuing Bank. 9.4 Incorporation By Reference of Events of Default. The occurrence of any event of default set forth in the Credit Agreements shall constitute an Event of Default hereunder with respect to the Company. All of such events of default, together with related definitions and ancillary provisions, are hereby incorporated into this Agreement by reference, mutatis mutandis, as if such terms were set forth in this Agreement in full, without regard to any termination of such Credit Agreements, without regard to any expiration of any commitment thereunder and without regard to the final payment in full of any obligations of the Company or any other person or entity thereunder. To the extent that any Event of Default incorporated herein by reference is inconsistent with the other terms of this Agreement, the Issuing Bank shall not be deemed to have waived any rights hereunder by virtue of such inconsistency. 9.5 Action if Event of Default. If any Event of Default shall occur and be continuing, the Issuing Bank may take one or more of the following actions: (a) declare the Letter of Credit Commitment to be terminated, whereupon the Letter of Credit Commitment shall forthwith terminate; or (b) enforce the Company's Reimbursement Obligations under Section 2.2; or (c) demand that Company deposit with the Issuing Bank an amount equal to all or any part of the then Stated Amount of the Letters of Credit in immediately available funds or in similar Cash Collateral acceptable to the Issuing Bank, pledged to the Issuing Bank, provided such payment of Cash Collateral is permissible in accordance with the terms of the Credit Agreements. Any Cash Collateral shall be held by the Issuing Bank in an interest bearing cash collateral account and shall be applied to reimbursement of amounts to be paid by the Issuing Bank under the Letter of Credit and to payment of such other Obligations in such order of application, as the Issuing Bank shall determine with any excess amount returned to the Company. The Company acknowledges and agrees that the Issuing Bank would not have an adequate remedy at law for failure by the Company to immediately pay the Bank the amount provided under this Section 9.5 and that the Issuing Bank shall have the right to require the Company to specifically perform such undertaking whether or not any drawings have been made under the Letter of Credit; provided, however, that upon the occurrence of any bankruptcy Event of Default, the Letter of Credit Commitment shall forthwith terminate, and all sums then owing by the Company hereunder and under each document executed pursuant hereto shall become and be immediately due and payable without further action on the part of any Person and without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Company. 10. MISCELLANEOUS. 10.1 No Waiver; Modifications in Writing. (a) No failure or delay on the part of the Issuing Bank in exercising any right, power or remedy hereunder, and no course of dealing between the Company and the Issuing Bank, shall operate as a waiver of any such right, power or remedy, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Issuing Bank at law, in equity or otherwise. (b) No amendment, modification, supplement, termination or waiver of or to any provision of this Agreement, or any other document executed pursuant hereto, nor consent to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Issuing Bank. (c) Any waiver pursuant to this Section 10.1 shall not affect the obligations of the Company or the rights of the Issuing Bank under any provision of this Agreement or any document, except to the extent set forth in this Section 10.1 and in such waiver. Any waiver of any provision of this Agreement, and any consent to any departure by the Company from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 10.2 Further Assurances. The Company agrees to do such further acts and things and to execute and deliver to the Issuing Bank such additional assignments, agreements, powers and instruments, as the Issuing Bank may reasonably require or deem advisable to carry into effect the purposes of this Agreement or to better assure and confirm unto the Issuing Bank its rights, powers and remedies hereunder. 10.3 Notices, etc. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands instructions and other communications required or permitted to be given to or made upon any party hereto or any other Person shall be in writing and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopier, or by prepaid courier, and shall be deemed to be given for purposes of this Agreement on the day that such writing is delivered (in the case of personal delivery) or sent to the intended recipient thereof (or, in the case of (i) any notice which is sent by mail, five days after the deposit thereof, postage prepaid, in the mail and (ii) any notice which is sent through a public courier company, on the next Business Day after the day on which such notice is delivered to such courier company) in each case in accordance with the provisions of this Section 10.3. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section 10.3, notices, demands, instructions and other communications in writing shall be given to or made upon any party at its address (or to its telex or telecopier numbers) indicated next to its signature on the signature pages hereof and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such Person next to its signature on the signature pages hereof, or to such address, telex, telecopier or telephone number from time to time notified by any recipient to the other parties hereto. Anything herein to the contrary notwithstanding, any notice from the Company pursuant to clause (a) of Section 2.1 hereof shall be effective, for purposes of this Agreement, only when actually received by all Persons to whom such notices are required to be sent or given. 10.4 (a) Costs, Expenses and Taxes. The Company agrees to pay all reasonable costs and expenses of the Issuing Bank in connection with the negotiation, preparation, reproduction, execution and delivery of this Agreement and each other document executed pursuant hereto or thereto, any amendments or modifications of (or supplements to) any of the foregoing and any and all other documents furnished pursuant hereto or thereto or in connection herewith or therewith, including the reasonable fees and out-of-pocket expenses of Mayer, Brown & Platt, counsel to the Issuing Bank, and the allocated cost of internal legal counsel to the Issuing Bank. The Company further agrees to pay all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses and the allocated expense of internal counsel), if any, of the Issuing Bank in connection with the enforcement of this Agreement or any other document executed pursuant hereto or thereto or in connection herewith or therewith. In addition, the Company shall pay any and all stamp or transfer taxes and other Relevant Taxes payable or determined to be payable in connection with the execution and delivery or enforcement of this Agreement or any other documents executed pursuant hereto or thereto and agrees to save and hold Issuing Bank harmless from and against any and all liabilities with respect to or result from any delay in paying or omission to pay such Relevant Taxes. (b) Indemnity. The Company shall pay, and shall protect, indemnify and save harmless the Issuing Bank and its respective officers, directors, shareholders, employees, agents and servants (herein called the "Indemnified Parties") from and against, any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, damages, costs or expenses including, without limitation, reasonable attorneys' fees and expenses (herein called the "Indemnified Liabilities") of any nature arising from or relating to this Agreement or any other document executed pursuant hereto or thereto, except that no Indemnified Party shall be entitled to indemnification under this clause (b) for any loss, liability, action, suit, judgment, demand, damage, cost or expense which is directly caused by such Indemnified Party's gross negligence or willful misconduct. If any action, suit or proceeding arising from any of the foregoing is brought against any Indemnified Party or any other Person indemnified or intended to be indemnified pursuant to this Section 10.4, the Company, to the extent and in the manner reasonably directed by the Issuing Bank, will resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by the Company (which counsel shall be satisfactory to the Person or Persons indemnified or intended to be indemnified). If and to the extent that the foregoing provisions of this Section 10.4 may be unenforceable for any reason, the Company hereby agrees to make the maximum contribution to payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. (c) Issuing Bank may Perform. If the Company shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty on the part of the Company contained herein or in any other document executed in connection herewith shall be breached, the Issuing Bank may (but shall not be obligated to), after two days' notice to the Company, do the same or cause it to be done or remedy any such breach, and may expend its funds for such purpose; provided, however, that no such action by the Issuing Bank shall relieve the Company of any liability in connection with such failure or breach or be deemed to constitute a waiver of any default under this Agreement, or such other document. Any and all amounts so expended by the Issuing Bank shall be repayable to it by the Company immediately upon the Issuing Bank's demand therefor, provided such demand shall be made within 180 days of the Issuing Bank's incurring such expense, with interest at a rate per annum (computed for the actual number of days elapsed on the basis of a year consisting of 360 days) equal to 2% plus the Reference Rate in effect from time to time during the period from and including the date so expended by the Issuing Bank to the date of repayment. (d) Survival of Obligations. The obligations of the Company under this Section 10.4 shall survive the termination of this Agreement and the discharge of the Company's Obligations hereunder for a period of four years from the date of such termination or discharge. 10.5 Binding Effect; Assignment. This Agreement shall be binding upon, and inure to the benefit of, the Company, the Issuing Bank, and their respective successors and assigns; provided, however, that the Company may not assign its rights hereunder or in connection herewith or any interest herein (voluntarily, by operation of law or otherwise), so long as any Letters of Credit are outstanding or Reimbursement Obligations exist or the Letter of Credit Commitment remains in full force and effect, without the prior written consent of the Issuing Bank. The Issuing Bank may assign all or a part of their respective interests with the written consent of the Company, provided, however, that such consent shall not be unreasonably withheld. 10.6 Waiver of Jury Trial. THE COMPANY AND THE ISSUING BANK EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY INSTRUMENT EXECUTED PURSUANT HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OR ANY SUCH PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE ISSUING BANK TO ENTER INTO THIS AGREEMENT. 10.7 Liability of the Issuing Bank. The Company hereby assumes all risks for the acts or omissions of the Beneficiary thereof with respect to its use of the Letter of Credit. Neither the Issuing Bank nor any of its officers or directors shall be liable or responsible for (i) the use which may be made of the Letter of Credit or for any acts or omissions of the Beneficiary and any transferee in connection therewith; (ii) the validity or genuineness of documents, or of any endorsement(s) thereon, even if such documents should in fact prove to be in any or all respect invalid, fraudulent or forged; (iii) any of the circumstances whatsoever in making or failing to make payment under any Letter of Credit, except only that the Company shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Company which the Company provides were caused by the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under the Letter of Credit comply with the terms of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any information to the contrary. 10.8 Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. 10.9 Governing Law; Arbitration. This Agreement and each other document executed pursuant hereto shall be governed by, and construed in accordance with, the law of the State of California. Any controversy among the parties arising out of or relating to this Agreement or a Letter of Credit shall at the request of any party be determined by arbitration. The arbitration shall be conducted in San Francisco, California, under the laws of the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement or the Letter of Credit and pursuant to the Commercial Rules of the American Arbitration Association. The arbitrators shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrators. Judgment upon the arbitration award may be entered in any court having jurisdiction. This Paragraph shall not limit the right of any party to this Agreement or a Letter of Credit to exercise lawful self-help remedies or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, during, or after the pendency of any arbitration. The seeking, obtaining or exercising of such a remedy does not waive the right of any party, including the party who sought such remedy, to resort to arbitration. Notwithstanding the foregoing, no controversy shall be submitted to arbitration under this Paragraph without the consent of all parties if, at the time of the proposed submission, such controversy arises from or relates to an obligation to Bank which is secured by real property collateral. 10.10 Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 10.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon the parties, their successors and permitted assigns. 10.12 Reserve Requirements. If reserve, special deposit, or similar requirements or any similar restrictions, or any other requirements of law not presently applicable to the Issuing Bank, are hereafter imposed upon or determined by the Issuing Bank or held to be applicable to the Issuing Bank at any time and from time to time, which would materially increase the costs to the Issuing Bank of continuing the Letter of Credit financing hereunder or materially affect the profitability (on an after-tax basis) to the Issuing Bank of the Letter of Credit transactions contemplated hereby, then the Issuing Bank may give thirty days' written notice to the Company of such requirement or restriction and of the additional costs, or loss or prospective loss of profitability, resulting from the imposition or application of such requirement or restriction to the Issuing Bank. Upon such notice the Company shall compensate the Issuing Bank for all additional costs, or for any loss of profit, accruing to the Issuing Bank from and including the date of such imposition, imposition or holding to but not including the expiration of the Letter of Credit. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or caused it to be executed and delivered by their duly authorized officers, all as of the day and year first above written. THE CHARLES SCHWAB CORPORATION By: A. John Gambs Title: Executive Vice President, Chief Financial Officer Address: 101 Montgomery Street San Francisco, CA 94104 Telecopy: 415-296-5187 c/o General Counsel BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: Vice President Address: 1850 Gateway Boulevard Concord, California 94520 Attention: Jeffrey Donahue Telecopy: Copy: Jack Williams Bank of America 231 South LaSalle Street Chicago, Illinois 60697 LIST OF EXHIBITS EXHIBIT A - Credit Agreements (See Fourth Whereas Clause of Preamble) EXHIBIT B - Application (1.1) EXHIBIT C - Legal Opinion (8.1(d)(iii)) EXHIBIT D - Legal Opinion (Investment Company Act of 1940) (8.1(d)(iv)) Bank of America INTERNATIONAL TRADE BANK #2621 333 SOUTH BEAUDRY AVENUE, 19TH FLOOR LOS ANGELES, CA 90017 DATE: December 19, 1994 IRREVOCABLE STANDBY LETTER OF CREDIT NO. LASB-( ) -------------------------------------------------------------- Customer: The Charles Schwab Corporation 101 Montgomery Street San Francisco, CA 94104 Beneficiary: ( NAME OF FUND ) ------------------------------------------------ a series of shares of beneficial interest of The Charles Schwab Family of Funds 101 Montgomery Street, San Francisco, CA 94104 Attention: William J. Klipp Ladies and Gentlemen: 1. We are hereby established at the request of and for the account of our customer (the "Account Party"), our Irrevocable Standby Letter of Credit No. LASB-( ) (the "Letter of Credit") in favor of (NAME OF FUND), a series of shares of beneficial interests of The Charles Schwab Family of Funds, a Massachusetts business trust registered under the Investment Company Act of 1940 ("Beneficiary") and we hereby irrevocably authorize the Beneficiary to make demand for payment from us, the Bank of America National Trust and Savings Association (the "Bank") under this Letter of Credit. We are advised that this Letter of Credit has been issued pursuant to the terms of the Reimbursement Agreement, dated as of December 19, 1994, by and between the Bank and the Account Party (the "Reimbursement Agreement"), and is available upon the terms and conditions hereinafter set forth, in an aggregate amount not exceeding $( Dollar Amount ) (the "Stated Amount"). No payment hereunder shall exceed an amount equal to (i) the Stated Amount available on the date of such demand, minus (ii) the aggregate amount of any demand previously honored hereunder. Unless otherwise defined in this Letter of Credit, capitalized terms used herein shall have the respective meanings assigned to such terms in Section 8. 2. Funds under this Letter of Credit are available to the Beneficiary against a Certificate, signed by a duly authorized officer of the Beneficiary, in the form attached hereto as Exhibit B (the "Payment Demand Certificate"), appropriately completed and presented to the Bank as provided in paragraph 3 hereof. Multiple Payment Demand Certificates may be hereunder at any time on or before to the Stated Expiry Date. 3. All documents presented during regular business hours on a Business Day to the Bank in connection with any demand for payment under this Letter of Credit, as well as all notices and other communications to the Bank in respect hereof, shall be in writing, shall make specific reference to this Letter of Credit by number, shall be to the attention of the Bank's Standby Letter of Credit Department and shall either (i) be (Continued on Page Two) /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. personally delivered to the Bank at its office located at 333 South Beaudry Avenue, 19th Floor, Los Angeles, California 90017, (or at any other office of the Bank in the continental United States designed by the Bank by written notice delivered to the Beneficiary) or (ii) be sent to the Bank by tested telex or by facsimile transmission to the following number(s) (or to any number(s) designated by the Bank by written notice delivered to the Beneficiary), as applicable: Telex No. MCI 67652 (Answerback: BANKAMER SFO) Facsimile No. (213) 345-6694 4. The Bank hereby agrees that demands for payment made under and in compliance with the terms of this Letter of Credit will be duly honored by the Bank (from the Bank's own funds and not directly or indirectly from funds or other assets of the Account Party or any affiliate of the Account Party) upon presentation of the certificate specified in paragraph 2 hereof to the Bank as provided in paragraph 3 hereof on or before the Stated Expiry Date (as defined in paragraph 7 hereof) or such earlier termination of this Letter of Credit. The Stated Amount of this Letter of Credit at any time may be less than the aggregate amount owed in connection with a Payment Event to Beneficiary on any Security or Securities as calculated under the definition of "Payment Amount" under Section 8 of this Letter of Credit. If the Payment Amount requested at any time on or before to the Stated Expiry Date under any demand for payment by Beneficiary under this Letter of Credit exceeds, at the time of such demand for payment, the then Stated Amount available under this Letter of Credit then the Bank, provided such demand is in compliance with the terms of this Letter of Credit and subject to the terms of this Letter of Credit, shall pay such demand in an amount equal only to the then available Stated Amount of this Letter of Credit. If a demand for payment is made by the Beneficiary hereunder at or prior to 9:00 a.m. Los Angeles time, on a Business Day (as hereinafter defined), and if such demand for payment conforms to the terms and conditions hereof, payment shall be made for the lesser of the amount specified or the then Stated Amount available, in immediately available funds, by 5:00 p.m. Los Angeles time, on that Business Day of such presentation. If a demand for payment is made by the Beneficiary hereunder on a Business Day after 9:00 a.m., Los Angeles time, and if such demand for payment conforms to the terms and conditions hereof, payment shall be made for the less of the amount specified or the then Stated Amount available, in immediately available funds, by 1:00 p.m., Los Angeles time, on the following Business Day. Payment under this Letter of Credit shall be made by wire transfer or deposit to the (Name of Beneficiary) in the accounts specified in the certificate(s) delivered pursuant to paragraph 2 hereof. As used in this Letter of Credit, "Business Day" shall mean a day on which banks located in Los Angeles, California, are not required or authorized to remain closed. To the extent practical, the Beneficiary shall give the Bank at least one Business Day's advance written notice (such notice to be sent by facsimile transmission to the number set forth in paragraph 3 above) of the amount of each demand for payment, but failure of the Beneficiary to give such notice or any discrepancies between the amount or other information set forth in such notice from the amount or other information set forth in the certificate actually presented to the Bank shall in no way relieve, diminish or otherwise change the obligation of the Bank to honor properly submitted demands for payment under this Letter of Credit. (Continued on Page Three) /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. 5. Only the Beneficiary may make demands for payment under this Letter of Credit, and demands for payment under this Letter of Credit shall be presented directly to the Bank and not negotiated. Upon payment made hereunder of the lesser of the amount specified in a demand for payment or the then Stated Amount available, the Bank shall be fully discharged of its obligation under this Letter of Credit with respect to such demand for payment and the Bank shall not thereafter be obligated to make any further payments under this Letter of Credit in respect of such demand for payment. By paying the Beneficiary an amount demanded in accordance with this Letter of Credit, the Bank makes no representation as to the correctness of the amount demanded or of the calculations and representations of the Beneficiary. required by this Letter of Credit. 6. The Stated Amount shall be automatically reduced from time to time as follows: a. Upon demand for payment honored and paid by the Bank under this Letter of Credit, the Stated Amount shall be reduced by an amount equal to the amount of such demand; and b. Upon receipt by the Bank of the certificate of the Beneficiary in the form of Exhibit C hereto, the Stated Amount shall be permanently reduced by an amount equal to the amount specified in such certificate. 7. This Letter of Credit shall automatically terminate upon the earliest of (i) August 1st, 1995 (being called the "Stated Expiry Date), (ii) on the date that the Bank receives notification from the Beneficiary that this Letter of Credit has been replaced by a substitute letter of credit, or (iii) the Bank has paid a demand for payment accompanied by a certificate in the form of Exhibit B hereto where there will be no outstanding amount available under this Letter of Credit. Upon the expiration or termination of this Letter of Credit, the Beneficiary shall promptly return this Letter of Credit to the Bank for cancellation. Pursuant to the terms of the Reimbursement Agreement, the Bank, at the request of the Account Party, may give its written consent to periodic extensions of the Stated Expiry Date. The Bank shall deliver to the Beneficiary a certificate in the form of Exhibit D hereto evidencing such extension of the Stated Expiry Date. 8. As used in this Letter of Credit and the Certificates in the forms of Exhibit A through D hereto, the following capitalized terms shall have the following meanings: "Issuer" means the issuer or any successor to such issuer of any Security. "Par Amount" shall mean, with respect to any Security, an amount determined by multiplying the Par Amount the Par Amount of a particular Security by the Upper Limit Percentage and subtracting therefrom an amount equal to the greater of (i) either the amount of proceeds received by Beneficiary from the sale of a Security of Securities or the amount equal to the value resulting from a disposition through exchange, restructuring or other disposition of such Security or Securities or (ii) the Par Value of such Security multiplied by the Lower Limit Percentage. (Continued on Page Four) /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when documents are presented. "Payment Event" shall mean (i) a default in repayment to the Beneficiary of the principal amount on the original maturity of any Security by the Issuer thereof, and (ii) the Beneficiary's sale or disposition through exchange, restructuring or other disposition of any Security. "Lower Limit Percentage" shall mean, with respect to any Security, the percentage stated as the "Lower Limit Percentage" for any Security listed in Exhibit A. "Security" or "Securities" means any and all Securities listed in Exhibit A attached hereto. "Upper Limit Percentage" shall mean, with respect to any Security, the percentage stated as the "Upper Limit Percentage" for any Security listed in Exhibit A. 9. This Letter of Credit is subject to the Uniform Customs and Practice of Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No. 500 (the "Uniform Customs"); provided, however, that Article 41 of the Uniform Customs shall be disregarded. This Letter of Credit shall be deemed to be a contract made under the laws of the State of California, including without limitation, Article 5 of the Uniform Commercial Code as in effect in the State of California, and shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the Laws of the State of California, without regard to principles of conflicts of law. 10. This Letter of Credit sets forth in full the undertaking of the Bank, and such undertaking shall not be deemed in any way to be modified, amended amplified or otherwise affected by any document, instrument or agreement referred to herein except only the Uniform Customs and the certificate(s) provided for herein, and any such reference shall not be deemed to incorporate herein by reference any such document, instrument or agreement. /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. Exhibit A to Irrevocable Letter of Credit No. LASB-( ) --------------- LIST OF SECURITIES
Security Par Amount Upper Limit Lower Limit Percentage Percentage AS PER ATTACHED. /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. Schwab Money Market Fund Exhibit A to Irrevocable Letter of Credit No. LASB 222-63-0
EXHIBIT A LIST OF SECURITIES
Upper Limit Lower Limit Security Par Amount Percentage Percentage City of Irvine (Orange County, California) $47,455,000 98 65 Taxable Notes Series 1994 CUSIP#464607CE9 Final Maturity: 7/26/95 Orange County, California $41,500,000 65 40 Taxable Notes Series 1994-1995 CUSIP#684201EL6 Final Maturity: 7/10/95 Irvine Unified School District $46,375,000 90 65 1994 Taxable Notes CUSIP#463610HG3 Final Maturity: 6/13/95 Newport Mesa Unified School District $24,960,000 90 65 1994 Taxable Notes CUSIP#652113QU8 Final Maturity: 6/13/95 North Orange County Community College District $47,785,000 90 65 1994 Taxable Notes CUSIP#661334AE2 Final Maturity: 6/13/95 Orange County Board of Education $35,880,000 90 65 1994 Taxable Notes CUSIP#684215AJ5 Final Maturity: 6/13/95 Orange County Flood Control District 94-95 $46,375,000 95 65 CUSIP#684252EF2 Final Maturity: 8/1/95 City of Anaheim $55,000,000 98 65 Taxable Notes Series CUSIP#032537GN6 Final Maturity: 4/4/95 Fixed Coupon: 5%
/s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. Schwab California Tax-Exempt Money Fund Exhibit A to Irrevocable Letter of Credit No. LASB 222-63-1 EXHIBIT A LIST OF SECURITIES
Upper Limit Lower Limit Security Par Amount Percentage Percentage Orange County, California $39,890,000 95 65 Pooled Tax and Revenue Anticipation Notes Series 1994-95 CUSIP#684201EJ1 Fixed Coupon: 4.5% 7/28/95
/s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. [/FN] Schwab Tax-Exempt Money Fund Exhibit A to Irrevocable Letter of Credit No. LASB 222-63-2 EXHIBIT A LIST OF SECURITIES
Upper Limit Lower Limit Security Par Amount Percentage Percentage Orange County, California $74,160,000 90 65 Pooled Tax and Revenue Anticipation Notes Series 1994-95 CUSIP#684201FJ1 Fixed Coupon: 4.5% 7/28/95
/s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. Exhibit B to Irrevocable Letter of Credit No. LASB-(_________) FORM OF PAYMENT DEMAND CERTIFICATE TO: Bank of America National Trust and Savings Institution 333 S. Beaudry Ave., Los Angeles, Ca 90017 Attention: Standby Letter of Credit Department Re: Irrevocable Letter of Credit No. LASB-(_________) The undersigned hereby certificates to Bank of America National Trust and Savings Association (the "Bank"), with reference to Irrevocable Letter of Credit No. LASB-(________) (the "Letter of Credit") issued by the Bank in favor of (NAME OF FUND), a series of shares of beneficial interest of The Charles Schwab Family of Funds (the "Beneficiary") and for the account of your customer (the "Account Party"), that the undersigned is a duly authorized officer of the Beneficiary, that any capitalized term used but not defined herein shall have its respective meaning set forth in the Letter of Credit and that: 1. (NAME OF FUND), a series of shares of beneficial interest of The Charles Schwab Family of Funds is the Beneficiary under this Letter of Credit. 2. The Beneficiary hereby makes a demand for payment under the Letter of Credit in a Payment Amount equal to $__________. 3. The Beneficiary is demanding payment under the Letter of Credit because a Payment Event has occurred, specifically (Check One) ____ the Issuer has defaulted in the repayment of the principal amount at the original maturity of the Security or Securities; or ______ the Beneficiary has sold or disposed through an exchange, restructuring, or other disposition of the Security or Securities (Choose One) The amount received from such sale of the Security or Securities equals $_____ [or] The value of such Security or Securities at the time of such exchange, restructuring or disposition equals $_______. 4. The Payment Amount hereby demanded was computed in accordance with the terms and conditions of the Letter of Credit, but, in any event, the Payment Amount does not include any interest due and owing on any Security or Securities. 5. The Beneficiary hereby directs you to make payment of the payment Amount demanded hereunder [by deposit] [by wire transfer] to [Name of Beneficiary], ABA Number ______, Account Number _______, Attention: _______. In Witness whereof, the Beneficiary has executed and delivered this Certificate as of the _____ day of ____________. (NAME OF FUND), a series of shares of beneficial interest of The Charles Schwab Family of Funds By: ---------------------- Title: /s/ Ben Cortes /s/ Frantz Bellevue AUTHORIZED COUNTERSIGNATURE AUTHORIZED SIGNATURE PROVISIONS APPLICABLE TO THIS CREDIT: This credit is subject to the Uniform Customs and Practice for Documentary Credits, 1993 revision, International Chamber of Commerce Publication No. 500. Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the account party to arrange for an amendment. This procedure will facilitate prompt handling when doucments are presented. EX-11 10 EXHIBIT 11.1 EXHIBIT 11.1 THE CHARLES SCHWAB CORPORATION Computation of Earnings per Common Equivalent Share (In thousands, except per share amounts)
Year Ended December 31, 1994 1993 1992 ---- ---- ---- Income before extraordinary charge $135,343 $124,368 $81,228 Extraordinary charge - early retirement of debt 6,700 ------------------------------------------------------------------------------------------------ Net Income $135,343 $117,668 $81,228 ================================================================================================ Shares* Weighted average number of common shares outstanding 84,977 86,337 86,054 Common stock equivalent shares related to option plans 2,626 2,838 1,798 ------------------------------------------------------------------------------------------------ Weighted average number of common and common equivalent shares outstanding 87,603 89,175 87,852 ================================================================================================ Earnings per Common Equivalent Share* Income before extraordinary charge $1.54 $1.39 $.92 Extraordinary charge - early retirement of debt .07 ------------------------------------------------------------------------------------------------ Earnings per common equivalent share $1.54 $1.32 $.92 ================================================================================================
* Reflects the 1995 three-for-two common stock split. EX-12 11 EXHIBIT 12.1 EXHIBIT 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands, unaudited)
Year Ended December 31, 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Earnings before taxes on income and extraordinary charge $224,343 $206,272 $146,228 $ 88,097 $ 29,109 -------------------------------------------------------------------------------------------------------------- Fixed charges Interest expense 198,236 132,552 159,531 225,558 238,497 Interest portion of rental expense 17,102 15,428 13,314 10,531 8,855 -------------------------------------------------------------------------------------------------------------- Total fixed charges (a) 215,338 147,980 172,845 236,089 247,352 -------------------------------------------------------------------------------------------------------------- Earnings before taxes on income, extraordinary charge and fixed charges (b) $439,681 $354,252 $319,073 $324,186 $276,461 ============================================================================================================== Ratio of earnings to fixed charges (b) divided by (a)* 2.0 2.4 1.8 1.4 1.1 ============================================================================================================== Ratio of earnings to fixed charges as adjusted** 7.0 7.2 5.6 3.9 2.2 ============================================================================================================== * The ratio of earnings to fixed charges is calculated in a manner consistent with SEC requirements. For such purposes, "earnings" consist of earnings before taxes on income, extraordinary charge 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-13 12 EXHIBIT 13.1 EXHIBIT 13.1 The Charles Schwab Corporation 1994 Annual Report to Stockholders (only those portions specifically incorporated by reference into The Charles Schwab Corporation 1994 Annual Report on Form 10-K) The Charles Schwab Corporation Quarterly Financial Information (Unaudited) (In Millions, Except Per Share Data and Ratios)
----------------------------------------------------------------------------------------------------------------------------------- Weighted Earnings Dividends Average per Declared Range Range Expenses Common Common per of Common of Price/ Excluding Net Equivalent Equivalent Common Stock Price Earnings Revenues (a) Interest Income Shares Share Share per Share (b) Ratio (c) ------------------------------------------------------------------------------------------------------------------------------------ 1994 by Quarter Fourth $270.4 $214.4 $33.8 87.6 $.38 $.047 $24.67 - $18.42 16 - 12 Third 248.1 196.5 31.2 87.1 .36 .047 20.58 - 16.92 14 - 11 Second 258.2 205.1 32.1 87.5 .37 .047 22.58 - 16.50 16 - 12 First Dividend Increase 287.9 224.3 38.2 88.2 .43 .047 22.00 - 17.33 16 - 13 ------------------------------------------------------------------------------------------------------------------------------------ 1993 by Quarter Fourth $257.5 $212.3 $28.5 89.8 $.32 $.033 $25.58 - 19.17 19 - 15 Third 238.8 191.1 22.2 (d) 89.5 .25 (d) .033 24.75 - 17.83 18 - 13 Second Dividend Increase/ Stock Split 232.4 180.4 31.6 89.0 .35 .033 19.33 - 13.61 17 - 12 First 236.3 174.9 35.4 88.5 .40 .027 16.56 - 11.06 17 - 11 ------------------------------------------------------------------------------------------------------------------------------------ 1992 by Quarter Fourth $193.5 $148.2 $25.2 86.7 $.29 $.027 $12.39 - 7.39 13 - 8 Third 159.3 144.3 7.8 87.4 .09 .027 11.56 - 7.44 14 - 9 Second Dividend Increase 176.8 143.8 18.5 88.6 .21 .027 15.39 - 9.06 18 - 10 First 219.9 167.0 29.7 88.7 .33 .018 16.78 - 12.94 22 - 17 ------------------------------------------------------------------------------------------------------------------------------------ 1991 by Quarter Fourth Dividend Increase/ Stock Split $167.3 $138.6 $16.1 88.4 $.18 $.018 $14.94 - 8.82 26 - 16 Third Dividend Increase 147.4 122.9 13.2 88.1 .15 .015 9.26 - 7.37 23 - 19 Second 128.9 112.3 9.5 87.7 .11 .012 7.37 - 5.26 23 - 16 First 126.1 107.7 10.6 87.5 .12 .012 6.07 - 3.37 23 - 13 ------------------------------------------------------------------------------------------------------------------------------------ 1990 by Quarter Fourth Dividend Increase $ 93.9 $ 92.1 $ 1.0 87.7 $.01 $.012 $ 4.04 - 3.37 22 - 18 Third 103.9 91.3 7.2 90.2 .08 .009 4.89 - 3.15 21 - 13 Second 96.7 88.4 4.8 92.8 .05 .009 5.15 - 4.37 25 - 21 First 92.9 86.5 3.7 92.5 .04 .009 5.30 - 3.93 26 - 20 ==================================================================================================================================== All share and per share data have been restated to reflect the 1995, 1993 and 1991 three-for-two common stock splits. (a) Revenues are presented net of interest expense. (b) Represents New York Stock Exchange high and low range of common stock price per share. (c) Price/Earnings Ratio is computed by dividing the high and low market prices by earnings per share for the 12-month period ended on the last day of the quarter presented. The extraordinary charge in 1993 (described below) has been excluded. (d) Net income and earnings per share are net of the effect of a $6.7 million ($.07 per share) extraordinary charge on the early retirement of debt.
1 The Charles Schwab Corporation Selected Financial and Operating Data (In Millions, Except Per Share Amounts and as noted)
----------------------------------------------------------------------------------------------------------------------------- Growth Rates (1) --------------------- Compounded Annual ---------- ------ 5-Year 1-Year 1989-1994 1993-1994 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------------- Operating Results (for the year) Revenues Commissions 19% (1%) $ 546 $ 552 $441 $349 $244 Interest revenue, net of interest expense (2) 20% 37% 165 120 92 77 71 Principal transactions (3) (4%) 163 169 130 63 4 Mutual fund service fees 40% 59% 157 99 63 54 46 Other 11% 36% 34 25 24 27 22 ------------------------------------------------------------------------------------------------------------------------------ Total 25% 10% 1,065 965 750 570 387 ------------------------------------------------------------------------------------------------------------------------------ Expenses excluding interest Compensation and benefits 27% 11% 437 393 307 234 155 Communications 23% 13% 107 94 76 57 42 Occupancy and equipment 21% 14% 88 77 65 51 43 Depreciation and amortization 1% 23% 55 44 40 52 49 Other 22% 3% 154 150 116 88 69 ------------------------------------------------------------------------------------------------------------------------------ Total 22% 11% 841 758 604 482 358 ------------------------------------------------------------------------------------------------------------------------------ Income before taxes on income and extraordinary charge 47% 9% 224 207 146 88 29 Taxes on income 44% 9% 89 82 65 39 12 ------------------------------------------------------------------------------------------------------------------------------ Income before extraordinary charge 48% 9% 135 125 81 49 17 Extraordinary charge - early retirement of debt 7 ------------------------------------------------------------------------------------------------------------------------------ Net income 48% 15% $ 135 $ 118 $ 81 $ 49 $ 17 ============================================================================================================================== Earnings per common equivalent share (4) Income before extraordinary charge 50% 11% $1.54 $1.39 $.92 $.56 $.18 Extraordinary charge - early retirement of debt .07 ------------------------------------------------------------------------------------------------------------------------------ Earnings per common equivalent share 50% 17% $1.54 $1.32 $.92 $.56 $.18 ============================================================================================================================== Dividends declared per common share (4) 47% 49% $.188 $.126 $.099 $.057 $.039 ============================================================================================================================== Other (at year end) Total assets 18% 15% $7,918 $6,897 $5,905 $5,026 $4,188 Long-term and subordinated borrowings 6% (8%) 171 185 152 119 126 Stockholders' equity 22% 23% 467 379 259 200 154 Book value per common share (4) 22% 25% 5.47 4.37 3.04 2.31 1.87 ============================================================================================================================== Other (for the year) Return on stockholders' equity (1) 32% 37% 35% 29% 10% Revenue growth 10% 29% 32% 47% 12% Pre-tax profit margin 21% 21% 20% 15% 8% After-tax profit margin 13% 12% 11% 9% 4% Effective income tax rate 40% 40% 44% 44% 42% ============================================================================================================================== Weighted average number of common and common equivalent shares (4) 88 89 88 88 91 ============================================================================================================================== (1) Growth rates and return on stockholders' equity are not presented in cases where deemed not meaningful. (2) Interest revenue is presented net of interest expense. Interest expense for 1990 through 1994 was (in millions): $238, $225, $159, $132 and $198, respectively. (3) On July 1, 1991, the Company acquired Mayer & Schweitzer, Inc., whose operating results have been consolidated with those of the Company since the acquisition. (4) All share and per share data have been restated to reflect the 1995, 1993 and 1991 three-for-two common stock splits. Certain prior years' revenues and expenses have been reclassified to conform to the 1994 presentation.
2 Management's Discussion and Analysis of Results of Operations and Financial Condition DESCRIPTION OF BUSINESS The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide brokerage and related investment services to customers with 3.0 million active (a) accounts and assets that totaled $122.6 billion at December 31, 1994. CSC's principal subsidiary, Charles Schwab & Co., Inc. (Schwab), serves an estimated 42% of the discount brokerage market as measured by commission revenues. Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities acquired by CSC in 1991, provides trade execution services to broker-dealers and institutional customers. During 1994, orders handled by M&S totaled over 5 billion shares, or over 6% of the total shares traded on Nasdaq. With a network of 208 branch offices, Schwab is physically represented in 46 states, the Commonwealth of Puerto Rico and the United Kingdom. Schwab maintains four regional customer telephone service centers that handle customer calls and orders. Schwab's touch-tone telephone trading service, TeleBroker (registered trademark), provides customers access to Schwab on a 24-hour basis. These complementary customer service delivery systems - branches, telephone centers and on-line services - allow Schwab to achieve its customer service quality standards in a cost- competitive manner. Collectively, these systems handled over 68 million calls and over 11 million trades during 1994. The Company has historically used discount pricing as a tactic in its efforts to gain market share and enhance the value of its services. In recent years, Schwab has introduced additional price- competitive product offerings such as its No-Annual-Fee IRA, its Mutual Fund OneSource (trademark) service and its Schwab 500 Brokerage (trademark) service, which includes commission discounts from Schwab's standard rates. Management expects to continue to use this value-pricing philosophy in the marketing of new products and services. Environmental factors influencing the Company's performance include fundamentally cyclical financial markets, and heavy competition from full commission and discount brokerage firms, as well as from mutual fund companies. Increasingly, competition has come from institutions other than brokerage firms as banks, insurance companies and others expand their product lines. Such competition may negatively impact the Company's ability to maintain historic profit margins and increase market share. The significant growth during 1994 of asset-based revenues such as mutual fund service fees and net interest revenue has enhanced the consistency of the Company's revenue streams and provided an ability to cover a greater proportion of fixed expenses. However, transaction-based revenues continue to represent the majority of the Company's revenues. Since these revenues are heavily influenced by fluctuations in the volume of securities transactions, it is not unusual for the Company to experience significant variations in quarterly revenue levels. Most of the Company's expenses do not vary directly, at least in the short term, with fluctuations in securities trading volume. This combination of primarily variable revenue streams and a primarily nonvariable cost structure can result in increased profitability with rapid increases in revenue and reduced profitability (or losses) with rapid reductions in revenue. These factors, along with the environmental factors discussed above, may subject the Company's future earnings and common stock price to significant volatility. The Company's long-term performance objectives call for profitable growth within several markets of the financial services industry - retail brokerage, mutual funds, equity securities market-making and support services for independent investment managers. The Company's strategy for achieving its objectives continues to be effective investment in technology, product development, marketing programs and customer service delivery systems. It is management's goal to increase the value of the Company by achieving over the long term a 20% annual revenue growth rate while maintaining a 10% after-tax profit margin and a 20% return on stockholders' equity. (CHART OMITTED) RESULTS OF OPERATIONS SUMMARY The financial markets experienced significant volatility during 1994, creating a difficult environment for investors. The Federal Reserve repeatedly increased short-term interest rates, which contributed to the largest single year decline in bond values in a decade. The Standard & Poor's 500 Index reached a record high of 482 in February, a low of 439 in April and ended the year down 2%. The combined daily average share volume of the New York Stock Exchange and Nasdaq increased 11% from 1993 to 586 million shares. (CHART OMITTED) Despite these factors, trading activity at Schwab reached record levels during 1994, with daily average retail trades, which include Mutual Fund OneSource (trademark) trades, reaching 43,500, an increase of 23% over 1993. Revenues of $1.1 billion in 1994 represent the Company's fifth consecutive year of record revenues, up 10% from 1993. This increase reflects gains in mutual fund service fees and net interest revenue, partially offset by decreases in (a) Accounts with balances or activity within the preceding twelve months. 3 commission and principal transaction revenues. The Company's annual revenue growth was less than management's long-term goal of 20%. In response to this slowed revenue growth, management implemented certain cost reduction measures that mitigated the impact of slowed revenue growth on net income. The Company's strong performance was also reflected in a $26.8 billion, or 28%, increase in customer assets. Earnings in 1994 were $135 million, or $1.54 per share, up from $118 million, or $1.32 per share, in 1993, after a $.07 per share extraordinary charge for early debt retirement, and $81 million, or $.92 per share, in 1992. Share information throughout this report has been restated to reflect the three-for-two common stock split, effected in the form of a 50% stock dividend, declared January 17, 1995 and payable March 1, 1995 to stockholders of record February 1, 1995. The after-tax profit margin for 1994 was 13%, which exceeded the Company's long-term goal of 10%. Return on stockholders' equity was 32% in 1994, well above the Company's long-term goal of 20%. Reflecting these strong results, the Company's Board of Directors declared a cash dividend increase during January 1995, raising the effective annual dividend rate 29% to $.240 per share from the $.188 per share rate established in January 1994. (CHART OMITTED) During 1994, the Company continued to invest in technology, product and service enhancements, marketing programs and new customer service facilities. This contributed to an 11% increase in noninterest expenses, which totaled $840 million. With customer trading activity up 23% over 1993, the Company increased its servicing capacity by opening 10 branch offices, including its first branch office in the Commonwealth of Puerto Rico, and its fourth regional customer telephone service center. In addition, Schwab commenced operation of five specialists' posts on the Pacific Stock Exchange. These posts make markets in over 240 common stocks. The Company expects to continue to expand its capacity to provide principal execution services to customers. (CHART OMITTED) REVENUES Commissions Commission revenues were $546 million in 1994, compared to $552 million in 1993 and $441 million in 1992. Commission revenues are affected by the number of customer accounts that traded, the average number of transactions per account that traded and the average commission per transaction. Schwab operates in an agency capacity when executing commission transactions. (CHART OMITTED) Retail agency commission revenues constituted over 95% of total commissions in each of the last three years. Remaining commissions represent business done with institutional customers. Commissions earned on retail agency trades totaled $523 million in 1994, compared to $531 million in 1993 and $427 million in 1992. The daily average retail agency trade level for such commissions was 28,900 in 1994, 27,700 in 1993 and 22,000 in 1992. The following table shows a comparison of certain factors that influence retail agency commission revenues:
---------------------------------------------------------------- 1994 1993 1992 ---------------------------------------------------------------- Number of customer accounts that traded during the year (in thousands) 1,352 1,227 1,046 Average number of retail agency transactions per account that traded 5.4 5.7 5.4 Total number of retail agency transactions (in thousands) 7,282 7,003 5,599 Average commission per retail agency transaction $71.88 $75.89 $76.30 Total retail agency commission revenues (in millions) $523 $531 $427 ----------------------------------------------------------------
Note: The above table excludes customer transactions in Schwab's Mutual Fund OneSource (trademark) service. From 1992 to 1994, the total number of retail agency transactions executed by Schwab has increased as Schwab's customer base has grown. From 1993 to 1994, average commission per retail agency transaction decreased $4.01 as the proportion of trades in lower commission per transaction products, such as mutual funds, has increased. This was primarily the result of Schwab's success in attracting customer mutual fund business. Strong price competition, particularly with respect to customer equity securities transactions, which yield a higher average commission per trade also contributed to the decrease. The effect of the increase in the total number of retail agency transactions on retail agency commission revenues for 1994 was offset entirely by the decrease in average commission per retail agency transaction. From 1992 to 1993, average commission per retail agency transaction decreased $.41 primarily due to a higher proportion of mutual fund transactions, and a higher proportion of trades placed through TeleBroker (registered trademark), which provides users a 10% commission discount. The effect of the increase in the total number of retail agency transactions on retail agency commission revenues for 1993 was offset partially by the decrease in average commission per retail agency transaction. 4 Attracting new customer accounts is important in generating commission revenues. Schwab opened 736,000 new customer accounts during 1994, up 4% and 31%, respectively, over account openings of 706,000 in 1993 and 562,000 in 1992. Interest Revenue, Net of Interest Expense The Company presents interest revenue net of interest expense in its financial statements. This presentation eliminates the impact of market interest rate fluctuations on total revenues, thereby providing a clearer view of the Company's performance in the areas of attracting and investing customer cash balances and managing its balance sheet. In performing its role as clearing broker for its customers' trading activity, Schwab holds cash balances payable to customers. In most cases, Schwab pays its customers interest on such cash balances awaiting investment, and may invest these funds and earn interest revenue. Schwab also may lend these funds to customers on a secured basis to purchase qualified securities - a practice commonly known as "margin lending." Pursuant to Securities and Exchange Commission (SEC) regulations, customer cash balances that are not used for margin lending are segregated into investment accounts that are maintained for the exclusive benefit of customers. When investing segregated customer cash balances, the Company must adhere to SEC regulations that restrict investments to 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 resale agreements collateralized by qualified securities. The Company's policies for credit quality and maximum maturity requirements are more restrictive than these SEC regulations. Investment information for the last three years is as follows:
----------------------------------------------------------- 1994 1993 1992 ----------------------------------------------------------- Investment composition (in billions at year end) Resale agreements $3.8 $3.3 $3.0 Certificates of deposit .2 .2 .2 U.S. Treasuries .1 .3 Average maturity of investments (in days) During the year 54 71 78 At year end 37 69 53 -----------------------------------------------------------
Interest revenue net of interest expense reached a record $165 million in 1994, compared to $120 million in 1993 and $92 million in 1992 as shown in the following table (in millions):
---------------------------------------------------------- 1994 1993 1992 ---------------------------------------------------------- Interest Revenue Investments, customer-related $168 $113 $140 Margin loans to customers 185 132 104 Other 10 7 7 ---------------------------------------------------------- Total 363 252 251 ---------------------------------------------------------- Interest Expense Customer cash balances 178 115 141 Long-term and subordinated borrowings 12 12 13 Other 8 5 5 ---------------------------------------------------------- Total 198 132 159 ---------------------------------------------------------- Interest Revenue, Net of Interest Expense $165 $120 $ 92 ==========================================================
The Company's interest-earning assets (principally investments and margin loans to customers) are financed primarily by interest- bearing customer cash balances. Other funding sources include noninterest-bearing customer cash balances, proceeds from stock lending activities, long-term borrowings and stockholders' equity. Average balances and interest rates on customer-related, interest-earning assets and related funding sources are summarized as follows (dollars in millions):
--------------------------------------------------------------------------- 1994 1993 1992 --------------------------------------------------------------------------- Earning Assets (customer-related): Investments: Average balance outstanding $3,957 $3,469 $3,460 Average interest rate 4.26% 3.25% 4.05% Margin loans to customers: Average balance outstanding $2,742 $2,212 $1,619 Average interest rate 6.74% 5.99% 6.45% Average yield on earning assets 5.28% 4.32% 4.82% Funding Sources (customer-related and other): Interest-bearing customer cash balances: Average balance outstanding $5,472 $4,693 $4,313 Average interest rate 3.25% 2.44% 3.27% Other interest-bearing sources: Average balance outstanding $ 353 $ 275 $ 206 Average interest rate 2.94% 3.30% 4.93% Average noninterest-bearing portion $ 874 $ 713 $ 560 Average interest rate on funding sources 2.81% 2.18% 2.97% Summary: Average yield on earning assets 5.28% 4.32% 4.82% Average interest rate on funding sources 2.81% 2.18% 2.97% ---------------------------------------------------------------------------- Average net interest margin 2.47% 2.14% 1.85% ============================================================================
Interest revenue from customer-related investments increased $55 million from 1993 to 1994 due to a 101 basis point increase in the average interest rate earned on such investments. This increase was slightly greater than the 100 5 basis point increase in the Donoghue Taxable Money Fund Average (the Donoghue Average) during 1994. Interest revenue from customer-related investments decreased $27 million from 1992 to 1993 as a result of an 80 basis point decline in the average interest rate earned on such investments. This decline was greater than the 67 basis point decline in the Donoghue Average during 1993. Interest earned on margin loans to customers increased $53 million from 1993 to 1994 as average margin loan balances increased 24% and the average interest rate earned on such balances increased 75 basis points. Despite a 46 basis point decline in the average interest rate earned on margin loans to customers, interest earned on such balances increased $28 million from 1992 to 1993 as average margin loan balances increased 37%. The growth in margin loan balances from 1992 to 1994 is attributable to a more active trading environment and an increase in the number of customer margin accounts. During 1994, interest expense on customer cash balances increased $63 million due to an 81 basis point increase in the average interest rate paid on these balances and a 17% increase in the average balance outstanding. Interest expense on customer cash balances decreased $26 million during 1993 as a result of an 83 basis point decline in the average interest rate paid on such balances, partially offset by a 9% increase in the average balance outstanding. Principal Transactions Principal transactions include net gains from market-making activities in Nasdaq securities and markups on customer fixed income security trades. Factors that influence principal transactions include the volume of customer trades and market price volatility. During 1994, a record 74 billion shares traded on Nasdaq and the Nasdaq Composite Index decreased 3%. Revenues from principal transactions were $163 million in 1994, compared to $169 million in 1993 and $130 million in 1992. The 4% decrease from 1993 to 1994 was due to a lower average revenue per principal transaction from market-making activities in 1994. A portion of this decrease is attributable to the impact of the July 1994 National Association of Securities Dealers (NASD) 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. The 30% increase from 1992 to 1993 was primarily due to an increase in trading volume handled by M&S. As a market maker in Nasdaq securities, M&S generally executes customer trades as principal. M&S business practices call for competitively priced customer executions, generally defined as the highest bid price on a sell order and the lowest offer price on a buy order available through NASD member firms. Customer trades exceeding certain sizes are executed on a negotiated basis. Substantially all Nasdaq security trades originated by the customers of Schwab are directed to M&S. Mutual Fund Service Fees The Company earns mutual fund service fees for providing services, such as reporting of share ownership and dividend activity, administration and investment management, to its proprietary and certain third-party mutual funds. These fees are based upon daily balances of customer assets invested in the funds. Revenues received from customer purchase and sale transactions of mutual funds are included in commission revenues. The Company currently does not charge commissions on purchases and sales of its proprietary funds. Mutual fund service fees were $157 million in 1994, compared to $99 million in 1993 and $63 million in 1992. The increases from 1992 to 1994 were primarily attributable to significant increases in customer assets in Schwab's proprietary funds, collectively referred to as the SchwabFunds (registered trademark), and customer assets in funds purchased through Schwab's Mutual Fund OneSource (trademark) service. The SchwabFunds include money market funds, bond funds and equity index funds. Schwab customers may elect to have cash balances in their brokerage accounts automatically invested in certain SchwabFunds money market funds. This feature provides a significant competitive advantage to SchwabFunds money market funds as uninvested customer cash is swept into these funds on a regular basis. Customer assets invested in the SchwabFunds, the majority of which are in SchwabFunds money market funds, were $23.3 billion at the end of 1994, $15.8 billion at the end of 1993 and $11.4 billion at the end of 1992. During July 1992, Schwab introduced nationally its no- transaction-fee mutual fund service, known as the Mutual Fund OneSource service, which at December 31, 1994, enabled customers to trade 280 mutual funds in 28 well-known fund families without incurring transaction fees. The service is particularly attractive to investors who execute mutual fund trades directly with multiple mutual fund companies to avoid brokerage transaction fees and achieve investment diversity among fund families. Fees received by Schwab via the Mutual Fund OneSource program are based on daily balances of customer assets invested in the participating funds through Schwab and are paid by the funds and/or fund sponsors. Customer assets held by Schwab that have been purchased through the Mutual Fund OneSource service, excluding Schwab's proprietary funds, totaled $12.5 billion at December 31, 1994, $8.3 billion at December 31, 1993 and $1.8 billion at December 31, 1992. Other Revenues Other revenues include IRA maintenance fees, other brokerage fees, sales and usage fees and revenues relating to Schwab's affinity credit card arrangement. These revenues totaled $34 million during 1994, compared to $25 million in 1993 and $23 million in 1992. The 36% increase from 6 1993 to 1994 represented higher IRA maintenance fees and increased sales of StreetSmart (trademark) and Equalizer (registered trademark), Schwab's on- line trading software products, partially offset by a decrease in revenues from Schwab's affinity credit card arrangement. During 1993, Schwab terminated its affinity credit card arrangement with a bank service provider and entered into a new affinity credit card arrangement with another provider. Schwab received a payment in connection with the termination of the arrangement in 1993, which represented substantially all of the increase in other revenues from 1992 to 1993. During 1992, the Company introduced its No-Annual-Fee IRA, which is available to existing and prospective customers with IRA balances of $10,000 or more. The Company had previously charged an annual account fee on virtually all IRAs. Management believes that, over the long term, increases in commissions, principal transactions and mutual fund service fees generated by new customer accounts and assets attracted by the IRA program will eventually exceed the related foregone annual-fee revenue. IRA openings increased 6% in 1994 and 43% in 1993 over the respective preceding year's level. (CHART OMITTED) EXPENSES Compensation and Benefits Compensation and benefits expense includes salaries and wages, variable compensation, and related employee benefits and taxes. The Company provides its employees with compensation programs that contain variable pay components that are tied to the achievement of the Company's financial objectives and growth in customer assets and, therefore, a portion of compensation and benefits expense will fluctuate with these measures. Compensation and benefits expense was $437 million for 1994, compared to $393 million in 1993 and $307 million in 1992. The Company had approximately 6,500 employees and contractors at the end of both 1994 and 1993, and 4,600 at the end of 1992. These amounts include full-time employees and full-time equivalents for part-time and temporary employees, as well as persons employed on a contract basis. Increases in compensation and benefits expense between 1992 and 1994 were generally the result of increases in salaries and wages due to the larger average number of employees necessary to support expansion of the Company's branch office network, regional customer telephone service centers, technology and marketing programs, and the development of new products and services. In 1994, the increase in salaries and wages was offset partially by a decline in variable compensation. In 1993, an increase in variable compensation also contributed to the overall increase in compensation and benefits. The Company encourages and provides mechanisms for employee ownership of the Company's common stock through its profit sharing and employee stock ownership plan, its stock option plans and an automatic investment plan. The Company's overall compensation structure is intended to attract, retain and reward highly qualified employees and to align the interests of employees with those of stockholders. Management, employees and their families own directly and through the Company's profit sharing and employee stock ownership plan approximately 45% of the Company's outstanding common stock at December 31, 1994. In addition, management and employees held options to purchase common stock, which are not considered outstanding for ownership purposes, representing an additional 10% of the Company's outstanding common stock at December 31, 1994. (CHART OMITTED) Communications Communications expense, including telephone, postage, and news and quotation charges, was $107 million for 1994, $94 million in 1993 and $76 million in 1992. The increase in communications expense between 1992 and 1994 primarily resulted from higher customer transaction volumes. Increases in customer use of toll- free telephone numbers, reflecting a higher proportion of incoming calls handled by TeleBroker (registered trademark) and regional customer telephone service centers, also contributed to higher telephone expenses over this period. Occupancy and Equipment Occupancy and equipment expense includes the costs of leasing and maintaining the Company's headquarters, four regional customer telephone service centers, a primary data center and 208 branch offices. It also includes lease and rental expenses on computer and other equipment. Occupancy and equipment expense was $88 million for 1994, compared to $77 million in 1993 and $65 million in 1992. This trend reflects the Company's continued growth and expansion. The Company opened a regional customer telephone service center in each of 1994 and 1992 while, in 1993, it opened its new primary data center in Phoenix. Schwab opened 10 new branch offices in 1994, 23 in 1993 and 17 in 1992. Depreciation and Amortization Depreciation and amortization expense includes that relating to equipment and office facilities, property, leasehold improvements and customer lists. Such expenses were $55 million for 1994, compared to $44 million in 1993 and $40 million in 1992. The increases from 1992 to 1994 were primarily due to newly acquired data processing related assets and leasehold improvements which increased the Company's customer service capacity and fixed asset base from the respective preceding year's level. Commissions, Clearance and Floor Brokerage Commissions, clearance and floor brokerage expense includes fees paid to stock and option exchanges for trade 7 executions, fees paid by M&S to broker-dealers for orders received for execution and fees paid to clearing entities for trade processing. Commissions, clearance and floor brokerage expense was $49 million in 1994, $43 million in 1993 and $32 million in 1992. The increases from 1992 to 1994 were primarily attributable to increases in the number of trades processed by Schwab and M&S and increases in the average per share paid for orders received. Advertising and Market Development Advertising builds the image and awareness of the firm and plays a crucial role in obtaining new customer accounts, which have represented an important source of revenue and revenue growth for the Company. Advertising and market development expense includes television, print and direct mail advertising expenses and related production, printing and postage costs. Such expenses totaled $36 million in 1994, $41 million in 1993 and $34 million in 1992. The 11% decrease from 1993 to 1994 was primarily a result of the Company's reduced spending on network and cable television advertising and printed marketing materials. The 20% increase from 1992 to 1993 was a result of increases in the Company's promotional spending for its brand image and costs relating to new product offerings such as Schwab's No-Annual-Fee IRA and Mutual Fund OneSource (trademark) service. Professional Services Professional services expense was $22 million in 1994, $22 million in 1993 and $14 million in 1992. This category includes the cost of consultants engaged to support product, service and systems development, and legal and accounting fees. The 55% increase in professional services expense from 1992 to 1993 was primarily due to increases in consulting fees relating to various company development projects - including those involving data processing, business processes and marketing research. Other Expenses Other expenses were $47 million for 1994, $44 million in 1993 and $35 million in 1992. Other expenses include travel and entertainment, errors and bad debts, bank service charges (primarily relating to costs of processing checks written by customers), registration fees for employees and other miscellaneous expenses. The increase in these expenses from 1992 to 1993 was primarily attributable to a combination of higher staffing levels required to support the Company's growth and to higher transaction volumes. Taxes on Income Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes. The adoption of this accounting standard did not have a material impact on the Company's financial position or results of operations. The Company's effective income tax rate was 39.7% in both 1994 and 1993, and 44.5% in 1992. The decline in the effective income tax rate during 1993 was primarily due to changes in the anticipated tax effects of the amortization of certain intangible assets (see discussion below). 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). A trial is scheduled for August 1995. The asserted additional tax of $19 million (after initial settlement stipulations), excluding interest, arises from the IRS' audit of the tax periods ended March 31, 1988 and December 31, 1988. The majority of the asserted additional tax relates to the deductions claimed by the Company for amortization of intangible assets received in the Company's 1987 acquisition of Schwab. The resolution of the contested issues may also affect the Company's taxable years ended December 31, 1989 through 1994. Of the $19 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 CSC is operated as a holding company, conducting virtually all business through its wholly owned subsidiaries. The capital structure among CSC and its subsidiaries is designed to provide each entity with capital and liquidity consistent with its operating plan. A description of significant aspects of this structure for CSC and its two principal subsidiaries, Schwab and M&S, follows. 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 (the majority of which are segregated for the exclusive benefit of customers pursuant to regulatory requirements) and receivables from customers and brokers. 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 business days. Liquidity needs relating to customer trading and margin 8 borrowing activities are met primarily through cash balances in customer accounts, which totaled $6.7 billion in 1994, $5.7 billion in 1993 and $5.1 billion in 1992. 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 1996, of which $99 million was outstanding at December 31, 1994. At year end, Schwab also had outstanding $25 million in fixed-rate subordinated term loans from CSC maturing in 1996. In January 1995, the maturity date for $15 million of the $25 million debt scheduled to mature in 1996 was extended to 1997. Borrowings under these subordinated lending arrangements qualify as regulatory capital for Schwab. For use in its brokerage operations, Schwab maintains uncommitted bank credit lines totaling $480 million, of which $400 million is available on an unsecured basis. The need for short-term borrowings arises primarily from timing differences between cash flow requirements and the scheduled liquidation of interest-bearing investments, or, if applicable, the release of funds from required regulatory reserves. Schwab used such borrowings for 29 days in 1994, 25 days in 1993 and 42 days in 1992, with the daily amounts borrowed averaging $43 million, $19 million and $24 million, respectively. These lines were unused at December 31, 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 receivables from brokers, dealers and clearing organizations, cash and equivalents and marketable securities. M&S may borrow up to $10 million under a subordinated lending arrangement with CSC. Borrowings under this arrangement qualify as regulatory capital for M&S. This 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 unsecured advances or loans to their parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of their minimum dollar amount requirement of $1 million. At December 31, 1994, Schwab had $315 million of net capital (10% of aggregate debit balances), which was $254 million in excess of its minimum required net capital. At December 31, 1994, M&S had $5 million of net capital (206% of aggregate debit balances), which was $4 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. CSC has individual liquidity needs that arise from its $170 million Senior Medium-Term Notes, Series A (Medium-Term Notes). In 1993, CSC used proceeds from certain of the Medium-Term Notes to prepay its 10% Senior and 9% Junior Subordinated Debentures totaling $116 million and to pay a related prepayment premium of approximately $11 million. The 10% Senior and 9% Junior Subordinated Debentures had been due in 1998 and 2002, respectively. The remaining proceeds were used for general corporate purposes. The Medium-Term Notes have maturities ranging from two to nine years and fixed interest rates ranging from 4.95% to 7.72% with interest payable semiannually. In April 1994, a prospectus supplement covering the issuance of up to $100 million in Senior or Senior Subordinated Medium-Term Notes, Series A, pursuant to a registration statement, was filed with the SEC. Currently, $80 million in securities remain unissued under the registration statement. In October 1994, CSC prepaid its $35 million Senior Term Loan due in March 1995 using working capital funds. When the loan was prepaid, a related interest rate exchange arrangement was terminated. CSC may borrow under its $225 million committed unsecured credit facility with a group of eleven banks through June 1995. The funds are available for general corporate purposes and CSC pays a commitment fee on the unused balance. The terms of this 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 facility has never been used. In December 1994, a $100 million letter of credit facility was established by CSC with a commercial bank to issue letters of credit (LOCs) to three of the SchwabFunds (registered trademark) money market funds in connection with the bankruptcies of Orange County, California and the Orange County investment pool. CSC has agreed to reimburse the bank for any payments made under the LOCs, and to leave unutilized as much as $100 million of its $225 million credit facility. The LOC facility was voluntarily established by CSC as a precautionary measure to provide independent support for the valuation of certain securities held by the funds. These securities were issued by municipalities that participated in the investment pool maintained by Orange County and, in one case, represent a direct obligation of Orange County. Although the issuers, other than Orange County, have not filed for bankruptcy, their ability to repay obligations in a timely manner may be affected by shortfalls, if any, of 9 amounts scheduled to be received from investments in the Orange County investment pool. At December 31, 1994, LOCs totaling $58.5 million were outstanding under this facility. The funds may make demands for payments under the LOCs if the issuers of certain municipal securities held by the funds fail to pay a specified percentage of the principal amount of the securities when due or if the proceeds received by the funds in the disposition of any such securities are less than a specified percentage of the principal amount of the securities. The funds will absorb losses of principal amounts of the securities, if any, at disposition or maturity for each security up to a specified percentage. The LOCs expire and the securities mature on or before August 1, 1995 and pertain to securities held by each of the three money market funds at December 31, 1994 as follows: for the first fund, $340.0 million aggregate principal amount, representing 3.01% of the fund's net assets, is covered in part by a $28.0 million LOC; for the second fund, $74.2 million aggregate principal amount, representing 2.44% of the fund's net assets, is covered in part by an $18.5 million LOC; for the third fund, $39.9 million aggregate principal amount, representing 3.06% of the fund's net assets, is covered in part by a $12.0 million LOC. To date, the LOCs have not been needed to maintain the funds' $1 per share net asset values. At December 31, 1994, had the funds disposed of all the specified securities at values provided by the funds' pricing service, the funds would have had the right to make demands for payments on the bank totaling approximately $9 million. These values may not be representative of market values in effect at December 31, 1994. Whether, or to what extent, the funds would make any demands for payments under the LOCs is dependent upon factors such as the issuers' cash flows, the issuers' capacity for the normal financing of their operations and the timely resolution of the obligations of Orange County and the Orange County investment pool. Accordingly, management is currently unable to determine whether, or to what extent, the funds would make any demands for payment under the LOCs. (CHART OMITTED) Cash Flows Net cash provided by operating activities was $206 million during 1994, up from $132 million in 1993, allowing the Company to finance the majority of its growth with internally generated funds. During 1994, the Company invested $32 million in various capital expenditures including a fourth regional customer telephone service center and enhancements to its data processing and telecommunications systems. The Company also opened 10 branch offices and made improvements to certain existing office facilities. In addition, during 1994, the Company: - Issued $20 million in Medium-Term Notes. - Prepaid its $35 million Senior Term Loan due in March 1995. - Repurchased 2,499,600 shares of its common stock for $47 million. As of December 31, 1994, authorization granted by the Company's Board of Directors allowed for the repurchase of up to 912,900 additional shares. The Company will continue to monitor opportunities to repurchase common stock in cases where stockholder value would be enhanced. - Paid common stock dividends of $16 million. Capital Adequacy The Company's stockholders' equity at December 31, 1994 totaled $467 million. In addition to its equity, the Company had long- term borrowings of $171 million that bear interest at a weighted average rate of 6.04%. These borrowings, together with the Company's equity, provided total financial capital of $638 million at December 31, 1994. (CHART OMITTED) 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 December 31, 1994, such ratio was 17 to 1 compared to 18 to 1 at December 31, 1993. Over 96% 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 stockholders' equity could support up to $4.9 billion of additional assets relating to customer activity. LOOKING AHEAD The general financial success within the securities industry over the past several years has strengthened existing competitors and attracted new competitors such as banks and insurance companies. Management expects intense competition to continue in 1995. The Company will respond to such competition by continuing to invest heavily in technology, customer service facilities and product development. To help ensure effective use of resources, the Company will continue to focus on improving its internal business processes with the goal of enhancing customer service quality and the Company's cost structure. The Company will continue to leverage cross-marketing opportunities within its existing customer base and develop new products and services consistent with evolving customer needs and its competitive-pricing philosophy. The Company will continue to support its products and services with aggressive marketing and promotional efforts. In 10 1994's challenging environment, the Company added over $26 billion in customer assets and plans to do as well in 1995. The Company intends to enhance customer service capacity by adding 20 to 25 branch offices and by adding additional staff and equipment to existing regional customer telephone service centers. While these activities require significant operating expense outlays and, during certain years, significant capital expenditures, they are important investments for the Company's long-term profitable growth. Management's financial goals are to achieve over the long term a 20% annual revenue growth rate while maintaining a 10% after-tax profit margin and a return on stockholders' equity of 20%. 11 The Charles Schwab Corporation Consolidated Statement of Income (In Thousands, Except Per Share Amounts)
-------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 -------------------------------------------------------------------------------------------------------- Revenues Commissions $ 546,112 $552,206 $ 441,429 Interest revenue, net of interest expense of $198,236 in 1994, $132,382 in 1993 and $159,491 in 1992 164,708 119,849 91,540 Principal transactions 162,595 169,081 130,013 Mutual fund service fees 156,812 98,554 63,391 Other 34,370 25,323 23,139 -------------------------------------------------------------------------------------------------------- Total 1,064,597 965,013 749,512 -------------------------------------------------------------------------------------------------------- Expenses Excluding Interest Compensation and benefits 437,064 392,768 306,615 Communications 106,682 94,348 75,854 Occupancy and equipment 87,641 76,668 65,241 Depreciation and amortization 54,556 44,433 40,490 Commissions, clearance and floor brokerage 49,344 43,039 32,116 Advertising and market development 36,401 40,726 33,810 Professional services 21,928 22,385 14,448 Other 46,638 44,374 34,710 -------------------------------------------------------------------------------------------------------- Total 840,254 758,741 603,284 -------------------------------------------------------------------------------------------------------- Income before taxes on income and extraordinary charge 224,343 206,272 146,228 Taxes on income 89,000 81,904 65,000 -------------------------------------------------------------------------------------------------------- Income before extraordinary charge 135,343 124,368 81,228 Extraordinary charge - early retirement of debt 6,700 -------------------------------------------------------------------------------------------------------- Net Income $ 135,343 $117,668 $ 81,228 ======================================================================================================== Weighted average number of common and common equivalent shares outstanding* 87,603 89,175 87,852 ======================================================================================================== Earnings per Common Equivalent Share* Income before extraordinary charge $ 1.54 $ 1.39 $ .92 Extraordinary charge - early retirement of debt .07 -------------------------------------------------------------------------------------------------------- Earnings per Common Equivalent Share $ 1.54 $ 1.32 $ .92 ======================================================================================================== Dividends Declared per Common Share* $ .188 $ .126 $ .099 ========================================================================================================
* Reflects the 1995 three-for-two common stock split. See Notes to Consolidated Financial Statements. (Chart Omitted) (Chart Omitted) 12 The Charles Schwab Corporation Consolidated Balance Sheet (In Thousands, Except Share Data)
------------------------------------------------------------------------------------------------------------------- December 31, 1994 1993 ------------------------------------------------------------------------------------------------------------------- Assets Cash and equivalents (including resale agreements of $242,500 in 1994 and $120,000 in 1993) $ 380,616 $ 279,828 Cash and investments required to be segregated under Federal or other regulations (including resale agreements of $3,787,984 in 1994 and $3,267,440 in 1993) 4,206,466 3,676,319 Receivable from brokers, dealers and clearing organizations 86,028 71,616 Receivable from customers (less allowance for doubtful accounts of $3,204 in 1994 and $2,229 in 1993) 2,923,867 2,553,255 Equipment, office facilities and property (less accumulated depreciation and amortization of $162,474 in 1994 and $143,339 in 1993) 129,105 136,440 Customer lists (less accumulated amortization of $140,860 in 1994 and $130,434 in 1993) 26,813 37,114 Other assets 164,967 141,945 ------------------------------------------------------------------------------------------------------------------- Total $7,917,862 $6,896,517 =================================================================================================================== Liabilities and Stockholders' Equity Drafts payable $ 117,383 $ 123,384 Payable to brokers, dealers and clearing organizations 296,420 303,981 Payable to customers 6,670,362 5,745,783 Accrued expenses 195,320 158,866 Long-term borrowings 171,363 185,330 ------------------------------------------------------------------------------------------------------------------- Total liabilities 7,450,848 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; 89,230,020 shares in 1994 and 1993* 595 595 Additional paid-in capital 166,103 161,052 Retained earnings 373,161 253,692 Treasury stock--3,781,995 shares in 1994 and 2,474,217 shares in 1993, at cost* (57,968) (23,153) Note receivable from Profit Sharing Plan (13,013) Unearned ESOP shares (10,174) Unamortized restricted stock compensation (4,703) ------------------------------------------------------------------------------------------------------------------- Stockholders' equity 467,014 379,173 ------------------------------------------------------------------------------------------------------------------- Total $7,917,862 $6,896,517 ===================================================================================================================
* Reflects the 1995 three-for-two common stock split. See Notes to Consolidated Financial Statements. (Chart Omitted) 13 The Charles Schwab Corporation Consolidated Statement of Cash Flows (In Thousands)
----------------------------------------------------------------------------------------------------------------------------- December 31, 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 135,343 $ 117,668 $ 81,228 Noncash items included in net income: Depreciation and amortization 54,556 44,433 40,490 Deferred income taxes 3,781 (5,352) (7,141) Other 3,699 (1,074) 1,370 Extraordinary charge - early retirement of debt 11,205 Change in accrued expenses 40,908 43,653 20,616 Change in other assets (27,215) (37,625) (11,163) ----------------------------------------------------------------------------------------------------------------------------- Net cash provided before change in customer-related balances 211,072 172,908 125,400 ----------------------------------------------------------------------------------------------------------------------------- Change in customer-related balances: Payable to customers 924,579 670,276 693,737 Receivable from customers (371,587) (648,548) (601,352) Drafts payable (6,001) 21,052 23,891 Payable to brokers, dealers and clearing organizations (7,561) 105,483 73,389 Receivable from brokers, dealers and clearing organizations (14,412) (23,250) (757) Cash and investments required to be segregated under Federal or other regulations (530,147) (166,170) (193,574) ----------------------------------------------------------------------------------------------------------------------------- Net change in customer-related balances (5,129) (41,157) (4,666) ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 205,943 131,751 120,734 ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of equipment, office facilities and property - net (31,534) (77,127) (53,538) Purchase of life insurance policies (41,684) Other (606) 6,241 3,925 ----------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (73,824) (70,886) (49,613) ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from loans on life insurance policies 41,299 Repayment of short-term borrowings (20,000) Proceeds from long-term borrowings 20,000 150,000 35,000 Repayment of long-term and subordinated borrowings (35,916) (128,032) (2,676) Purchase of treasury stock (46,781) (23,227) Dividends paid (16,038) (10,946) (8,411) Other 6,105 3,651 2,007 ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (31,331) 14,673 (17,307) ----------------------------------------------------------------------------------------------------------------------------- Increase in cash and equivalents 100,788 75,538 53,814 Cash and equivalents at beginning of year 279,828 204,290 150,476 ----------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $ 380,616 $ 279,828 $ 204,290 =============================================================================================================================
See Notes to Consolidated Financial Statements. 14 The Charles Schwab Corporation Consolidated Statement of Stockholders' Equity (In Thousands)
Note Receivable Unamortized Common Stock Additional From Profit Unearned Restricted ------------ Paid-In Retained Treasury Sharing ESOP Stock Shares* Amount Capital Earnings Stock Plan Shares Compensation Total ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1991 86,646 $392 $141,881 $ 72,938 $ (7,225) $ (8,179) $199,807 Net income 81,228 81,228 Dividends declared on common stock (8,411) (8,411) Purchase of treasury stock (2,490) (23,227) (23,227) Stock options exercised 857 1,413 4,008 5,421 Collection on note receivable from Profit Sharing Plan 3,925 3,925 Other 65 65 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1992 85,013 392 141,946 147,168 (26,444) (4,254) 258,808 ------------------------------------------------------------------------------------------------------------------------------------ Net income 117,668 117,668 Dividends declared on common stock (10,946) (10,946) Stock options exercised and restricted stock compensation awards 654 4,005 3,291 7,296 Three-for-two stock split effected in the form of a 50% stock dividend 198 (198) Common stock issued to Profit Sharing Plan for a note receivable 1,089 5 14,995 (15,000) Collection on note receivable from Profit Sharing Plan 6,241 6,241 Other 106 106 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1993 86,756 595 161,052 253,692 (23,153) (13,013) 379,173 ------------------------------------------------------------------------------------------------------------------------------------ Net income 135,343 135,343 Dividends declared on common stock (16,038) (16,038) Purchase of treasury stock (2,500) (46,781) (46,781) Stock options exercised and restricted stock compensation awards 1,192 4,293 11,966 $(4,892) 11,367 Amortization of restricted stock compensation awards 189 189 Collection on note receivable from Profit Sharing Plan 1,467 1,467 Reclassification of note receivable from Profit Sharing Plan 11,546 $(11,546) ESOP shares released for allocation 758 164 1,372 2,294 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1994 85,448 $595 $166,103 $373,161 $(57,968) $(10,174) $(4,703) $467,014 ==================================================================================================================================== * Share amounts are presented net of treasury shares and have been restated to reflect the 1995 three-for-two common stock split.
See Notes to Consolidated Financial Statements. 15 The Charles Schwab Corporation Notes to Consolidated Financial Statements Basis of Presentation The consolidated financial statements include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively the Company), including Charles Schwab & Co., Inc. (Schwab), a securities broker-dealer, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, and other subsidiaries. Revenues are presented net of interest expense. Prior years' financial statements have been reclassified to conform to the 1994 presentation. All material intercompany balances and transactions have been eliminated. Significant Accounting Policies Securities transactions recorded by Schwab and the related revenues and expenses are recorded on settlement date, which is generally five business days after trade date. Revenues and expenses on a settlement date basis for Schwab are not materially different from trade date. M&S records principal transactions and the related revenues and expenses on a trade date basis. Cash and investments required to be segregated under Federal or other regulations consist primarily of securities purchased under agreements to resell (Resale Agreements), U.S. Treasury securities, certificates of deposit and commercial paper. Resale Agreements are accounted for as collateralized financing transactions and are recorded at the amount for which the securities will be resold. U.S. Treasury securities are stated at market. Certificates of deposit and commercial paper are stated at cost, which approximates market. Depreciation and amortization - Equipment and office facilities are depreciated on a straight-line basis over their estimated useful lives, generally three to seven years. Property is depreciated on a straight-line basis over twenty years. Leasehold improvements are amortized over the lesser of their useful life or the life of the lease. Customer lists and other intangibles are amortized on a straight-line basis over periods from three to fifteen years. Earnings per common equivalent share are calculated by dividing net income by the sum of the weighted average number of common shares outstanding during the period plus common share equivalents. Common share equivalents result from the dilutive effect of stock options. Information presented in the Consolidated Financial Statements and notes thereto regarding share and per share amounts, stock option data and market prices give effect to the 1995 three-for-two common stock split, effected in the form of a 50% stock dividend. Cash equivalents - For purposes of reporting cash flows, the Company considers all highly liquid investments (including Resale Agreements) with original maturities of three months or less that are not required to be segregated under Federal or other regulations to be cash equivalents. Income taxes - Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes - on a prospective basis. The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method previously required by Accounting Principles Board (APB) Opinion No. 11 to an asset and liability approach, which requires the recognition of deferred tax assets and liabilities at tax rates expected to be in effect when these balances reverse. Future tax benefits attributable to temporary differences are recognized currently to the extent that realization of such benefits is more likely than not. The adoption of this accounting standard did not have a material impact on the Company's financial position or results of operations. Estimated fair value of financial instruments - The Company considers the amounts presented for financial instruments on the consolidated balance sheet to be reasonable estimates of fair value except for long-term borrowings and certain off-balance sheet financial instruments. Disclosure of the fair value of these instruments, determined by the Company using available market information and appropriate valuation methodologies, is presented under the "Long-Term Borrowings" note. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market transaction. Short-Term Funding The principal source of financing for Schwab's margin lending is cash balances in customer Schwab One (registered trademark) brokerage accounts. At December 31, 1994, Schwab was paying interest at 4.7% on $5.8 billion of cash balances in Schwab One brokerage accounts, which were included in amounts payable to customers. At December 31, 1993, Schwab was paying interest at 2.4% on $5.0 billion of such cash balances. For use in its brokerage operations, Schwab maintains uncommitted bank credit lines totaling $480 million, of which $400 million is available on an unsecured basis at December 31, 1994. Schwab's uncommitted bank credit lines totaled $390 million, of which $310 million was available on an unsecured basis at December 31, 1993. There were no borrowings outstanding 16 under these lines at December 31, 1994 and 1993. Long-Term Borrowings Long-term borrowings at December 31, 1994 and 1993 consist of the following (in thousands):
--------------------------------------------------------------------- 1994 1993 --------------------------------------------------------------------- Senior Medium-Term Notes $170,000 $150,000 Senior Term Loan 35,000 Other (principally equipment financing) 1,363 330 --------------------------------------------------------------------- Total $171,363 $185,330 =====================================================================
CSC has $170 million aggregate principal amount of Senior Medium- Term Notes, Series A (Medium-Term Notes), with fixed interest rates ranging from 4.95% to 7.72% and maturities as follows: 1996 - $26 million; 1997 - $28 million; 1998 - $30 million; and thereafter - $86 million. The Medium-Term Notes carry a weighted average interest rate of 6.04%. Proceeds from certain of the Medium-Term Notes were used in 1993 to prepay CSC's $50 million 10% Senior Subordinated Debentures and $66 million 9% Junior Subordinated Debentures, which were due in 1998 and 2002, respectively, and to pay a related prepayment premium of approximately $11 million. The remaining proceeds were used for general corporate purposes. The fair value of the Medium-Term Notes is estimated to be $156 million and $148 million at December 31, 1994 and 1993, respectively, based on estimates of market rates for debt with similar terms and remaining maturities. In April 1994, a prospectus supplement covering the issuance of up to $100 million in Senior or Senior Subordinated Medium-Term Notes, Series A, pursuant to a registration statement, was filed with the Securities and Exchange Commission (SEC). Currently, $80 million in securities remain unissued under the registration statement. In October 1994, CSC prepaid its $35 million Senior Term Loan due in March 1995 using working capital funds. When the loan was prepaid, a related interest rate exchange arrangement was terminated. The fair value of such arrangement was estimated to be $1 million at December 31, 1993 based on the estimated amount CSC would have needed to pay to terminate the arrangement. CSC may borrow under its $225 million committed unsecured credit facility with a group of eleven banks through June 1995. The funds are available for general corporate purposes and CSC pays a commitment fee on the unused balance. The terms of this 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 facility has never been used. CSC has agreed to maintain availability under this facility to repay any obligations arising under the $100 million letter of credit facility. (The fair value of such obligations are estimated to be $9 million at December 31, 1994 - see the "Commitments, Contingent Liabilities and Other Information" note). Taxes on Income Income tax expense, including the tax benefit related to the extraordinary charge, is as follows (in thousands):
------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------- Current: Federal $72,157 $72,362 $58,452 State 13,062 14,894 13,689 ------------------------------------------------------------------------- Total current 85,219 87,256 72,141 ------------------------------------------------------------------------- Deferred: Federal 3,221 (4,477) (6,267) State 560 (875) (874) ------------------------------------------------------------------------- Total deferred 3,781 (5,352) (7,141) ------------------------------------------------------------------------- Taxes on income before extraordinary charge 89,000 81,904 65,000 Current tax benefit - extraordinary charge (4,504) ------------------------------------------------------------------------- Total taxes on income $89,000 $77,400 $65,000 =========================================================================
The temporary differences which created deferred tax assets and liabilities, included as net deferred tax assets in other assets, are detailed below (in thousands):
---------------------------------------------------------------- At December 31, 1994 1993 ---------------------------------------------------------------- Deferred Tax Assets: Deferred compensation $ 8,086 $13,389 Reserves and allowances 8,321 5,336 Depreciation and amortization 3,386 3,602 State and local taxes 1,325 2,367 ---------------------------------------------------------------- Total deferred assets 21,118 24,694 ---------------------------------------------------------------- Deferred Tax Liabilities: Asset valuation differences (7,870) (7,177) Other (1,534) (1,173) ---------------------------------------------------------------- Total deferred liabilities (9,404) (8,350) ---------------------------------------------------------------- Net deferred tax asset $11,714 $16,344 ================================================================
During 1994, the Company purchased certain assets which resulted in the establishment of a deferred tax liability of $849,000. Recognition of such liability did not 17 impact income tax expense during 1994. There was no valuation allowance associated with deferred tax assets at December 31, 1994 and 1993. The principal components of the deferred income tax benefit for the year ended December 31, 1992, under APB Opinion No. 11, were deferred compensation and unrealized gains and losses on investments held. The effective income tax rate differs from the amount computed by applying the Federal statutory income tax rate as follows:
----------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 ----------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 34.0% State income taxes, net of Federal tax benefit 4.0 4.5 5.8 Amortization of intangibles 4.5 Other .7 .2 .2 ----------------------------------------------------------------- Effective income tax rate 39.7% 39.7% 44.5% =================================================================
Stock Options, Restricted Stock Awards and Performance Units The Company's stock option plans provide for granting to officers, directors and other key employees options for the purchase of shares of common stock at not less than market value on the date of grant, restricted stock and performance units. Certain options are immediately exercisable and all options expire within either eight or ten years from the date of grant. The options and shares acquired upon exercise of each option generally vest over a four or five-year period from the date of grant of the option. The Company may repurchase unvested shares related to certain options at the exercise price from any participant who ceases to be an employee or director of CSC or any of its subsidiaries. A summary of option activity follows:
------------------------------------------------------------------------ Number Option Price of Shares Per Share ------------------------------------------------------------------------ Outstanding at December 31, 1991 4,362,330 $ .38 - 5.96 ------------------------------------------------------------------------ Granted 4,406,900 8.72 - 16.22 Exercised (856,705) .38 - 4.37 Canceled (81,167) .38 - 4.37 ------------------------------------------------------------------------ Outstanding at December 31, 1992 7,831,358 .38 - 16.22 ------------------------------------------------------------------------ Granted 960,171 13.83 - 23.08 Exercised (655,292) .38 - 20.83 Canceled (215,412) 2.89 - 8.72 ------------------------------------------------------------------------ Outstanding at December 31, 1993 7,920,825 .38 - 23.08 ------------------------------------------------------------------------ Granted 2,075,554 17.00 - 21.58 Exercised (1,191,859) .38 - 21.58 Canceled (77,334) 3.89 - 22.33 ------------------------------------------------------------------------ Outstanding at December 31, 1994 8,727,186 $ .38 - 23.08 ========================================================================
At December 31, 1994, options to purchase 3,995,438 shares were vested, 2,972,596 shares were available for future grants and 4,731,748 shares were unvested. In 1994 and 1993, the Company granted 228,000 and 38,850 shares of common stock, respectively, to certain officers of the Company. The 1994 and 1993 common stock grants had aggregate fair market values of $5 million and $.8 million, respectively, at their grant dates. Shares granted in the 1994 stock grants are restricted from sale for five years, and have a five-year amortization and vesting period. The 1993 stock grants are restricted from sale for four years and vest immediately. In 1994, the Company granted 448,275 performance units in tandem with stock options on a one-to-one basis to certain officers and key employees of the Company. In lieu of exercising the related stock option, each unit gives the participant the right to receive an amount in cash, based upon achieving a certain level of annual after-tax net income. For financial statement purposes, the Company assumes a portion of these units will be redeemed for cash. The units and options vest over a five-year period. Employee Benefit Plans The Company has a profit sharing and employee stock ownership plan (the Profit Sharing Plan), including a 401(k) salary deferral program, for eligible employees who have met certain service requirements. The Company matches certain employee contributions; additional contributions to this plan are at the discretion of the Company. Total Company contribution expense was $14 million for 1994, $16 million for 1993 and $11 million for 1992. In 1992, The Charles Schwab Trust Company, a subsidiary of CSC, became trustee of the plan. Effective January 1, 1994, the Company adopted Statement of Position (SOP) No. 93-6 - Employers' Accounting for Employee Stock Ownership Plans (the Statement). The Statement requires income statement recognition of the fair value of common stock released for allocation to employees through an Employee Stock Ownership Plan (ESOP). The adoption of the Statement did not have a material impact on the Company's financial position, results of operations or earnings per share. In January 1993, the Profit Sharing Plan borrowed $15 million from the Company to purchase 1,088,708 newly issued shares of the Company's common stock. The note receivable from the plan bears interest at 7.9% and is due in annual installments through 2007. Upon implementation of the Statement, the note from the plan was reclassed from note receivable to unearned ESOP shares on the consolidated balance sheet. As the note is repaid, shares are released for allocation to eligible employees based on the proportion of debt service paid during the year and the 18 allocated shares become outstanding for earnings per share computations. Dividends on allocated shares and unallocated shares are charged to retained earnings and compensation and benefits expense, respectively. Under the "grandfather" provisions of the Statement, the Company did not apply the Statement to shares purchased by the ESOP prior to December 31, 1992. Previously, the accounting rules provided for the cost basis of shares released for allocation through ESOP plans to be recognized as expense and all ESOP shares to be considered outstanding for earnings per share computations. At December 31, 1993, unreleased ESOP shares of 879,916 were considered outstanding for earnings per share computations that would not have been considered outstanding under the Statement. Dividends on all "grandfather" shares are used to pay debt service. ESOP information is as follows:
------------------------------------------------------------------------------------- Shares Purchased Shares Purchased in 1993 Prior to 1993 ------------------------------------------------------------------------------------- Number of shares purchased 1,088,708 2,231,405 Shares released for allocation prior to 1994 (208,791) (1,752,978) Shares released for allocation in 1994 (141,584) (478,427) ------------------------------------------------------------------------------------- Unreleased shares at December 31, 1994 738,333 ===================================================================================== Fair value of unreleased shares at December 31, 1994 $17,166,242 ===================================================================================== Compensation and benefits expense during 1994 $ 2,675,000 $1,532,000 =====================================================================================
In January 1991, the Company implemented a long-term cash incentive plan for certain officers and key employees. Payments under this plan are based upon achieving a certain level of pre- tax income, as defined, over the four-year period ended December 31, 1994. Related compensation expense, accrued as pre-tax income reached certain targeted levels, was $18 million for 1994, $16 million for 1993 and $11 million for 1992. During 1994, the Company implemented a life insurance program covering substantially all employees. Under the program, investment in insurance policies is recorded net of policy loans in other assets. At December 31, 1994, policy loans with an interest rate of 10.3% totaled $41 million. Interest incurred on policy loans is tax deductible, while the increase in the cash value of the policies and death benefit proceeds are not subject to tax. Regulatory Requirements Schwab and M&S are subject to the SEC's Uniform Net Capital Rule and each compute net capital under the alternative method permitted by this Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from customer transactions or a minimum dollar amount, which is based on the type of business conducted by the broker-dealer. The minimum dollar amount for both Schwab and M&S is $1 million. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar amount requirement. At December 31, 1994, Schwab's net capital was $315 million (10% of aggregate debit balances), which was $254 million in excess of the minimum required net capital and $164 million in excess of 5% of aggregate debit balances. At December 31, 1994, M&S' net capital was $5 million (206% of aggregate debit balances), which was $4 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 December 31, 1994. Under Rule 15c3-3, M&S had no cash reserve requirement at December 31, 1994. Commitments, Contingent Liabilities and Other Information The Company has noncancelable operating leases for office space and equipment. Future minimum rental commitments under these leases at December 31, 1994 are as follows (in thousands): ----------------------------------------------------------- 1995 $54,700 1996 46,775 1997 38,913 1998 31,701 1999 25,415 Thereafter 44,241 =========================================================== Certain leases contain provisions for renewal options and rent escalations based on increases in certain costs incurred by the lessor. Rent expense was $64 million for 1994, $56 million for 1993 and $48 million for 1992. The Company has entered into certain agreements with its Chairman that provide compensation for employment through March 1995 and for the use of his name and likeness subsequent to his employment. The agreements can be terminated only under limited circumstances. Aggregate amounts paid pursuant to the name and likeness agreement cannot exceed $2 million per year (subject to adjustment for changes in the cost of living since 1987) for a maximum of 15 years after compensation under the employment agreement ceases. A new employment agreement with the 19 Company's Chairman is scheduled to be submitted to the stockholders for approval at the May 8, 1995 Annual Meeting of Stockholders. 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 $81 million at December 31, 1994. Through its broker-dealer subsidiaries, the Company loans securities temporarily to other brokers in connection with its security lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and by requiring additional cash as collateral when necessary. The Company is obligated to settle transactions with brokers and other financial institutions even if its customers fail to meet their obligations to the Company. Customers are required to complete their transactions on settlement date, generally five business days after trade date. If customers do not fulfill their contractual obligations, the Company may incur losses. The Company has established procedures to reduce this risk by requiring deposits from customers for certain types of trades. As customers write option contracts or sell securities short, the Company may incur losses if the customers do not fulfill their obligations and the collateral in customer accounts is not sufficient to fully cover losses which customers may incur from these strategies. To control this risk, the Company monitors required margin levels daily and customers are required to deposit additional collateral, or reduce positions, when necessary. In its capacity as market maker, M&S maintains inventories in Nasdaq securities on both a long and short basis. While long inventory positions represent M&S ownership of securities, short inventory positions represent obligations of M&S to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to M&S as market values of securities fluctuate. To control the risk of losses, long and short positions are continuously monitored to assure compliance with limits established by the Company. 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). A trial is scheduled for August 1995. The asserted additional tax of $19 million (after initial settlement stipulations), excluding interest, arises from the IRS' audit of the tax periods ended March 31, 1988 and December 31, 1988. The majority of the asserted additional tax relates to deductions claimed by the Company for amortization of intangible assets received in the Company's 1987 acquisition of Schwab. The resolution of the contested issues may also affect the Company's taxable years ended December 31, 1989 through 1994. Of the $19 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 October 26, 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 Federal cases have been consolidated and transferred for all pretrial purposes to Federal District Court in the Southern District of New York and a consolidated amended complaint was filed on December 16, 1994. The complaint does not set forth any specific conduct by M&S and does not request any specific amount of damages, although it requests that the actual damages be trebled where permitted by statute. The consolidated amended complaint generally alleges an illegal combination and conspiracy among the defendant market makers to fix and maintain the spreads between the bid and ask prices of Nasdaq securities. On February 2, 1995, the defendants filed a motion to dismiss the consolidated amended complaint for failure to state a claim. The ultimate outcome of these actions cannot currently be determined. There are other various lawsuits pending against the Company which, in the opinion of management, will be resolved with no material impact on the Company's financial position or results of operations. In December 1994, a $100 million letter of credit facility 20 was established by CSC with a commercial bank to issue letters of credit (LOCs) to three of the SchwabFunds (registered trademark) money market funds in connection with the bankruptcies of Orange County, California and the Orange County investment pool. CSC has agreed to reimburse the bank for any payments made under the LOCs, and to leave unutilized as much as $100 million of its $225 million credit facility. The LOC facility was voluntarily established by CSC as a precautionary measure to provide independent support for the valuation of certain securities held by the funds. These securities were issued by municipalities that participated in the investment pool maintained by Orange County and, in one case, represent a direct obligation of Orange County. Although the issuers, other than Orange County, have not filed for bankruptcy, their ability to repay obligations in a timely manner may be affected by shortfalls, if any, of amounts scheduled to be received from investments in the Orange County investment pool. At December 31, 1994, LOCs totaling $58.5 million were outstanding under this facility. The funds may make demands for payments under the LOCs if the issuers of certain municipal securities held by the funds fail to pay a specified percentage of the principal amount of the securities when due or if the proceeds received by the funds in the disposition of any such securities are less than a specified percentage of the principal amount of the securities. The funds will absorb losses of principal amounts of the securities, if any, at disposition or maturity for each security up to a specified percentage. The LOCs expire and the securities mature on or before August 1, 1995 and pertain to securities held by each of the three money market funds at December 31, 1994 as follows: for the first fund, $340.0 million aggregate principal amount, representing 3.01% of the fund's net assets, is covered in part by a $28.0 million LOC; for the second fund, $74.2 million aggregate principal amount, representing 2.44% of the fund's net assets, is covered in part by an $18.5 million LOC; for the third fund, $39.9 million aggregate principal amount, representing 3.06% of the fund's net assets, is covered in part by a $12.0 million LOC. To date, the LOCs have not been needed to maintain the funds' $1 per share net asset values. At December 31, 1994, had the funds disposed of all the specified securities at values provided by the funds' pricing service, the funds would have had the right to make demands for payments on the bank totaling approximately $9 million. These values may not be representative of market values in effect at December 31, 1994. Whether, or to what extent, the funds would make any demands for payments under the LOCs is dependent upon factors such as the issuers' cash flows, the issuers' capacity for the normal financing of their operations and the timely resolution of the obligations of Orange County and the Orange County investment pool. Accordingly, management is currently unable to determine whether, or to what extent, the funds would make any demands for payment under the LOCs. Concentrations of Credit Risk Schwab enters into collateralized Resale Agreements which could result in losses in the event the counterparty to the transaction does not purchase the securities held as collateral for the cash advanced and the market value of these securities declines. To control this risk, Schwab requires that the counterparty deliver to a custodian securities to be held as collateral with a market value in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty. Schwab also monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. Cash Flow Information Certain investing and financing activities of the Company affect its financial position but do not affect cash flows. For the year ended December 31, 1993, common stock was issued to the Profit Sharing Plan for a $15 million note receivable. Certain additional information affecting the cash flows of the Company follows (in thousands):
--------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 --------------------------------------------------------------------- Income taxes paid $ 75,530 $ 86,453 $ 64,625 ===================================================================== Interest paid: Customers $176,487 $114,606 $141,135 Long-term and subordinated borrowings 11,632 13,584 13,134 Other 7,422 4,400 8,833 --------------------------------------------------------------------- Total interest paid $195,541 $132,590 $163,102 =====================================================================
Subsequent Event On January 17, 1995, the Board of Directors approved a three-for- two stock split of the Company's common stock, which will be effected in the form of a 50% stock dividend. The stock dividend is payable March 1, 1995 to stockholders of record February 1, 1995. Share and per share data in this report have been restated to reflect this transaction. The Board also increased the quarterly cash dividend 29% to $.060 per share payable February 15, 1995 to stockholders of record February 1, 1995. 21 Management's Report To Our Stockholders: Management of the Company is responsible for the preparation, integrity and objectivity of the consolidated financial statements and the other financial information presented in this report. To meet these responsibilities we maintain a system of internal control that is designed to provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of Company and customer assets from unauthorized use, and the execution and recording of transactions in accordance with management's authorization. The system is augmented by careful selection of our managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that employees adhere to the highest standards of personal and professional integrity. The Company's internal audit function monitors and reports on the adequacy of and compliance with our internal controls, policies and procedures. Although no cost- effective internal control system will preclude all errors and irregularities, we believe the Company's system of internal control is adequate to accomplish the objectives set forth above. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on estimates and our best judgments. The financial statements have been audited by the independent accounting firm of Deloitte & Touche LLP, whose audit included consideration of the internal control structure to the extent necessary to render their opinion on the financial statements. We made available to Deloitte & Touche LLP all the Company's financial records and related data. We believe that all representations made to Deloitte & Touche LLP during their audit were valid and appropriate. The Board of Directors through its Audit Committee, which is comprised entirely of nonmanagement directors, has an oversight role in the area of financial reporting and internal control. The Audit Committee periodically meets with Deloitte & Touche LLP, our internal auditors and Company management to review accounting, auditing, internal control and financial reporting matters. Charles R. Schwab Chairman of the Board and Chief Executive Officer A. John Gambs Executive Vice President and Chief Financial Officer Independent Auditors' Report To the Stockholders and Board of Directors of The Charles Schwab Corporation: We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the Company) as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Charles Schwab Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Francisco, California February 27, 1995 THE CHARLES SCHWAB CORPORATION Chart Appendix List In this appendix, the following descriptions of certain charts in portions of the Company's 1994 Annual Report to Stockholders that are omitted from the EDGAR Version are more specific with respect to the actual numbers, amounts and percentages than is determinable from the charts themselves. The Company submits such more specific descriptions only for the purpose of complying with the requirements for transmitting portions of this Annual Report on Form 10-K electronically via EDGAR; such more specific descriptions are not intended in any way to provide information that is additional to the information otherwise provided in portions of the Annual Report. EDGAR Version Page Number CHART DESCRIPTION ------ ----------------- 3 Stacked bar chart titled "Assets in Schwab Customer Accounts" depicting the composition of customer assets at year end 1990, 1991, 1992 1993 and 1994 (shown on the bottom axis) as follows (billions of dollars): Cash and Equivalents $10.6, $12.6, $15.6, $20.1 and $28.6, respectively; Stocks (net of margin loans) $12.7, $22.1, $29.6, $39.5 and $46.1, respectively; Mutual Fund Marketplace (registered trademark) $2.6, $6.4, $12.2, $26.2 and $32.2, respectively; Fixed Income Securities $4.7, $6.4, $8.2, $10.0 and $15.7, respectively; Assets in Schwab Customer Accounts (bar labeled) $30.6, $47.5, $65.6, $95.8 and $122.6, respectively. 3 Stacked bar chart titled "Schwab Customers' Daily Average Trading Volume" depicting the composition of Schwab's daily average volume for the fiscal years 1990, 1991, 1992, 1993 and 1994 (shown on the bottom axis) as follows (thousands of trades): Commission and Other Trades 13.1, 17.6, 22.2, 27.9 and 29.2, respectively; Mutual Fund OneSource (trademark) Trades 0, .3, 1.4, 7.4 and 14.3, respectively; Schwab Customers' Daily Average Trading Volume (bar labeled) 13.1, 17.9, 23.6, 35.3 and 43.5, respectively. 4 Bar chart titled "Revenues" depicting revenues for the fiscal years 1990, 1991, 1992 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars) (bar labeled): $387, $570, $750, $965 and $1,065, respectively. 4 Pie chart titled "Composition of Revenues" depicting composition of revenues (percent of total) for the fiscal years 1992, 1993 and 1994 as follows: Commissions 60%, 57% and 51%, respectively; Net Interest Revenue 12%, 12% and 15%, respectively; Principal Transactions 17%, 18% and 15%, respectively; Mutual Fund Service Fees 8%, 10% and 15%, respectively; Other 3%, 3% and 4%, respectively. 4 Stacked bar chart titled "Commissions" depicting the composition of commissions for the fiscal years 1992, 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars): Listed $251, $300 and $279, respectively; Options $32, $37 and $39, respectively; Nasdaq $122, $169 and $169, respectively; Other $36, $46 and $59, respectively; Commissions (bar labeled) $441, $552 and $546, respectively. 7 Pie chart titled "Expenses Excluding Interest" depicting composition of expenses excluding interest (percent of total) for the fiscal years 1992, 1993 and 1994 as follows: Compensation & Benefits 51%, 52% and 52%, respectively; Communications 13%, 12% and 13%, respectively; Occupancy & Equipment 11%, 10% and 10%, respectively; Depreciation & Amortization 7%, 6% and 6%, respectively; Other 18%, 20% and 19%, respectively. 7 Stacked bar chart titled "Compensation and Benefits" depicting the composition of compensation and benefits for the fiscal years 1992, 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars): Salaries and Wages $183, $225 and $273, respectively; Variable Compensation $80, $108 and $101, respectively; Other Benefits $44, $60 and $63, respectively; Compensation and Benefits (bar labeled) $307, $393 and $437, respectively. 10 Bar chart titled "Net Cash Provided by Operating Activities" depicting net cash provided by operating activities for the fiscal years 1992, 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars) (bar labeled): $121, $132 and $206, respectively. 10 Bar chart titled "Ratio of Assets to Stockholders' Equity" depicting the Company's ratio of assets to stockholders' equity at year end 1992, 1993 and 1994 (shown on the bottom axis) as follows (bar labeled): 23, 18 and 17, respectively. 12 Bar chart titled "Net Income" depicting net income for the fiscal years 1992, 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars) (bar labeled): $81, $118 and $135, respectively. 12 Bar chart titled "Dividends Declared per Common Share" depicting dividends declared per common share for the fiscal years 1992, 1993 and 1994 (shown on the bottom axis) as follows (bar labeled): $.099, $.126 and $.188, respectively. 13 Stacked bar chart titled "Composition of Assets" depicting the composition of the Company's assets at year end 1992, 1993 and 1994 (shown on the bottom axis) as follows (millions of dollars): Cash and Investments $3,714, $3,956 and $4,587, respectively; Secured Receivables $1,952, $2,625 and $3,010, respectively; Other $239, $316 and $321, respectively; Composition of Assets (bar labeled) $5,905, $6,897 and $7,918, respectively. EX-21 13 EXHIBIT 21.1 Exhibit 21.1 THE CHARLES SCHWAB CORPORATION Subsidiaries of the Registrant Schwab Holdings, Inc., a Delaware corporation Charles Schwab & Co., Inc., a California corporation Charles Schwab (Hong Kong) Limited, a Hong Kong corporation Charles Schwab Limited, a United Kingdom corporation Charles Schwab Investment Management, Inc., a Delaware corporation Mayer & Schweitzer, Inc., a New Jersey corporation The Charles Schwab Trust Company, a California corporation Performance Technologies, Inc., a North Carolina corporation EX-23 14 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post- Effective Amendment No. 1 to Registration Statement No. 33- 21582 on Form S-8, in Registration Statement No. 33-30260 on Form S-8, in Registration Statement No. 33-37485 on Form S- 8, in Registration Statement No. 33-45356 on Form S-8, in Registration Statement No. 33-37842 on Form S-8, in Registration Statement No. 33-54701 on Form S-8, and in Amendment No. 1 to Registration No. 33-50923 on Form S-3 of The Charles Schwab Corporation of our reports dated February 27, 1995 appearing in and incorporated by reference in this Annual Report on Form 10-K of The Charles Schwab Corporation for the year ended December 31, 1994. DELOITTE & TOUCHE San Francisco, California March 24, 1995 EX-27 15 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the Consolidated Statement of Income and Consolidated Balance Sheet of the Company's 1994 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of this report, for the period ended December 31, 1994, and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-31-1994 DEC-31-1994 556598 3009895 4030484 0 0 129105 7917862 117383 6966782 0 0 0 171363 595 0 0 466419 7917862 162595 362944 546112 0 156812 198236 437064 224343 135343 0 0 135343 1.54 1.54