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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
The Charles Schwab Corporation
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(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box)
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction
applies: N/A
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2) Aggregate number of securities to which transaction applies:
N/A
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: N/A
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4) Proposed maximum aggregate value of transaction: N/A
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5) (5)Total fee paid: N/A
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
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2) Form, Schedule, or Registration Statement No.: N/A
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3) Filing Party: N/A
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4) Date Filed: N/A
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[THE CHARLES SCHWAB CORPORATION LOGO]
March 21, 1997
Dear Stockholder:
You are cordially invited to attend our Annual Meeting of Stockholders,
which will be held May 12, 1997 at 2:00 p.m. in the Grand Ballroom of the ANA
Hotel, located at 50 Third Street (between Market and Mission Streets) in San
Francisco, California.
The meeting will provide an opportunity for you to hear a report on 1996
operations, to meet your directors and executive officers, and to participate in
a question and answer session. At the meeting, you will be asked to elect three
directors, each for a term of three years or until their successors are elected,
to approve amendments to the Company's 1992 Stock Incentive Plan and to consider
a stockholder proposal requesting that the Board of Directors amend the
Certificate of Incorporation.
The matters expected to be acted upon are more fully described in the Proxy
Statement which follows.
To ensure that your shares are represented at the meeting, please complete,
sign and date the enclosed proxy and return it promptly in the envelope
provided. You may revoke your proxy at any time before it is voted.
We look forward to seeing you at the meeting.
Sincerely,
/s/ David S. Pottruck
/s/ Charles R. Schwab /s/ Lawrence J. Stupski DAVID S. POTTRUCK
CHARLES R. SCHWAB LAWRENCE J. STUPSKI President and
Chairman of the Board and Vice Chairman of the Board Chief Operating Officer
Chief Executive Officer
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THE CHARLES SCHWAB CORPORATION
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 12, 1997
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The Annual Meeting of Stockholders of The Charles Schwab Corporation, a
Delaware corporation (the "Company"), will be held on Monday, May 12, 1997 at
2:00 p.m. in the Grand Ballroom of the ANA Hotel, located at 50 Third Street
(between Market and Mission Streets) in San Francisco, California, for the
following purposes:
1. Electing three directors to serve pursuant to the Company's bylaws for
three-year terms or until their successors are elected.
2. Voting on an amendment to the 1992 Stock Incentive Plan.
3. Voting on a stockholder proposal requesting that the Board of Directors
amend the Certificate of Incorporation.
4. Transacting such other business as may properly come before the
meeting, and all adjournments and postponements thereof.
The Board has fixed the close of business on March 13, 1997 as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Annual Meeting. A complete list of such stockholders of record will be
available at 101 Montgomery Street, San Francisco, California, prior to the
Annual Meeting.
By Order of the Board of Directors,
/s/ Mary B. Templeton
MARY B. TEMPLETON
Corporate Secretary
March 21, 1997
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TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE COMPLETE
AND PROMPTLY MAIL YOUR PROXY IN THE RETURN POSTAGE PREPAID ENVELOPE
PROVIDED. THIS WILL NOT PREVENT YOU FROM REQUESTING A TICKET TO ATTEND THE
MEETING AND VOTING IN PERSON, SHOULD YOU SO DESIRE.
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THE CHARLES SCHWAB CORPORATION
101 MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94104
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PROXY STATEMENT
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This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of The Charles Schwab Corporation, a Delaware
corporation (the "Company"), for use at the Annual Meeting of Stockholders (the
"Annual Meeting") to be held on May 12, 1997. This Proxy Statement and form of
proxy are being mailed to stockholders on or about March 24, 1997.
At the Annual Meeting, holders of the Company's Common Stock, par value
$0.01 per share ("Common Stock"), as of March 13, 1997, the record date, will be
asked to elect three directors, for three-year terms or until their successors
are elected, to approve an amendment to the 1992 Stock Incentive Plan and to
consider a stockholder proposal requesting that the Board of Directors amend the
Certificate of Incorporation. The Board of Directors knows of no other business
for consideration at the Annual Meeting. If any other matters are properly
presented at the Annual Meeting or any adjournment or postponement thereof, it
is the intention of the persons named in the proxy to vote, or otherwise to act,
on your behalf in accordance with their judgment on such matters.
As used in this Proxy Statement, "Schwab" means Charles Schwab & Co., Inc.
RECORD DATE AND VOTE REQUIRED
At the close of business on March 13, 1997, there were 176,254,174 shares
of Common Stock outstanding and entitled to vote at the Annual Meeting. Each
share of Common Stock outstanding on that date entitles the stockholder of
record on that date to one vote on each matter to be voted upon at the Annual
Meeting. A majority of all shares issued and outstanding, whether represented in
person or by proxy at the Annual Meeting, constitutes a quorum for the
transaction of business at the meeting. Of the total votes represented at the
Annual Meeting, the affirmative vote of a plurality is necessary for the
election of directors and the affirmative vote of a majority is necessary to
pass the amendment to the 1992 Stock Incentive Plan.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
The Certificate of Incorporation of the Company provides that the Board of
Directors shall be divided
into three classes, as nearly equal in number as possible, with staggered
three-year terms. Each of the three nominees for the class to be elected this
year is at present a member of the Board of Directors. The remaining seven
directors will continue to serve for the terms set forth below. The directors
elected at the Annual
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Meeting will hold office until either the Annual Meeting of Stockholders to be
held in the year 2000 or until their successors are elected and qualified.
The persons named in the proxy intend to vote for the election of the
nominees named below. The three nominees receiving the greatest number of votes
will be elected directors of the Company for the terms discussed above. Should
any nominee become unavailable to serve as a director, the proxies will be voted
for such other person as the Board of Directors may designate, or the number of
authorized directors may be reduced.
The Board of Directors has nominated and recommends the election of David
S. Pottruck, Nancy H. Bechtle and C. Preston Butcher as directors of the
Company.
Certain information concerning the current directors, including the
nominees to be elected at this meeting, is set forth below.
NOMINEES FOR ELECTION OF DIRECTORS IN 1997
(TERM EXPIRING IN 2000)
David S. Pottruck, age 48, became the Chief Operating Officer and a
director of the Company in March 1994 and has been President of the Company and
Chief Executive Officer of Schwab since July 1992. In the last five years Mr.
Pottruck has served as an Executive Vice President of the Company (March 1987 to
July 1992) and has been President and a director of Schwab (since July 1988).
Nancy H. Bechtle, age 59, has been a director of the Company and has served
as a member of the Audit Committee and Customer Quality Assurance Committee
since September 1992 and the Compensation Committee since January 1996. Ms.
Bechtle has been a director and Chief Financial Officer of J.R. Bechtle & Co.,
an international consulting firm, since 1979. She has been the President and
Chief Executive Officer of the San Francisco Symphony since 1987, and has served
as a member of the San Francisco Symphony Board of Governors since 1984.
C. Preston Butcher, age 58, has been a director of the Company since
October 1988 and has served as a member of the Audit Committee since February
1989 and as a member of the Compensation Committee since September 1992. He
served as a member of the Customer Quality Assurance Committee from May 1992 to
September 1992. Mr. Butcher has been the President, Chief Executive Officer and
Regional Partner of Lincoln Property Company N.C., Inc., a real estate
development and management firm, since 1967, and is a director of BRE
Properties, Inc., a real estate investment trust.
DIRECTORS WHOSE TERMS DO NOT EXPIRE THIS YEAR
(TERMS EXPIRING IN 1998)
Lawrence J. Stupski, age 51, has been the Vice Chairman of the Company
since July 1992, and a director of the Company since its incorporation in
November 1986. He also has served as Chief Operating Officer of
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the Company (November 1986 to March 1994) and President of the Company (November
1986 to July 1992). Mr. Stupski was a director of Schwab from September 1981 to
February 1995 and in the last five years also has served as Chief Operating
Officer (September 1981 to July 1992), Chief Executive Officer (July 1988 to
July 1992), and Vice Chairman (July 1992 to August 1994) of Schwab.
Donald G. Fisher, age 68, has been a director of the Company since January
1988. He has served as a member of the Customer Quality Assurance Committee
since February 1989 and as a member of the Audit Committee since September 1992.
He previously served as a member of the Audit Committee from March 1988 to May
1992, and as a member of the Compensation Committee from February 1988 to
September 1992. Mr. Fisher is the Chairman of the Board of The Gap, Inc., a
nationwide specialty retail clothing chain. Mr. Fisher was also Chief Executive
Officer of The Gap, Inc. and a director from 1969 to November 1995. Mr. Fisher
also is currently a director of AirTouch Communications.
Anthony M. Frank, age 65, has been a director of the Company and has served
as a member of the Audit Committee and Customer Quality Assurance Committee
since December 1993. He is the current Chairman of the Customer Quality
Assurance Committee. He also served as a director of the Company from April 1987
until February 1988 and from March 1992 until April 1993. Mr. Frank is Chairman
of Belvedere Capital Partners, a general partner of a financial institutions
investment fund. From March 1988 until March 1992, Mr. Frank served as
Postmaster General of the United States. From April 1993 until November 1993,
Mr. Frank was Chairman of the Board of Independent Bancorp of Arizona, Inc., a
registered bank holding company. Mr. Frank also is currently a director of
Bedford Property Investors; Living Centers of America Temple-Inland, Inc.;
General American Investors, a closed-end investment company; and Irvine
Apartment Communities and Crescent Real Estate Equities, both real estate
investment trusts.
(TERMS EXPIRING IN 1999)
Charles R. Schwab, age 59, was a founder of Schwab in 1971, and has been
its Chairman since 1978. He has been the Chairman, Chief Executive Officer and a
director of the Company since its incorporation in November 1986. Since February
1989, he has been a member of the Customer Quality Assurance Committee of the
Board of Directors. Mr. Schwab currently serves as a director of The Gap, Inc.,
Transamerica Corporation, AirTouch Communications and Siebel Systems, Inc., and
as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust and Schwab Annuity Portfolios, all registered investment
companies.
Frank C. Herringer, age 54, has been a director of the Company and a member
of the Customer Quality Assurance Committee and Audit Committee since October
1996. Mr. Herringer is Chairman of the Board, Chief Executive Officer and
President of Transamerica Corporation. At Transamerica, he has been Chairman
since January 1, 1996, Chief Executive Officer since 1991 and President since
1986. Mr. Herringer is also a director of Pacific Telesis Group and Unocal
Corporation.
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Stephen T. McLin, age 50, has been a director of the Company and has served
as a member of the Audit Committee since July 1988 and as a member of the
Compensation Committee since February 1989. Mr. McLin is the current Chairman of
the Audit Committee. Since January 1987, Mr. McLin has been the President and
Chief Executive Officer of America First Financial Corporation, a finance and
investment banking firm. Mr. McLin is also Chairman of the Board of EurekaBank,
a federal savings bank.
Roger O. Walther, age 61, has been a director of the Company and a member
of the Customer Quality Assurance Committee since April 1989 and has served as a
member of the Compensation Committee since May 1989. He is the current Chairman
of the Compensation Committee. Since May 1992, Mr. Walther has been the Chairman
and Chief Executive Officer of ELS Educational Services, Inc., the largest
provider of English as a second language courses in the United States. Mr.
Walther was President, Chief Executive Officer and a director of AIFS, Inc.,
which designs and markets educational and cultural programs internationally,
from 1964 to February 1993. Since 1985, Mr. Walther has served as Chairman and
has been a director of First Republic Bancorp, a bank holding company.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During 1996, the Board of Directors held eight regular meetings and one
special meeting. During 1996, each of the directors, except Mr. Fisher, attended
at least 75% of all meetings of the Board of Directors and the Committees on
which they served. The Board of Directors has an Audit Committee, a Compensation
Committee, and a Customer Quality Assurance Committee. The Board of Directors
does not have a nominating committee or any committee serving a similar
function.
The Audit Committee, among other things, confers with the Company's
independent accountants and internal auditors regarding the scope of their
respective examinations, reviews reports of the Company's independent
accountants and internal auditors, and reviews recommendations concerning
internal controls. The Audit Committee reports to the Board of Directors with
respect to such matters and recommends the selection of independent auditors.
The Audit Committee held four meetings during 1996.
The Compensation Committee reviews and approves the Company's compensation
philosophy, all programs that govern annual and long term compensation of
executive officers, and material employee benefit plans. In addition, the
Compensation Committee has the authority to grant options or make equity grants
to members of the Board of Directors and key employees under the Company's stock
option plans. The Compensation Committee held seven meetings in 1996.
The Customer Quality Assurance Committee monitors service quality and
customer satisfaction. The Customer Quality Assurance Committee proposes
initiatives to research service quality and reviews the results of Schwab
customer surveys. The Customer Quality Assurance Committee held two meetings in
1996.
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DIRECTOR COMPENSATION
Directors who are also officers of the Company or its subsidiaries do not
receive any additional compensation for their services as directors. In 1996,
non-employee directors received an annual retainer of $25,000, $1,500 for each
Board meeting attended, $300 for each Board committee meeting attended either
immediately prior to or following a Board meeting, and $1,000 for each Board
committee meeting otherwise attended, and are reimbursed for their expenses of
attendance at such meetings. In 1996, committee chairpersons received an
additional annual retainer of $3,000. Non-employee directors may participate in
the Directors' Deferred Compensation Plan, under which directors may elect to
defer receipt of all or a portion of their directors' fees and receive, upon
ceasing to serve as a director, the amount that would have resulted from
investing the deferred amounts in the Company's Common Stock. In addition, the
Company's non-employee directors receive an annual, automatic grant of options
under the 1992 Stock Incentive Plan of 1,500 shares of Common Stock (2,500
shares of Common Stock if the exercise price is less than $35). The annual,
automatic option grant to non-employee directors of 2,500 shares of Common Stock
was made on May 15, 1996 at a fair market value (as defined in the 1992 Stock
Incentive Plan) of $24.625 per share.
PROPOSAL NO. 2 -- AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN
SUMMARY
The 1992 Stock Incentive Plan (the "1992 Plan") was adopted by the Board of
Directors and approved by the stockholders in 1992. Originally, the stockholders
authorized the issuance of 11,250,000 shares of Common Stock of the Company
(adjusted for stock splits occurring since 1992) under the 1992 Plan. In 1994,
the stockholders approved an amendment to increase the number of shares
available for 1992 Plan awards by 8,400,000 (adjusted for stock splits occurring
since May 1994). Since the 1992 Plan was adopted, the Company has used equity
incentives to attract, retain and properly motivate key employees. Absent the
amendment, shares would not be available for the award of grants after 1997. As
of December 31, 1996, there were 2,259,199 shares remaining for issuance under
the 1992 Plan. The amendment to increase the number of shares of Common Stock
that may be issued under the 1992 Plan will become effective upon stockholder
approval.
DESCRIPTION OF PROPOSED AMENDMENT TO THE 1992 PLAN
The amendment would increase by 9,500,000 shares the total number of shares
that may be granted under the 1992 Plan as Restricted Common Stock, Performance
Share Awards and options.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ADOPTION
OF THE PROPOSED AMENDMENT TO THE 1992 PLAN.
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GENERAL DESCRIPTION OF THE 1992 PLAN
Purpose. The 1992 Plan permits the granting of Restricted Common Stock,
Performance Share Awards or options (or a combination thereof) to key employees
and directors of the Company. The purpose of the 1992 Plan is to promote the
long-term success of the Company and the creation of incremental stockholder
value by (a) encouraging non-employee directors and key employees to focus on
long-range objectives, (b) encouraging the attraction and retention of
non-employee directors and key employees with exceptional qualifications, and
(c) linking the interests of non-employee directors and key employees directly
to stockholder interests.
Eligibility to Receive Awards. Key employees of the Company and its
subsidiaries, including directors who are also employees, are eligible for
awards under the 1992 Plan. Non-employee directors are eligible for an annual,
automatic grant of nonqualified options each year. As of December 31, 1996,
approximately 1,324 persons were recipients of awards under the 1992 Plan.
Types of Awards. Awards under the 1992 Plan may take the form of
Restricted Common Stock, Performance Share Awards and options to acquire Common
Stock of the Company. Options in turn may include nonqualified stock options
("NSOs") and incentive stock options ("ISOs") intended to qualify for special
tax treatment. Any award under the 1992 Plan may include one of these elements
or a combination of several elements except that non-employee directors will
only be eligible to receive NSOs. No payment is required upon the grant of any
award, except that the recipient of Restricted Common Stock must pay the par
value thereof. Upon exercise of an option, the optionee must pay the exercise
price thereof to the Company. On March 13, 1997, the closing price of the
Company's Common Stock was $36.00 per share.
If the amendment is adopted, a total of 11,534,593 shares (subject to
antidilution provisions) will be issuable as Restricted Common Stock, or
pursuant to Performance Share Awards and options under the 1992 Plan, exclusive
of grants made prior to March 13, 1997. If any Restricted Common Stock,
Performance Share Awards or options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Stock being
issued, or if options terminate for any other reason prior to exercise, then the
underlying shares again become available for awards.
Administration, Amendment and Termination. The 1992 Plan is administered
by the Compensation Committee of the Board of Directors (the "Committee"). The
Committee, upon advice of the Company's executive management, selects the key
employees who will receive awards; determines the amount, vesting requirements,
performance criteria, if any, and other conditions of each award; interprets the
provisions of the 1992 Plan; and makes all other decisions regarding the
operation of the 1992 Plan. The grant of NSOs to non-employee directors is made
annually, and the Committee has no discretion with respect to those awards.
The 1992 Plan will remain in effect until it is discontinued by the Board
of Directors. ISOs may be granted under the 1992 Plan only within 10 years from
date of adoption of the 1992 Plan. The Committee may amend or terminate the 1992
Plan at any time and for any reason; provided, however, that any amendment of
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the 1992 Plan shall be subject to the approval of the Company's stockholders to
the extent required by applicable laws, regulations or rules.
Grants of Options to Non-Employee Directors. Under the 1992 Plan, each
non-employee director receives an annual, automatic grant of options to purchase
1,500 shares of Common Stock (2,500 shares of Common Stock if the exercise price
is less than $35). This grant is made on and as of May 15 of each year, and if
May 15 is not a business day, then the grant is made on and as of the next
succeeding business day. The exercise price is the closing price of the
Company's Common Stock on the date of each annual grant, and options generally
must be exercised while the optionee is a director. (For purposes of the 1992
Plan, "fair market value" is defined as the closing price of a share of Common
Stock as reported by the New York Stock Exchange Composite Transactions Index
for date of grant or award, as the case may be.) Options so granted to
non-employee directors will otherwise be subject to all the terms and conditions
of the 1992 Plan.
Restricted Common Stock and Performance Share Awards. Restricted Common
Stock has the same voting and dividend rights as Common Stock, but is subject to
forfeiture in the event that the applicable vesting conditions are not
satisfied. It is nontransferable prior to vesting.
A Performance Share Award is an obligation of the Company to issue and
deliver in the future one share of Common Stock in the event that the applicable
issuance conditions are satisfied. Performance Share Awards are nontransferable,
and the recipient has no voting or dividend rights until such time as the
associated shares of Common Stock are issued, at which time the recipient will
have the same voting, dividend and other rights as the Company's other
stockholders.
When granting an award, the Committee determines the number of Performance
Share Awards or shares of Restricted Common Stock to be included in the award as
well as the vesting or issuance conditions. No more than 200,000 shares of
Restricted Common Stock or Performance Share Awards may be granted to any
participant in any calendar year. The vesting or issuance conditions may be
based on the employee's service, his or her individual performance, the
Company's performance or other appropriate criteria. Where Company performance
is used as a vesting or issuance condition, performance goals are based on
business criteria specified by the Committee, selected from one or more of the
following: return on net assets, net income, earnings per share, return on
equity, return on investment, pretax income, operating income, cash flow,
stockholder return, revenue and revenue growth. Vesting or issuance may be
accelerated in the event of the employee's death, disability or retirement or in
the event of a change in control, as defined below. Recipients of Restricted
Common Stock or Performance Share Awards may satisfy tax withholding
requirements relating to the awards with Common Stock rather than cash.
Terms of Stock Options. The exercise price of an option must be equal to
or greater than the fair market value of Common Stock on the date of grant.
Similarly, the exercise price of NSOs granted to non-employee directors must be
equal to the fair market value of Common Stock on the date of grant. The term of
an ISO cannot exceed 10 years, and all options are nontransferable prior to the
optionee's death.
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Vesting conditions are established by the Committee at the time an option
is granted. Vesting may be accelerated in the event of the optionee's death,
disability or retirement or in the event of a change in control, as defined
below. The Committee may also impose forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions on shares
issued under the 1992 Plan.
Concurrently with the grant of any options to an employee, the Committee
may authorize the grant of replacement options. A replacement option is an
option that is granted when an optionee uses Common Stock held, or to be
acquired, by the optionee to exercise an option and/or to satisfy tax
withholding requirements incident to the exercise of an option. The Committee
may establish such other terms and conditions for replacement options as it
deems appropriate.
Tandem Grants of Options and Performance Units. The 1992 Plan permits the
issuance of options to certain participants (other than executive officers) in
tandem with Performance Unit Awards payable in cash, whereby a participant, at
the end of the performance unit cycle, has the right either (i) to exercise and
receive the cash value of the Performance Unit, which would result in
cancellation of the related option (subject to the proviso that a participant
who subsequent to the grant has become an executive officer may not exercise the
Performance Unit), or (ii) to retain the option, which results in cancellation
of the related Performance Unit.
Payment of Option Price. The exercise price of an option may be paid in
cash or by the surrender of shares of Common Stock already owned by the
optionee. An optionee may also pay the exercise price of an option by giving
"exercise/sale" directions. If exercise/sale directions are given, a sufficient
number of option shares to pay the exercise price and any withholding taxes are
issued directly to Schwab which, in turn, sells these shares in the open market.
Schwab remits to the Company the proceeds from the sale of these shares, and the
optionee receives the remaining option shares. Optionees may also satisfy their
withholding tax obligation upon exercise of an NSO by surrendering a portion of
their option shares to the Company.
Change in Control. For the purposes of the 1992 Plan, the term "change in
control" means (1) any change in control which would have to be disclosed in the
Company's next proxy statement under the rules of the Securities and Exchange
Commission ("SEC"), (2) any person's becoming the beneficial owner, directly or
indirectly, of at least 20% of the combined voting power of the Company's
outstanding securities, except by reason of a repurchase by the Company of its
own securities, or (3) a change in the composition of the Board of Directors as
a result of which fewer than two-thirds of the incumbent directors are directors
who either had been directors of the Company 24 months earlier or were elected
or nominated with the approval of at least a majority of the directors who had
been directors of the Company 24 months earlier and who were still in office at
the time of the election or nomination.
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FEDERAL TAX CONSEQUENCES
Under current federal income tax laws, the federal income tax consequences
of awards under the 1992 Plan can be summarized as follows:
Options. At the time the options are granted, the award of stock options
will have no federal income tax consequences to the Company or the optionee.
With respect to NSOs, upon exercise of the option, the optionee generally
will recognize ordinary income in an amount equal to the excess of the fair
market value of the optioned shares at the time of exercise over the exercise
price. Such ordinary income will be subject to withholding tax, and the amount
of ordinary income recognized by the optionee generally will be deductible for
tax purposes by the Company in the same year that the income is recognized by
the optionee. Upon any subsequent disposition of the shares, any additional gain
or loss recognized by the holder generally will be capital gain or loss.
In contrast, the exercise of ISOs will not result in any regular taxable
income to the optionee at that time; nor will the Company be entitled to any
deduction. However, the excess of the fair market value of the optioned shares
at the time of exercise over the exercise price will be an item of tax
preference for purposes of computing alternative minimum taxable income. If the
optionee holds the optioned shares after exercise for the requisite statutory
period, the difference between the sale price and the exercise price generally
will be taxed as capital gain or loss. If the optionee fails to hold the shares
for the requisite statutory period, the optionee generally will recognize
ordinary income at the time of such early disposition in an amount equal to the
excess of the fair market value of the shares at exercise (or if less, the sales
proceeds) over the exercise price, and the Company generally will be entitled to
a deduction in that same amount. Any additional gain on the disposition
generally will be taxed as capital gain.
Restricted Common Stock. Unless the recipient of a Restricted Common Stock
award elects to be taxed at the time of the issuance, there will be no federal
income tax consequences to the recipient or to the Company for as long as the
shares are subject to vesting restrictions. If and when such shares become
vested, the recipient will recognize ordinary income in an amount equal to the
excess of the fair market value of the shares on such date over any amount paid
for the shares. Such income will be subject to withholding tax at that time. The
Company generally will be entitled to a corresponding deduction in the same
amount that the recipient recognizes as income, except to the extent that the
amount of such income, when added to certain other compensation paid by the
Company to any individual who is a named executive officer at the end of the
fiscal year, exceeds $1,000,000. Upon any subsequent disposition of the shares,
any additional gain or loss recognized by the holder generally will be capital
gain or loss.
Performance Share Awards. The grant of Performance Share Awards will have
no federal income tax consequences to the Company or the recipient at the time
of the grant. When any Common Stock is delivered to a recipient pursuant to the
terms of the Performance Share Award, the recipient generally will recognize as
ordinary income the excess of the fair market value of the shares over any
amount paid therefor. Such income will be subject to withholding tax, and the
Company generally will be entitled to a corresponding deduction in
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the same amount that the recipient recognizes as income, except to the extent
that the amount of such income, when added to certain other compensation paid by
the Company to any individual who is a named executive officer at the end of the
fiscal year, exceeds $1,000,000. Upon any subsequent disposition of the shares,
any additional gain or loss recognized by the holder generally will be capital
gain or loss. To date, no Performance Share Awards have been granted under the
1992 Plan.
OPTIONS AND RESTRICTED SHARES GRANTED UNDER THE 1992 PLAN
The following table sets forth the number of shares with respect to which
options and Restricted Common Stock have been granted under the 1992 Plan for
the following individuals as of December 31, 1996:
NUMBER OF OPTIONS RESTRICTED SHARES OF
RECEIVED COMMON STOCK
NAME AS OF 12/31/96 AWARDED AS OF 12/31/96
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Charles R. Schwab....................................... 1,512,500 0
David S. Pottruck....................................... 1,604,000 0
Lawrence J. Stupski..................................... 969,500 0
Tom D. Seip............................................. 597,000 15,000
Timothy F. McCarthy..................................... 100,000 15,000
Luis E. Valencia........................................ 300,000 10,000
All current executive officers.......................... 6,552,000 100,900
All current directors who are not executive officers.... 100,000 0
Nancy H. Bechtle........................................ 12,000 0
C. Preston Butcher...................................... 16,500 0
Donald G. Fisher........................................ 16,500 0
Anthony M. Frank........................................ 12,000 0
Frank C. Herringer...................................... 10,000 0
Stephen T. McLin........................................ 16,500 0
Roger O. Walther........................................ 16,500 0
All employees, other than executive officers............ 11,452,257 862,300
10
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NEW PLAN BENEFITS
1992
STOCK INCENTIVE PLAN
------------------------
DOLLAR NUMBER OF
NAME VALUE UNITS(1)
- --------------------------------------------------------------------- ------ -------------
Non-Employee Directors............................................... * 10,500/17,500
- -------------------------------
* The Dollar Value of stock option grants are determined on the grant date.
(1) The 1992 Plan is administered by the Compensation Committee of the Board of
Directors, but the Compensation Committee has no discretion with respect to
the annual, automatic grant of NSOs to non-employee directors. Under the
1992 Plan, each non-employee director receives an annual grant of options to
purchase 1,500 shares of Common Stock (2,500 shares of Common Stock if the
exercise price is less than $35).
PROPOSAL NO. 3 -- STOCKHOLDER PROPOSAL REQUESTING THAT THE BOARD OF DIRECTORS
AMEND THE CERTIFICATE OF INCORPORATION
STOCKHOLDER PROPOSAL TO REINSTATE STOCKHOLDER RIGHT TO ACT BY WRITTEN CONSENT
AND TO CALL SPECIAL MEETINGS
BE IT RESOLVED, that the stockholders of the Company request that the Board
of Directors amend the Certificate of Incorporation to reinstate the rights of
the stockholders to take action by written consent and to call special meetings.
STATEMENT IN SUPPORT
The rights of the stockholders to take action by written consent and to
call special meetings should not be abridged.
The Company's elimination of these rights, in our opinion, effectively
removes important processes by which stockholders can act expeditiously to
protect their investment interests.
For example, the right of stockholders to act to remove incumbent directors
for egregious conduct should not be limited to the annual meeting. Also,
stockholders should not be prevented from giving timely consideration to a
bidder's proposal to acquire control of the Company, or a dissident
stockholder's slate of nominees for election of the Board of Directors, because
such proposals are required to be presented only at the annual meeting.
BOARD OF DIRECTORS RECOMMENDATION AGAINST AND COMMENTS ON THE STOCKHOLDER
PROPOSAL
The Board of Directors, after consideration of this proposal, recommends
that the stockholders vote AGAINST it because it is not in the best interests of
the Company.
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15
At the 1996 Annual Stockholders Meeting the stockholders approved certain
amendments to the Company's Certificate of Incorporation. Also during 1996, the
Board of Directors adopted related amendments to the Company's bylaws. All of
these amendments were intended to help assure the continuity and stability of
the Company's business and affairs. The stockholder proposal would ask the Board
of Directors to cancel two of the amendments approved last year, thereby
allowing stockholders to act by written consent and allowing stockholders
holding at least 25% of the voting power of the outstanding capital stock of the
Company to call special meetings. As detailed below, the Board of Directors does
not believe that allowing stockholders to take such actions is in the best
interest of the Company.
The current provision in the Certificate of Incorporation prohibiting
stockholder action by written consent gives all the stockholders of the Company
the opportunity to participate in determining any proposed action. This
provision allows the opportunity for discussion at a meeting and increases the
ability of minority stockholders to have their views considered by preventing
the holders of a simple majority of the voting power of the Company from using
the written consent procedure to take stockholder action without a meeting.
The current bylaw provision allowing the Board of Directors, the Chairman
or a duly designated committee of the Board of Directors to call special
meetings of stockholders provides for the orderly conduct of all Company affairs
at the annual meeting of stockholders or at a special meeting. Accordingly, a
stockholder cannot force consideration of a proposal over the opposition of the
Board of Directors by calling a special meeting of stockholders prior to such
time that the Board of Directors believes such consideration to be appropriate.
As a result, the Board of Directors will have the opportunity to adequately
evaluate and inform all stockholders of any matters to be considered.
For the foregoing reasons, the Board of Directors believes that the
stockholder proposal is not in the best interests of the Company and strongly
recommends that you vote AGAINST the proposal.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of March 13, 1997, by each person
who is known to the Company to own beneficially more than 5% of the Common
Stock, each executive officer named in the Summary Compensation Table, each of
the Company's directors and each nominee for election as a director, and all
directors and executive officers of the Company as a group.
NUMBER OF SHARES PERCENT OF
OF BENEFICIALLY OUTSTANDING
NAME OF BENEFICIAL OWNER(1) OWNED(2) COMMON STOCK
- ---------------------------------------------------------------- ---------------- ------------
Charles R. Schwab(3)(4)(5)...................................... 36,662,535 20.8%
Charles Schwab Profit Sharing and Employee Stock Ownership
Plan(6)(7).................................................... 16,459,957 9.3%
+Luis E. Valencia
+Walter W. Bettinger III
+Evelyn S. Dilsaver
+Wayne W. Fieldsa
+Thomas N. Lawrie
+Susanne D. Lyons
+Thomas W. Matchett, Jr.
Transamerica Corporation and Transamerica Investment Services,
Inc.(8)....................................................... 9,096,350 5.2%
Lawrence J. Stupski(3)(4)....................................... 4,725,926 2.7%
David S. Pottruck(3)(4)(9)...................................... 3,247,957 1.8%
Nancy H. Bechtle(3)............................................. 80,250 *
C. Preston Butcher(3)(10)....................................... 171,750 *
Donald G. Fisher(3)(11)......................................... 499,250 *
Anthony M. Frank(3)(12)......................................... 301,798 *
Frank C. Herringer(3)(13)....................................... 24,850 *
Stephen T. McLin(3)(14)......................................... 39,037 *
Roger O. Walther(3)(15)......................................... 36,339 *
Tom D. Seip(3)(4)............................................... 520,314 *
Timothy F. McCarthy(3)(4)....................................... 40,000 *
Luis E. Valencia(3)(4).......................................... 204,777 *
All executive officers and directors as a group (18
persons)(16).................................................. 63,788,182 36.2%
- -------------------------------
* Less than 1%.
+ Members of the Administrative Committee for the Profit Sharing Plan. For
information regarding shares beneficially owned by such persons, see Note 7
below.
(1) All information with respect to beneficial ownership of the shares is based
upon filings made by the respective beneficial owners with the SEC or
information provided by such beneficial owners to the
13
17
Company. Except as otherwise indicated in the notes to this table, the
address of each beneficial owner of more than 5% of the Common Stock is c/o
The Charles Schwab Corporation, 101 Montgomery Street, San Francisco,
California 94104.
(2) The persons named in the table have sole voting and investment power (or
voting and investment power shared with a spouse) with respect to all
shares of Common Stock shown as beneficially owned by them, subject to the
information contained in the notes to this table.
(3) Shares issuable upon exercise of options to acquire Common Stock that are
exercisable within 60 days of March 13, 1997 are treated as beneficially
owned as follows: Mr. Schwab 1,137,499 shares; Mr. Stupski 234,748 shares;
Mr. Pottruck 1,190,524 shares; Ms. Bechtle 72,750 shares; Mr. Butcher
16,500 shares; Mr. Fisher 16,500 shares; Mr. Frank 70,500 shares; Mr.
Herringer 10,000 shares; Mr. McLin 16,500 shares; Mr. Walther 16,500
shares; Mr. Seip 397,274 shares; Mr. McCarthy 25,000 shares; and Mr.
Valencia 194,024 shares.
(4) Includes amounts held by the Trustee of the Profit Sharing Plan and
allocated to the individual Employee Stock Ownership Plan ("ESOP") accounts
or held for the benefit of the named executives under the Profit Sharing
and Salary Deferral Components of the Profit Sharing Plan ("non-ESOP
components") as follows: Mr. Schwab 245,509 shares; Mr. Stupski 78,228
shares; Mr. Pottruck 165,061 shares; Mr. Seip 61,393 shares; Mr. McCarthy 0
shares; and Mr. Valencia 753 shares.
(5) This amount includes 2,384,398 shares held by nonprofit public benefit
corporations, as to which Mr. Schwab and his spouse, as two of three
directors, have shared voting and investment power but disclaim beneficial
ownership; 4,320,000 shares held by Mr. Schwab and his spouse as trustees
of a living trust; 3,482 shares held by Mr. Schwab as custodian for his
children; 1,500 shares held by Mr. Schwab as trustee of a trust with
respect to which he disclaims beneficial ownership; and 48,880 shares held
by the Schwab 1000 Fund and managed by Charles Schwab Investment
Management, Inc., which is a wholly-owned subsidiary of the Company, as to
which shares Mr. Schwab may be deemed to have shared voting and investment
power but with respect to which he disclaims beneficial ownership. This
amount does not include 6,836,964 shares held by Mr. Schwab's
brother-in-law, as trustee of various trust accounts for the benefit of Mr.
Schwab's spouse and children.
(6) The Trustee of the Profit Sharing Plan is The Charles Schwab Trust Company,
120 Kearny Street, San Francisco, California 94104 and the purchasing agent
of the Profit Sharing Plan is Bankers Trust Company of California, N.A.,
400 S. Hope Street, Los Angeles, CA 90071. The shares held by the Trustee
of the Profit Sharing Plan include an aggregate of 15,662,770 shares which,
as of March 13, 1997 had been allocated to the accounts of individual ESOP
participants or held for the benefit of Profit Sharing Plan participants,
including officers of the Company, in the non-ESOP components of the Profit
Sharing Plan, and which are voted at the direction of such participants.
The purchasing agent has sole voting power with respect to 797,187 of the
shares held by the Trustee that have not yet been allocated to the accounts
of individual ESOP participants. The purchasing agent is required to vote
all shares under its control in a specified manner. See "Voting." The
797,187 unallocated shares held by the
14
18
Trustee of the Profit Sharing Plan, and the voting rights attributable to
those shares, will be allocated to the accounts of individual ESOP
participants in the future.
(7) Mr. Valencia, Mr. Bettinger, Ms. Dilsaver, Mr. Fieldsa, Mr. Lawrie, Ms.
Lyons and Mr. Matchett are officers of the Company or one of its
subsidiaries and members of the Profit Sharing Plan Administrative
Committee. As such, they have shared investment power with respect to all
of the 16,459,957 shares held by the Trustee of the Profit Sharing Plan.
Mr. Valencia, Mr. Bettinger, Ms. Dilsaver, Mr. Fieldsa, Mr. Lawrie, Ms.
Lyons and Mr. Matchett each also have sole voting power with respect to the
753; 393; 7,059; 306; 5,569; 2,911; and 1,687 shares, respectively, held by
the Trustee of the Profit Sharing Plan and allocated to their individual
ESOP accounts or otherwise held for their benefit in the non-ESOP
components of the Profit Sharing Plan; the 10,000; 90,762; 900; 25,101;
7,867; 25,100; and 920 shares, respectively, held by each directly; and
194,024; 2,000; 65,250; 5,191; 2,250; 65,800; and 0 shares, respectively,
which each has the right to acquire under options which are exercisable
within 60 days of March 13, 1997. As a result, the members of the
Administrative Committee are deemed to be the beneficial owners of
outstanding Common Stock, as follows: Mr. Valencia 9.5%; Mr. Bettinger
9.4%; Ms. Dilsaver 9.4%; Mr. Fieldsa 9.4%; Mr. Lawrie 9.3%; Ms. Lyons 9.4%;
and Mr. Matchett 9.3%.
(8) The address of Transamerica Corporation ("Transamerica") is 600 Montgomery
Street, San Francisco, California 94111 and the address of Transamerica
Investment Services, Inc. ("TIS") is 1150 South Olive Street, Los Angeles,
California 90015. This disclosure is based on information contained in a
report on Schedule 13-G filed with the SEC. TIS is a wholly-owned
subsidiary of Transamerica, and the listed shares include shares held by
Transamerica and shares held for the benefit of investment advisory clients
of TIS, including other subsidiaries of Transamerica.
(9) This amount includes 11,362 shares held by Mr. Pottruck as custodian for
his children; 90,000 shares held by Mr. Pottruck as trustee of trusts held
for the benefit of his brothers; 75,050 shares held by a nonprofit public
benefit corporation as to which Mr. Pottruck, as a director, has voting and
investment power but disclaims beneficial ownership; and a total of 35,442
shares held by Mr. Pottruck's family members, as to which he shares
investment power but disclaims beneficial ownership.
(10) This amount includes 113,250 shares held by Mr. Butcher and his spouse as
joint tenants, and 42,000 shares held by Mr. Butcher's spouse as her
separate property.
(11) This amount includes 408,500 shares held by Mr. Fisher and his spouse as
trustees of a charitable remainder trust.
(12) This amount includes 41,298 shares held by Mr. Frank's daughter, as to
which he shares investment power but disclaims beneficial ownership.
(13) This amount includes 3,750 shares held by Mr. Herringer as custodian for
his children.
(14) This amount includes 22,312 shares held by Mr. McLin under the Company's
Dividend Reinvestment and Stock Purchase Plan.
(15) This amount includes 15,928 shares held by Mr. Walther for a trust account
under the Company's Dividend Reinvestment and Stock Purchase Plan and 3,911
shares held by his spouse.
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19
(16) Messrs. Schwab, Stupski, Pottruck, Butcher, Fisher, Frank, Herringer,
McLin, Walther, Seip, McCarthy, and Valencia, Ms. Bechtle and five other
executive officers are members of the group. The total number of shares
shown on this line includes the group's direct share holdings (except
individual Profit Sharing Plan holdings) and shares issuable upon exercise
of options within 60 days of March 13, 1997. The 15,662,770 allocated and
797,187 unallocated shares held by the Trustee of the Profit Sharing Plan
are also included in this total number of shares.
16
20
EXECUTIVE COMPENSATION
The following table shows specific compensation information for the
Company's Chief Executive Officer and the next four most highly compensated
executive officers in 1996 for fiscal years ending December 31, 1996, 1995, and
1994.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS
----------------------------------------
AWARDS
ANNUAL ------------------------ PAYOUTS
COMPENSATION RESTRICTED SECURITIES -------------
------------ STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) AWARDS($)(3) OPTIONS(#) PAYOUTS($)(4) COMPENSATION($)(5)
- ------------------------------ ---- ------------ ----------- ----------- ---------- ------------- ------------------
Charles R. Schwab,............ 1996 $800,004 $9,387,225 0 0 0 $ 18,810
Chairman and 1995 $800,004 $8,606,225 0 500,000 0 $ 24,699
Chief Executive Officer 1994 $772,506 $2,500,225 0 0 0 $ 18,890
David S. Pottruck,............ 1996 $695,004 $6,436,225 0 0 0 $ 18,810
President and 1995 $695,004 $5,898,225 0 350,000 0 $ 24,699
Chief Operating Officer 1994 $658,755 $ 662,543 0 300,000 $ 1,578,360 $ 18,890
Tom D. Seip,.................. 1996 $408,333 $1,395,572 0 0 0 $ 18,810
Executive Vice President 1995 $366,668 $1,046,288 $ 384,375 75,000 0 $ 24,699
1994 $306,258 $ 264,309 0 180,000 $ 751,600 $ 18,890
Timothy F. McCarthy,.......... 1996 $343,751 $1,111,485 $ 246,250 0 0 $ 6,805
Executive Vice President 1995 $108,336 $ 254,174 $ 128,125 100,000 0 $ 6,118
1994 N/A N/A N/A N/A N/A N/A
Luis E. Valencia,............. 1996 $329,167 $ 938,084 0 0 0 $ 18,810
Executive Vice President and 1995 $295,000 $ 762,695 $ 256,250 60,000 0 $ 24,699
Chief Administrative Officer 1994 $228,750 $ 182,546 0 240,000 0 $ 2,000
- -------------------------------
(1) Mr. McCarthy joined the Company in September of 1995, and Mr. Valencia
joined the Company in February of 1994.
(2) Includes, with respect to Mr. Schwab, amounts paid pursuant to his
Employment Agreement with the Company dated March 31, 1995. See "Employment
Agreement and Name Assignment."
(3) This column shows the market value of restricted stock awards on date of
grant. The year end value of Messrs. Seip, McCarthy and Valencia's shares
were $480,000, $480,000 and $320,000, respectively, based on the closing
sale price of the Company's Common Stock on December 31, 1996 ($32.00). This
per share price does not reflect any additional diminution in value
resulting from the restrictions placed on such shares. The holders have
voting and dividend rights with respect to the restricted shares. The
restricted shares, when originally issued, vested over a five-year period,
with 10% of the shares vesting two years after the grant date, an additional
10% of the shares vesting three years after the grant date, an additional
15% of the shares vesting four years after the grant date, and the remaining
65% of the shares vesting five years after the grant date. Some of the
restricted shares were issued subject to restrictions that would cause them
to vest more slowly or not at all if certain stock performance criteria are
not met. Thus, it is possible that a substantial number of the restricted
shares will not vest. However, because certain
17
21
percentages of the restricted shares would vest upon reaching each of the
specified return to shareholders targets (price appreciation plus
dividends), all, none or part of the restricted stock could vest in five
years from the date that the restricted shares were awarded. In 1996, and
effective January 1, 1997, the Compensation Committee of the Board of
Directors shortened the vesting period for all restricted grants made after
December 31, 1993 to four years. The restricted shares outstanding on
December 31, 1996 now have a vesting schedule with 10% of the shares vesting
two years after the grant date, an additional 40% of the shares vesting
three years after the grant date, and the remaining 50% of the shares
vesting four years after the grant date. Any restricted shares granted
subject to stock performance criteria remain subject to those conditions.
(4) The disclosure rules of the SEC currently in effect provide for disclosure
of compensation relating to long-term incentive plans only when compensation
awards are made and when they are paid out. The Long-Term Incentive Plan III
("LTIP"), which was adopted effective as of January 1, 1991, was terminated
as of December 31, 1994. Mr. Schwab did not participate in or earn any cash
bonuses pursuant to LTIP. Each participant's final cash bonus was equal to
the value of such participant's units on December 31, 1994 less the value of
such units on the date of grant. Units at the inception of LTIP had an
initial value of $0. Units awarded after the inception of LTIP were valued
as of either June 30 or December 31 of each year during the four year period
covered by the LTIP, depending on the date of grant. Participants at the
executive officer level were permitted to defer receipt of all or a portion
of their LTIP cash bonuses until the earlier of a specified date certain or
the date of the participant's termination of employment, provided that
deferrals will be paid immediately upon a change of control.
(5) Represents employer contributions to the retirement plans for the years
1994, 1995, and 1996.
18
22
STOCK OPTION TABLES
There were no grants to purchase the Company's Common Stock to the persons
named in the Summary Compensation Table during the fiscal year ended December
31, 1996.
The following table shows information concerning the exercise of stock
options during 1996 and the value of unexercised stock options held by the
individuals named in the Summary Compensation Table above as of December 31,
1996.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT 12/31/96 AT 12/31/96(1)(2)(3)
------------------- ---------------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(4) REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------- -------- ------------------- ---------------------
Charles R. Schwab...................... 0 N/A 1,137,499 $28,781,244
375,001 $ 2,390,631
David S. Pottruck...................... 0 N/A 1,190,524 $30,100,341
413,476 $ 4,860,909
Tom D. Seip............................ 0 N/A 420,024 $10,576,365
149,476 $ 2,327,316
Timothy F. McCarthy.................... 0 N/A 25,000 $ 159,375
75,000 $ 478,125
Luis E. Valencia....................... 0 N/A 134,024 $ 2,709,403
165,976 $ 2,913,097
- -------------------------------
(1) The amount in this column reflects the difference between the average of the
high and low market prices on December 31, 1996 and the option exercise
price and may not represent amounts actually realized by the named
individual.
(2) All options are granted at 100% of the fair market value (as defined in the
1992 Plan) of the Common Stock on the date of grant. The options expire
eight or ten years from the date of grant, unless they expire earlier on
account of certain events related to termination of employment. The options,
when originally granted, were subject to the vesting schedule of either the
1987 Stock Option Plan, the 1987 Executive Officer Stock Option Plan
(collectively, the "1987 Plans") or the 1992 Plan. Those granted from the
1987 Plans are subject to a five year vesting schedule with vesting
occurring in 10% increments every six months after the grant date. The
options granted from the amended 1992 Plan were subject to a five year
vesting schedule, with vesting occurring in increments of 10% and 15%, on
the first and second
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23
anniversary dates of the grant, and 25% each year on the third, fourth and
fifth anniversary dates of the grant. Effective January 1, 1997, the 1992
Plan was further amended by the Compensation Committee of the Board of
Directors to retroactively shorten the vesting period for all option grants
made after December 31, 1993 to four years. The options subject to this
amendment now have a vesting schedule that allows vesting in 25% increments
on each anniversary date of the grant, so that 100% of the options are
vested after four years, subject to the terms and conditions of the 1992
Plan.
(3) The value of unexercised options is calculated by multiplying the number of
options outstanding by the difference between the option exercise price and
the December 31, 1996 closing price of $32.00 per share of the Company's
Common Stock as reported on the New York Stock Exchange Composite
Transactions Index, and may not represent amounts actually realized by the
named individual.
(4) No named individual exercised stock options in 1996.
20
24
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
During 1996, the Compensation Committee (the "Committee") of the Company's
Board of Directors consisted of Mr. Walther, Ms. Bechtle, Mr. Butcher and Mr.
McLin. In addition, Mr. James Harvey was a member of the Committee until June of
1996. All members of the Committee during 1996 were not employees of the Company
or any of its subsidiaries. The Committee has overall responsibility for the
Company's executive compensation policies and practices. Each member satisfies
the applicable requirements of Section 16 of the Securities Exchange Act of
1934, as amended, and is an "outside director" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Committee determines the compensation of the Chairman of the Company and, upon
recommendation of the Chairman and the President, reviews and approves all
executive officers' compensation, including salary, payments under the annual
executive bonus plans, and awards under stock option and stock incentive plans.
The Committee has provided the following report on the Chairman's compensation,
the compensation policies of the Company as they apply to its executive officers
and the relationship of Company performance to executive compensation.
COMPENSATION POLICIES
The Company's compensation policies are designed to address a number of
objectives, including rewarding financial performance and motivating executive
officers to achieve significant returns for stockholders. The Company's policies
rely on two principles. First, a significant portion of executive officers'
total compensation should be in the form of stock and stock-based incentives.
Second, a large portion of their cash compensation should be at risk and vary,
depending upon meeting stated financial objectives.
When establishing salaries, bonus levels and stock-based awards for
executive officers, the Committee considers the individual's role,
responsibilities and performance during the past year, and the amount of
compensation paid to executive officers in similar positions of comparable
companies, based on periodic reviews of competitive data obtained from
independent consultants. The Committee reviews companies of similar size, rates
of growth and financial returns to the Company, including, but not limited to,
some of the companies included in the Dow Jones Securities Brokerage Group
Index. Companies outside the financial services industry are selected for
inclusion in the review based upon the extent to which they satisfy a list of
selection criteria, which includes size, growth rates, similar financial
performance, leadership status in their industry, reputation for innovation, and
the extent to which they compete with the Company for executives, not all of
which will be satisfied in any particular case. The Committee believes it is
necessary to include in its review companies other than those included in the
Dow Jones Securities Brokerage Group Index because the Company frequently
recruits employees from outside the financial services industry, depending upon
the specific skills required for the position. The Committee uses comparative
data to set compensation targets that will provide executive officers with
compensation that exceeds the average amounts paid to similar executives of
comparable companies in years in which the Company achieves superior
performance, and with compensation below the average of amounts paid to similar
executives of comparable companies in years in
21
25
which the Company fails to achieve superior performance. However, the Committee
also makes discretionary and subjective determinations of appropriate
compensation amounts to reflect, for example, the Company's philosophy of
compensating executives for the success they achieve in managing specific
enterprises. In the case of the compensation of the President, the Committee
places considerable weight on the recommendations of the Chairman, and with
respect to executive officers other than the Chairman and the President, the
Committee places considerable weight upon the recommendations of the Chairman
and the President.
THE IMPORTANCE OF OWNERSHIP
A fundamental tenet of the Company's compensation policy is that
significant equity participation creates a vital long term partnership between
management/owners and other stockholders. Through the Profit Sharing Plan and
various stock incentive plans, the benefits of equity ownership are extended to
executive officers and employees of the Company and its subsidiaries. As of
March 13, 1997, the directors, executive officers and other senior officers of
the Company and its subsidiaries owned an aggregate of 44,885,173 shares and had
the right to acquire an additional 5,955,975 shares upon the exercise of
employee stock options which were exercisable on March 13, 1997 or within sixty
days thereafter. In addition, the Profit Sharing Plan held 16,459,957 shares.
These interests, exclusive of other outstanding options, represented in the
aggregate 38.2% of the outstanding capital stock of the Company. The Company
intends to continue its strategy of encouraging its employees to become
stockholders.
The chart which follows this report compares changes in the Company's
cumulative total returns with those of the S&P 500 Index and the Dow Jones
Securities Brokerage Group Index. From December 31, 1991 through December 31,
1996 the cumulative total return of the Company's stock was 394%. By comparison,
in the same period the Dow Jones Securities Brokerage Group Index grew 143% and
the S&P 500 Index grew 103%. The Committee believes that the executive officers'
equity participation in the Company is a meaningful factor contributing to the
Company's success.
ANNUAL BASE SALARY
The Company believes that base salary is frequently a significant factor in
attracting, motivating and retaining skilled executive officers. Accordingly,
the Committee reviews base salaries of executive officers annually and generally
sets the base salary of its executive officers at or near the average of the
levels paid by the other companies it reviews. (See "Compensation Policies.")
VARIABLE COMPENSATION
Corporate Executive Bonus Plan. The Corporate Executive Bonus Plan ("the
Bonus Plan") pays bonuses each year to executive officers (other than the
Chairman, who is covered under an employment agreement with the Company, see
"Chairman's Compensation" below) based on the Company's performance. Depending
upon the Company's net revenue growth and pre-tax profit margin, the Bonus Plan
is paid out at a percentage of each participant's bonus target. Targets are
expressed as a percentage of base salary, which are
22
26
determined by the Committee based on the factors discussed above (see
"Compensation Policies"). The Committee sets target bonuses in the first quarter
of each year based upon the recommendation of the Chairman and, where
appropriate, the President. In the case of the President, who receives all of
his annual incentive compensation under the Bonus Plan, the target bonus can be
up to 300% of base salary. In the case of the remaining executive officers, who
also participate in the Annual Executive Individual Performance Plan (discussed
below), the target bonuses can be up to 50% of base salary. The target bonus is
adjusted upward or downward, in accordance with a payout matrix adopted by the
Committee at the time the target bonus is established, resulting in a payout of
a multiple (or fraction) of the target bonus depending upon the Company's
performance. The factors determining bonuses in the matrix are pre-tax profit
margin and net revenue growth. In general, a given percentage change in pre-tax
profit margin will have a greater impact on the determination of bonus payments
than the same percentage change in the net revenue growth rate. In 1996, the
Company achieved a pre-tax profit margin of 21.3% and net revenue growth of
30.4%. Based on this performance, executive officers received bonuses in excess
of 100% of their target bonus amounts in 1996.
Annual Executive Individual Performance Plan. The Annual Executive
Individual Performance Plan (the "Individual Performance Plan") pays bonuses to
executive officers other than the Chairman, Vice Chairman and President based on
a subjective determination of each such officer's individual contribution to the
attainment of the Company's performance objectives, made by the Committee upon
the recommendation of the Chairman and the President. In general, such
recommendations are based in significant part upon such officer's success in
achieving specific goals identified in such officer's business plan. The amount
available for payments under the Individual Performance Plan is determined in
accordance with a matrix, adopted by the Committee in its discretion, in advance
from time to time, that generates a funding amount based upon the level of the
Company's net revenue growth and pre-tax profit margin. Although individual
bonuses under the Individual Performance Plan may vary in recognition of
individual achievements, the aggregate amount of executive officer bonuses
payable under the Individual Performance Plan is based strictly on the Company's
performance.
1992 Stock Incentive Plan. In 1992, the Board of Directors approved a
stock incentive plan (the "1992 Plan"), which was approved by the stockholders
of the Company at the 1992 Annual Meeting and became effective on May 8, 1992.
Under the 1992 Plan, stock option grants are made to executive officers by the
Committee, based upon the factors discussed above (see "Compensation Policies").
The Committee has adopted a policy of granting infrequent and large stock
option awards to executive officers rather than annual, smaller grants. The
Committee believes that large, but infrequent awards provide a more powerful
incentive to executive officers to achieve sustained growth over the long term.
The Committee intends that stock-based incentives will be the sole long-term
incentives payable to executive officers.
During 1996, stock option grants were made to certain of the Company's
executive officers. In addition, certain of the Company's executive officers
received grants of restricted shares. To determine the size of the grants, the
Company reviewed and presented to the Committee data obtained from an
independent consultant concerning levels of long term compensation for executive
officers of selected financial services companies and
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companies of comparable size, rates of growth, and/or financial returns, as well
as the value of outstanding non-vested options held by the individual.
CHAIRMAN'S COMPENSATION
The Company's Chairman, Charles R. Schwab, is compensated based on an
employment agreement that was entered into between the Company and Mr. Schwab
and approved by the stockholders, effective as of March 31, 1995 (see
"Employment Agreement and Name Assignment"). Under the terms of his Employment
Agreement, Mr. Schwab receives a base salary of $800,000. Mr. Schwab's annual
bonus, if any, is a multiple of his base salary. The multiple is based on the
Company's performance for the year relative to net revenue growth and pre-tax
profit margin, and is determined under a matrix adopted by the Committee which
has the authority to adjust the matrix from time to time (in advance).
The Committee believes that Mr. Schwab's leadership is a vital factor in
the Company's success. The Committee believes that Mr. Schwab provides the
Company with the leadership, vision and inspiration for innovation that has
generated the Company's growth and superior performance, and that the Company's
overall strategic direction as developed by Mr. Schwab is critical to enhancing
the future long term value of the Company for its stockholders. Mr. Schwab's
leadership has enabled the Company to substantially outperform both the S&P 500
Index and the Dow Jones Securities Brokerage Group Index over the past five year
period. Based upon the Company's attainment in 1996 of a pre-tax profit margin
of 21.3% and net revenue growth of 30.4%, which resulted in pre-tax profit of
over $394,000,000, the amount of Mr. Schwab's annual bonus for 1996, calculated
pursuant to the matrix, was $9,387,000.
TAX LAW LIMITS ON EXECUTIVE COMPENSATION
Section 162(m) of the Code limits deductions for certain executive
compensation in excess of $1 million. Certain types of compensation are
deductible only if performance criteria are specified in detail, and payments
are contingent on stockholder approval of the compensation arrangement. The
Company believes that it is in the best interests of its stockholders to
structure compensation plans to achieve deductibility under Section 162(m),
except where the benefit of such deductibility is outweighed by the need for
flexibility or the attainment of other corporate objectives. Accordingly, the
Company's Corporate Executive Bonus Plan and 1992 Stock Incentive Plan were
approved by the stockholders in 1994, amendments to the Company's Corporate
Executive Bonus Plan were approved by the stockholders in 1995, and the
Company's employment agreement with Mr. Schwab was approved by the stockholders
in 1995 (see "Employment Agreement and Name Assignment"). The Committee will
continue to monitor issues concerning the deductibility of executive
compensation and will take appropriate action if and when it is warranted. Since
corporate objectives may not always be consistent with the requirements for full
deductibility, the Committee is prepared, if it deems appropriate, to enter into
compensation arrangements under which payments may not be
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deductible under Section 162(m); deductibility will not be the sole factor used
by the Committee in ascertaining appropriate levels or modes of compensation.
Compensation Committee of the Board of
Directors
Roger O. Walther, Chairman
Nancy H. Bechtle
C. Preston Butcher
Stephen T. McLin
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PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total
returns for the Company's Common Stock, the S&P 500 Index and the Dow Jones
Securities Brokerage Group Index, each of which assumes an initial investment of
$100 and reinvestment of dividends.
[CHART]
Comparison of Five Year Cumulative Total Return* Among
The Charles Schwab Corporation, S&P 500 Index and
Dow Jones Securities Brokerage Group Index Over Five Year Period Ended
December 31, 1996**
Dow Jones
The Charles Securities S & P
Schwab Corporation Brokerage Group Index 500 Index
Dec-91 100 100 100
Dec-92 87 103 108
Dec-93 162 133 118
Dec-94 177 118 120
Dec-95 308 161 165
Dec-96 494 243 203
- -------------------------------
* Total return assumes reinvestment of dividends.
** Information presented as of the end of each fiscal year ended December 31.
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EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT
The Company has entered into an employment agreement with Mr. Schwab,
effective March 31, 1995 (the "Employment Agreement"), which was approved by the
Company's stockholders and replaced an earlier employment agreement. The
Employment Agreement has an initial term of five years, and provides that as of
each March 31, the term of the Employment Agreement is automatically extended by
an additional year, subject to the same terms and conditions, unless either
party provides notice to the other, by that date, of an intention not to extend
the agreement.
The Employment Agreement provides for an annual base salary of $800,000 and
provides that Mr. Schwab will participate in all compensation and fringe benefit
programs made available to other executive officers, including the Company's
stock incentive plans. In lieu of participating in the executive bonus plans,
Mr. Schwab's annual bonus, if any, is a multiple of his base salary. This
multiple is based on the Company's performance for the year relative to net
revenue growth and pre-tax profit margin, and is determined under a matrix
adopted by the Committee which has the authority to adjust the matrix from time
to time (in advance). The matrix is also subject to annual, automatic adjustment
based on increases in the Consumer Price Index.
The Employment Agreement also provides that certain compensation and
benefits will be paid or provided to Mr. Schwab (or his immediate family or
estate) in the event his employment is terminated involuntarily, other than for
cause, prior to the expiration of the Employment Agreement. For these purposes,
"cause" is defined as the commission of a felonious act, or willful and gross
negligence or misconduct that results in material harm to the Company. Mr.
Schwab's resignation following a material change in his capacities or duties at
Schwab or the Company is included in the definition of "involuntary
termination." If an involuntary termination is for reasons other than death,
disability or for "cause," Mr. Schwab will be entitled to receive for a period
of 36 months all compensation to which he would have been entitled had he not
been terminated, including his base salary and participation in all bonus,
incentive and other compensation benefit plans for which he was or would have
been eligible (but excluding additional grants under the Company's stock
incentive plans). In addition, all outstanding, unvested awards under the
Company's stock incentive plans will vest fully on the effective date of the
termination. If an involuntary termination is by reason of disability, Mr.
Schwab will be entitled to receive his base salary, less any payments under the
Company's long term disability plan, and benefits (but not bonuses or other
incentive compensation) for a period of 36 months from such termination, and
shall also receive a pro-rated portion of any bonus or incentive payments
payable with respect to the year in which the disability occurs. If an
involuntary termination is by reason of death, a lump sum payment will be made
to Mr. Schwab's estate equal to five times his then base salary. If Mr. Schwab
should voluntarily resign his employment within 24 months of a change in control
of the Company, he shall be entitled to receive a pro-rated portion of any bonus
or incentive payments payable with respect to the year in which the resignation
occurs.
In addition, if Mr. Schwab's employment should terminate on account of any
voluntary resignation, or on account of an involuntary termination occurring
within 24 months of a change in control of the Company,
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Mr. Schwab shall have the right (but not the obligation) to enter into a
consulting arrangement under which he would provide certain consulting services
to the Company for a period of five years, in exchange for an annual payment
equal to the lesser of $1 million or 75% of his then base salary. The Employment
Agreement precludes Mr. Schwab from becoming associated with any business
competing with the Company for a period of five years following a voluntary
resignation of employment (except that such covenant would not apply in the
event of a resignation of employment occurring within 24 months of a change in
control of the Company).
The Company and Schwab also are parties to an Assignment and License
agreement with Mr. Schwab (the "Name Assignment") that was approved in July 1987
by the Company's non-employee director. Pursuant to the Name Assignment, Mr.
Schwab has assigned to the Company all service mark, trademark, and trade name
rights in and to Mr. Schwab's name (and variations thereon) and likeness,
subject to Mr. Schwab's perpetual, exclusive, irrevocable right to use his name
and likeness for any activity other than the financial services business. In
addition, Mr. Schwab will be entitled to use his likeness in the financial
services business, beginning immediately after any termination of his
employment, for some purposes (specifically, the sale, distribution, broadcast
and promotion of books, videotapes, lectures, radio and television programs, and
also any financial planning services that are not in direct competition with any
business in which the Company or its subsidiaries are then engaged or plan to
enter within three months), and beginning two years after any termination of his
employment, for all other purposes, provided that Mr. Schwab may not use his
likeness in a way that causes confusion as to whether the Company is involved
with goods or services actually marketed by Mr. Schwab or by third parties
unrelated to the Company. Subject to the same prohibition against actual
confusion of customers, Mr. Schwab at all times will be able to use his own name
to identify himself, but not as a service mark, trademark or trade name in the
financial services business. The "financial services business" is defined in the
Name Assignment as the business in which Schwab is currently engaged and any
additional and related businesses in which the Company or Schwab is permitted to
engage under rules and regulations of applicable regulatory agencies. The
Company's right to assign or license the right to use Mr. Schwab's name and
likeness are severely constrained during Mr. Schwab's lifetime.
No cash consideration is to be paid to Mr. Schwab for the Name Assignment
while he is employed by the Company or, after that employment terminates, while
he is receiving compensation pursuant to an employment agreement with the
Company. Beginning when all such compensation ceases, and continuing for a
period of 15 years, Mr. Schwab or his estate will receive three tenths of one
percent (0.3%) of the aggregate net revenues of the Company (on a consolidated
basis) and those of its unconsolidated assignees and licensees that use the name
or likeness. These payments may not, however, exceed $2,000,000 per year,
adjusted up or down to reflect changes from the cost of living prevailing in the
San Francisco Bay Area during specified months in 1987, and they will terminate
if the Company and its subsidiaries cease using the name and likeness.
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CERTAIN SEVERANCE ARRANGEMENTS
The Company has a Change in Control Severance Plan (the "Severance Plan"),
which covers the executive officers named in the Summary Compensation Table
(except Mr. Schwab). The Severance Plan provides that, if the executive is
terminated other than for cause within three years after a change in control of
the Company or if the executive terminates his or her employment for good reason
within such three-year period or voluntarily during the thirty-day period
following the first anniversary of the change in control, the executive is
entitled to receive a lump sum severance payment equal to three times the sum of
the executive's base salary and highest annual bonus, together with certain
other payments and benefits, including continuation of employee welfare
benefits. An additional payment is required to compensate the executive for any
excise taxes imposed upon payments under the agreements.
CERTAIN TRANSACTIONS
Certain directors and executive officers maintain margin trading accounts
with Schwab. Extensions of credit in such accounts are made in the ordinary
course of Schwab's business, are made on substantially the same terms including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons, and do not involve more than the normal
risk of collectibility or present other unfavorable features. To the extent any
employees of the Company wish to purchase common stock in brokerage
transactions, they ordinarily are required to do so through Schwab. Schwab
offers its employees a 20% discount on its standard commission rates for all
brokerage transactions.
Schwab provides administrative services to Transamerica Occidental Life
Insurance Company and First Transamerica Life Insurance Company, both of which
are indirect subsidiaries of Transamerica Corporation ("Transamerica"), in
connection with certain life insurance and annuity products. Schwab received
approximately $381,000 in payment for these services in 1996. Transamerica
beneficially owns more than 5% of the outstanding Common Stock of the Company.
VOTING
Each stockholder may exercise his or her right to vote either in person or
by properly executed proxy. Shares represented by a properly executed proxy
received by the Company in time to permit its use at the Annual Meeting will be
voted as indicated on the proxy, unless such proxy has previously been revoked.
If no instructions are indicated on the proxy, such shares will be voted for the
Board of Directors' nominees to the Board of Directors of the Company, for the
amendments to the 1992 Plan and against the stockholder proposal requesting that
the Board of Directors amend the Certificate of Incorporation. Under applicable
Delaware law, abstentions are considered as shares present and entitled to vote
and, therefore, will have the same effect as a vote against a matter presented
at the meeting.
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Stockholders may revoke the authority granted by their proxies at any time
before the exercise of the powers conferred thereby by notice in writing
delivered to the Secretary of the Company; by submitting a subsequently dated
proxy; or by attending the Annual Meeting, withdrawing the proxy and voting in
person.
Brokers (other than Schwab) who hold shares in street name for customers
have the authority under applicable New York Stock Exchange rules to vote on the
election of directors. Schwab is entitled to vote such shares only in the same
proportion as the Company's shares are voted by all record holders. With respect
to all other matters presented for a vote, shares as to which brokers do not
cast a vote pursuant to discretionary voting authority from their customers or
authority under the New York Stock Exchange rules to vote on a particular matter
are regarded as broker non-votes. Broker non-votes are considered under Delaware
law as shares not entitled to vote with respect to such matter, but are counted
toward the establishment of a quorum.
Participants in the Profit Sharing Plan are entitled to instruct the
purchasing agent of the Profit Sharing Plan how to vote all shares of Common
Stock that are allocated to participants' individual accounts under the ESOP
component of the Profit Sharing Plan, as well as participants' proportionate
interest in shares of Common Stock held for the benefit of participants in
non-ESOP components. Participants will receive individual proxies for the voting
of such shares. If the purchasing agent does not receive voting instructions
from participants with respect to all such shares, the unvoted shares will be
voted in the same proportion as the shares for which voting instructions were
received by the purchasing agent. Similarly, shares held by the Profit Sharing
Plan under the ESOP component that have not yet been allocated to the ESOP
accounts of individual participants will be voted by the purchasing agent in the
same proportion as the votes cast by all shares voted by Profit Sharing Plan
participants. A proxy given by any stockholder participating through the
transfer agent in the Company's Dividend Reinvestment and Stock Purchase Plan
will govern the voting of all shares of Common Stock held for such stockholder's
account under that Plan.
APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has selected Deloitte & Touche LLP as the Company's
independent certified public accountants for the current fiscal year. Through
its predecessor, Deloitte Haskins & Sells, Deloitte & Touche LLP has served as
the accountants for the Company or Schwab since 1976. Representatives of
Deloitte & Touche LLP are expected to be present at the Annual Meeting to
respond to appropriate questions from stockholders and will have the opportunity
to make a statement.
ADDITIONAL INFORMATION
The Company will pay all costs of distribution and solicitation of proxies.
Brokers, nominees, fiduciaries and other custodians will be reimbursed their
reasonable fees and expenses incurred in forwarding proxy materials to
beneficial owners. MacKenzie Partners, Inc. has been retained at an estimated
cost of $12,000 to
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assist in the solicitation of proxies. In addition, proxies may be solicited by
employees of the Company or its subsidiaries without additional compensation.
The solicitations may be by mail, telephone and other means.
STOCKHOLDER PROPOSALS
In order for a stockholder's proposal to be considered for inclusion in the
Company's proxy statement for the 1998 Annual Meeting of Stockholders, such
proposal must be delivered to the attention of the Secretary of the Company and
received at the Company's principal executive office no later than November 23,
1997.
If a stockholder wants to nominate a person for election to the Board of
Directors, or bring other business before an annual meeting which has not been
submitted to the Company as a stockholder proposal for inclusion in the proxy
statement, the stockholder must follow procedures outlined in the Company's
bylaws. One of the procedural requirements in the bylaws is timely written
notice to the Secretary of the Company. A copy of these procedures is available
upon request from the Secretary of the Company, 101 Montgomery Street, San
Francisco, California 94104.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Mary B. Templeton
Mary B. Templeton
Corporate Secretary
March 21, 1997
San Francisco, California
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NOTICE
OF
ANNUAL
STOCKHOLDERS
MEETING
AND
PROXY
STATEMENT
--------------------------------------
1997
[THE CHARLES SCHWAB CORPORATION LOGO]
36
PROXY THE CHARLES SCHWAB CORPORATION PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 12, 1997
The undersigned hereby appoints Charles R. Schwab and Lawrence J. Stupski,
or either of them, proxies with full power of substitution and revocation in
each, to represent the undersigned and to vote, in accordance with the
instructions set forth in this Proxy, the number of shares of Common Stock of
The Charles Schwab Corporation set forth on the reverse side, which shares the
undersigned has the power to vote at the Annual Meeting of Stockholders to be
held on May 12, 1997 or at any adjournment or postponement thereof. The proxies
are authorized in their discretion to vote upon such other business as may
properly come before the meeting.
THIS PROXY ALSO RELATES TO SHARES HELD UNDER THE CHARLES SCHWAB
CORPORATION DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN.
YOUR VOTE IS IMPORTANT! PLEASE SIGN AND DATE ON THE REVERSE AND RETURN
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR OTHERWISE TO P. O. BOX 2702,
CHICAGO, IL 60690-9402 SO THAT YOUR SHARES CAN BE REPRESENTED AT THE MEETING.
The shares covered by this proxy will be voted in accordance with the
directions made on the reverse side. If no direction is given, this proxy will
be voted "FOR" all listed nominees for director (Proposal No. 1) and the
amendment to the 1992 Stock Incentive Plan (Proposal No. 2) and "AGAINST" the
stockholder proposal requesting that the Board of Directors amend the
Certificate of Incorporation (Proposal No. 3).
37
THE CHARLES SCHWAB CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
The Board of Directors recommends a vote "FOR" the following proposals.
1. Election of Directors-
Nominees: David S. Pottruck, Nancy H. Bechtle and C. Preston Butcher
For Withhold For All
All All Except those whose names(s) appear below.
____ ____ ____ ______________________________________________
2. Approval of Amendment to the 1992 Stock Incentive Plan.
For Against Abstain
____ ____ ____
The Board of Directors recommends a vote "AGAINST" the following proposal.
3. Stockholder proposal requesting that the Board of Directors amend the
Certificate of Incorporation.
For Against Abstain
____ ____ ____
This Proxy will be voted as directed. The Board of Directors proposes and
recommends a vote "FOR" Proposal No. 1 and Proposal No. 2 and a vote "AGAINST"
Proposal No. 3. If no direction is made, this proxy will be voted in accordance
with the Board of Directors' recommendation.
Dated: ________________________________, 1997
Signature(s)____________________________________________________________________
Note: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as a Fiduciary or for an estate, trust, corporation or partnership,
your title or capacity should be stated.
38
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
(RESTATED TO INCLUDE AMENDMENTS THROUGH SEPTEMBER 17, 1996)
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board of Directors on March 26, 1992. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of incremental stockholder value by (a) encouraging Non-Employee
Directors and Key Employees to focus on long-range objectives, (b) encouraging
the attraction and retention of Non-Employee Directors and Key Employees with
exceptional qualifications and (c) linking Non-Employee Directors and Key
Employees directly to stockholder interests. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Performance
Share Awards or Options, which may constitute incentive stock options or
nonstatutory stock options. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
ARTICLE 2. ADMINISTRATION.
2.1 The Committee. The Plan shall be administered by the Committee. The
Committee shall consist of two or more Non-Employee Directors, who shall be
appointed by the Board.
2.2 Committee Responsibilities. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
ARTICLE 3. LIMITATION ON AWARDS.
The aggregate number of Restricted Shares, Performance Share Awards and
Options awarded under the Plan shall not exceed 6,550,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares being
issued, or if any Options terminate for any other reason before being exercised,
then such Restricted Shares, Performance Share Awards or Options shall again
become available for Awards under the Plan. The limitation of this Article 3
shall be subject to adjustment pursuant to Article 10. Any Common Shares issued
pursuant to the Plan may be authorized but unissued shares or treasury shares.
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Subject to the overall limit on the aggregate shares set forth above,
the following limitations shall apply: (a) The maximum number of Common Shares
which may be granted subject to an Option to any one Participant in any one
fiscal year shall be 500,000; and (b) The maximum number of Restricted Shares or
Performance Share Awards which may be granted to any one Participant in any one
fiscal year shall be 200,000.
ARTICLE 4. ELIGIBILITY.
4.1 General Rule. Key Employees and Non-Employee Directors shall be
eligible for designation as Participants by the Committee.
4.2 Non-Employee Directors. In addition to any awards pursuant to
Section 4.1, Non-Employee Directors shall be entitled to receive the automatic
NSOs described in this Section 4.2.
(a) Each Non-Employee Director shall receive a Non-Officer Stock Option
covering 2,500 Common Shares for each Award Year with respect to
which he or she serves as a Non-Employee Director on the grant date
described in subsection (b) below; provided that the Non-Officer
Stock Option shall cover 1,500 shares if the Exercise Price
determined as of the grant date, is $35 or more;
(b) The NSO for a particular Award Year shall be granted to each
Non-Employee Director as of May 15 of each Award Year, and if May 15
is not a business day, then the grant shall be made on and as of the
next succeeding business day;
(c) Each NSO shall be exercisable in full at all times during its
term;
(d) The term of each NSO shall be 10 years; provided, however, that
any unexercised NSO shall expire on the date that the Optionee ceases
to be a Non-Employee Director or a Key Employee for any reason other
than death or disability. If an Optionee ceases to be a Non-Employee
Director or Key Employee on account of death or disability, any
unexercised NSO shall expire on the earlier of the date 10 years
after the date of grant or one year after the date of death or
disability of such Director; and
(e) The Exercise Price under each NSO shall be equal to the Fair
Market Value on the date of grant and shall be payable in any of the
forms described in Article 6.
4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the grant of
an ISO unless (a) the Exercise price under such ISO is at least 110 percent of
the Fair Market Value of a Common Share on the date of grant and (b) such ISO by
its terms is not exercisable after the expiration of five years from the date of
grant.
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4.4 Attribution Rules. For purposes of Section 4.3, in determining
stock ownership, a Key Employee shall be deemed to own the stock owned, directly
or indirectly, by or for his or her brothers, sisters, spouse, ancestors or
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which the Key Employee holds an option shall not be counted.
4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding stock"
shall include all stock actually issued and outstanding immediately after the
grant of the ISO to the Key Employee. "Outstanding stock" shall not include
treasury shares or shares authorized for issuance under outstanding options held
by the Key Employee or by any other person.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions of
the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO (or, in the case
of a Key Employee who is subject to the tax laws of a foreign jurisdiction, as
an option qualifying for favorable tax treatment under the laws of such foreign
jurisdiction), except for Options granted to Non-Employee Directors under
Section 4.2.
5.2 Options Nontransferability. No Option granted under the Plan shall
be transferable by the Optionee other than by will or the laws of descent and
distribution. An Option may be exercised during the lifetime of the Optionee
only by him or her. No Option or interest therein may be transferred, assigned,
pledged or hypothecated by the Optionee during his or her lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.3. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
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5.5 Exercisability and Term. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option. The term of an
ISO shall in no event exceed 10 years from the date of grant, and Section 4.3
may require a shorter term. Subject to the preceding sentence, the Committee
shall determine when all or any part of an Option is to become exercisable and
when such Option is to expire; provided that, in appropriate cases, the Company
shall have the discretion to extend the term of an Option or the time within
which, following termination of employment, an Option may be exercised, or to
accelerate the exercisability of an Option. A Stock Option Agreement may provide
for accelerated exercisability in the event of the Participant's death,
disability, Retirement, or other termination of employment and may provide for
expiration prior to the end of its term in the event of the termination of the
Optionee's employment; provided that upon an Optionee's Retirement, the
exercisability of all outstanding Options shall be accelerated, other than any
Options that had been granted within two years of the date of the Optionee's
Retirement. Except as provided in Section 4.2, NSOs may also be awarded in
combination with Restricted Shares, and such an Award may provide that the NSOs
will not be exercisable unless the related Restricted Shares are forfeited. In
addition, NSOs granted under this Section 5 may be granted subject to forfeiture
provisions which provide for forfeiture of the Option upon the exercise of
tandem awards, the terms of which are established in other programs of the
Company.
5.6 Limitation on Amount of ISOs. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect to
which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 Effect of Change in Control. The Committee (in its sole discretion)
may determine, at the time of granting an Option, that such Option shall become
fully exercisable as to all Common Shares subject to such Option immediately
preceding any Change in Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued
upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options. Concurrently with the grant
of any Option to a Participant (other than NSOs granted pursuant to Section
4.2), the Committee may authorize the grant of Replacement Options. If
Replacement Options have been authorized by the Committee with respect to a
particular award of Options (the "Underlying Options"), the Option Agreement
with respect to the Underlying Options shall so state, and the terms and
conditions of the Replacement Options shall be provided therein. The grant of
any Replacement Options shall be effective only upon the exercise of the
Underlying Options through the use of Common
42
Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options
shall equal the number of Common Shares used to exercise the Underlying Options,
and, if the Option Agreement so provides, the number of Common Shares used to
satisfy any tax withholding requirements incident to the exercise of the
Underlying Options in accordance with Section 13.2. Upon the exercise of the
Underlying Options, the Replacement Options shall be evidenced by an amendment
to the Underlying Option Agreement. Notwithstanding the fact that the Underlying
Option may be an ISO, a Replacement Option is not intended to qualify as an ISO.
The Exercise Price of a Replacement Option shall be no less than the Fair Market
Value of a Common Share on the date the grant of the Replacement Option becomes
effective. The term of each Replacement Option shall be equal to the remaining
term of the Underlying Option. No Replacement Options shall be granted to
Optionees when Underlying Options are exercised pursuant to the terms of the
Plan and the Underlying Option Agreement following termination of the Optionee's
employment. The Committee, in its sole discretion, may establish such other
terms and conditions for Replacement Options as it deems appropriate.
5.10 Options Granted to Non-United States Key Employees. In the case of
Key Employees who are subject to the tax laws of a foreign jurisdiction, the
Company may issue Options to such Key Employees that contain terms required to
conform with any requirements for favorable tax treatment imposed by the laws of
such foreign jurisdiction, or as otherwise may be required by the laws of such
foreign jurisdiction. The terms of any such Options shall be governed by the
Plan, subject to the terms of any Addendum to the Plan specifically applicable
to such Options.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock
Option Agreement. However, the Committee may specify in the Stock
Option Agreement that payment may be made pursuant to Section 6.2 or
6.3.
(b) In the case of an NSO, the Committee may at any time accept
payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company. Such Common Shares shall be
valued at their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. In the event that the Common Shares being surrendered
are Restricted Shares that have not yet become vested, the same restrictions
shall be imposed upon the new Common Shares being purchased.
43
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
ARTICLE 7. RESTRICTED SHARES AND PERFORMANCE SHARE AWARDS.
7.1 Time, Amount and Form of Awards. The Committee may grant Restricted
Shares or Performance Share Awards with respect to an Award Year during such
Award Year or at any time thereafter. Each such Award shall be evidenced by a
Stock Award Agreement between the Award recipient and the Company. The amount of
each Award of Restricted Shares or Performance Share Awards shall be determined
by the Committee. Awards under the Plan may be granted in the form of Restricted
Shares or Performance Share Awards or in any combination thereof, as the
Committee shall determine at its sole discretion at the time of the grant.
Restricted Shares or Performance Share Awards may also be awarded in combination
with NSOs, and such an Award may provide that the Restricted Shares or
Performance Share Awards will be forfeited in the event that the related NSOs
are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award is
granted in the form of Restricted Shares, the Award recipient, as a condition to
the grant of such Award, shall be required to pay the Company in cash an amount
equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be issued
pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other criteria as the Committee may adopt. A Stock
Award Agreement may also provide for accelerated vesting or issuance, as the
case may be, in the event of the Participant's death, disability or retirement.
The Committee, in its sole discretion, may determine, at the time of making an
Award of Restricted Shares, that such Award shall become fully vested in the
event that a Change in Control occurs with respect to the Company. The
Committee, in its sole discretion, may determine, at the time of making a
Performance Share Award, that the issuance conditions set forth in such Award
shall be waived in the event that a Change in Control occurs with respect to the
Company.
The Committee shall have the discretion to adjust the payouts
associated with Awards downward. Unless and until (i) the rules set forth under
Code Section 162(m) permit discretionary adjustments to increase payouts; or
(ii) the Committee determines that compliance
44
with Code Section 162(m) is not desired with respect to some or all Named
Executive Officers, no payout associated with an Award held by a Named Executive
Officer shall be discretionarily adjusted upward in a manner that would
eliminate the ability of the Award to satisfy the "performance-based" exception
under Treasury Regulation Section 1.162 - 27(e)(2).
7.4 Form of Settlement of Performance Share Awards. Settlement of
Performance Share Awards shall only be made in the form of Common Shares. Until
a Performance Share Award is settled, the number of Performance Share Awards
shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries. Each
recipient of a Performance Share Award under the Plan shall designate one or
more beneficiaries for this purpose by filing the prescribed form with the
Company. A beneficiary designation may be changed by filing the prescribed form
with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
ARTICLE 8. CLAIMS PROCEDURES.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the disposition
of a claim shall be furnished to the claimant within 90 days after the claim is
filed. If the claim is denied, the notice of disposition shall set forth the
specific reasons for the denial, citations to the pertinent provisions of the
Plan, and, where appropriate, an explanation as to how the claimant can perfect
the claim. If the claimant wishes further consideration of his or her claim, the
claimant may appeal a denied claim to the Committee (or to a person designated
by the Committee) for further review. Such appeal shall be filed in writing with
the Committee on a form supplied by the Committee, together with a written
statement of the claimant's position, no later than 90 days following receipt by
the claimant of written notice of the denial of his or her claim. If the
claimant so requests, the Committee shall schedule a hearing. A decision on
review shall be made after a full and fair review of the claim and shall be
delivered in writing to the claimant no later than 60 days after the Committee's
receipt of the notice of appeal, unless special circumstances (including the
need to hold a hearing) require an extension of time for processing the appeal,
in which case a written decision on review shall be delivered to the claimant as
soon as possible but not later than 120 days after the Committee's receipt of
the appeal notice. The claimant shall be notified in writing of any such
extension of time. The written decision on review shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, and shall specifically refer to the pertinent Plan provisions on which
it is based. All determinations of the Committee shall be final and binding on
Participants and their beneficiaries.
45
ARTICLE 9. VOTING RIGHTS AND DIVIDENDS.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other rights as
the Company's other stockholders.
(b) During the period of restriction, Named Executive Officers
holding Restricted Shares granted hereunder shall be credited with
all regular cash dividends paid with respect to all Restricted Shares
while they are so held. If a dividend is paid in the form of cash,
such cash dividend shall be credited to Named Executive Officers
subject to the same restrictions on transferability and
forfeitability as the Restricted Shares with respect to which they
were paid. If any dividends or distributions are paid in shares of
Common Stock, the shares of Common Stock shall be subject to the same
restrictions on transferability and forfeitability as the Restricted
Shares with respect to which they were paid. Subject to the
succeeding paragraph, and to the restrictions on vesting and the
forfeiture provisions, all dividends credited to a Named Executive
Officer shall be paid to the Named Executive Officer within
forty-five (45) days following the full vesting of the Restricted
Shares with respect to which such dividends were earned.
In the event that any dividend constitutes a "derivative
security" or an "equity security" pursuant to Rule 16(a) under the
Exchange Act, such dividend shall be subject to a vesting period
equal to the longer of: (i) the remaining vesting period of the
Restricted Shares with respect to which the dividend is paid; or (ii)
six (6) months. The Committee shall establish procedures for the
application of this provision.
Named Executive Officers holding Restricted Shares shall have
the same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share Awards
shall have no voting or dividend rights until such time as any Common Shares are
issued pursuant thereto, at which time they shall have the same voting, dividend
and other rights as the Company's other stockholders.
ARTICLE 10. PROTECTION AGAINST DILUTION; ADJUSTMENT OF AWARDS.
10.1 General. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff
or a similar occurrence, the Committee shall make appropriate adjustments in one
or more of (a) the number of Options, Restricted Shares and Performance Share
Awards available for future Awards under Article 3, (b) the number of
Performance Share Awards included in any prior Award which has not yet been
settled, (c) the number of Common
46
Shares covered by each outstanding Option or (d) the Exercise Price under each
outstanding Option.
10.2 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent, for
their continuation by the Company (if the Company is a surviving corporation),
for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
ARTICLE 11. LIMITATION OF RIGHTS.
11.1 Employment Rights. Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain employed by
the Company or any Subsidiary. The Company and its Subsidiaries reserve the
right to terminate the employment of any employee at any time, with or without
cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 7, 9 and 10.
11.3 Creditors' Rights. A holder of Performance Share Awards shall have
no rights other than those of a general creditor of the Company. Performance
Share Awards represent unfunded and unsecured obligations of the Company,
subject to the terms and conditions of the applicable Stock Award Agreement.
11.4 Government Regulations. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares to
be issued pursuant to the Plan shall be subject to all applicable laws, rules
and regulations, and such approvals by any governmental agencies as may be
required. The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award until such time as:
47
(a) Any legal requirements or regulations have been met relating to
the issuance of such Common Shares or to their registration,
qualification or exemption from registration or qualification under
the Securities Act of 1933, as amended, or any applicable state
securities laws; and
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock
Exchange or any other securities exchange on which Common Shares are
then listed.
ARTICLE 12. LIMITATION OF PAYMENTS.
12.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer in
the nature of compensation to or for the benefit of a Participant, whether paid
or payable (or transferred or transferable) pursuant to the terms of this Plan
or otherwise (a "Payment"), would be nondeductible for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
section 280G of the Code, then the aggregate present value of all Payments shall
be reduced (but not below zero) to the Reduced Amount; provided, however, that
the Committee, at the time of making an Award under this Plan or at any time
thereafter, may specify in writing that such Award shall not be so reduced and
shall not be subject to this Article 12. For purposes of this Article 12, the
"Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of section 280G of the Code.
12.2 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible because of section 280G of the Code, then the Company
shall promptly give the Participant notice to that effect and a copy of the
detailed calculation thereof and of the Reduced Amount, and the Participant may
then elect, in his or her sole discretion, which and how much of the Payments
shall be eliminated or reduced (as long as after such election, the aggregate
present value of the Payments equals the Reduced Amount) and shall advise the
Company in writing of his or her election within 10 days of receipt of notice.
If no such election is made by the Participant within such 10-day period, then
the Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
Payments equals the Reduced Amount) and shall notify the Participant promptly of
such election. For purposes of this Article 12, present value shall be
determined in accordance with section 280G(d)(4) of the Code. All determinations
made by the Auditors under this Article 12 shall be binding upon the Company and
the Participant and shall be made within 60 days of the date when a Payment
becomes payable or transferable. As promptly as practicable following such
determination and the elections hereunder, the Company shall pay or transfer to
or for the benefit of the Participant such amounts as are then due to him or her
under the Plan, and shall promptly pay or transfer to or for the benefit of the
Participant in the future such amounts as become due to him or her under the
Plan.
48
12.3 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company on demand, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.
12.4 Related Corporations. For purposes of this Article 12, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 13. WITHHOLDING TAXES.
13.1 General. To the extent required by applicable federal, state,
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the satisfaction of
any withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 Nonstatutory Options, Restricted Shares or Performance Share
Awards. The Committee may permit an Optionee who exercises NSOs, or who receives
Awards of Restricted Shares, or who receives Common Shares pursuant to the terms
of a Performance Share Award, to satisfy all or part of his or her withholding
tax obligations by having the Company withhold a portion of the Common Shares
that otherwise would be issued to him or her under such Awards. Such Common
Shares shall be valued at their Fair Market Value on the date when taxes
otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall
be subject to such restrictions as the Committee may impose, including any
restrictions required by rules of the Securities and Exchange Commission.
ARTICLE 14. ASSIGNMENT OR TRANSFER OF AWARD.
Any Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor's
process, whether voluntarily, involuntarily or by operation of law. However,
this Article 14 shall not preclude (i) a Participant from
49
designating a beneficiary to succeed, after the Participant's death, to those of
the Participant's Awards (including without limitation, the right to exercise
any unexercised Options) as may be determined by the Company from time to time
in its sole discretion, or (ii) a transfer of any Award hereunder by will or the
laws of descent or distribution.
ARTICLE 15. FUTURE OF PLANS.
15.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on May 8, 1992. The Plan shall remain in effect until it is terminated
under Section 15.2, except that no ISOs shall be granted after May 7, 2002.
15.2 Amendment or Termination. The Committee may, at any time and for
any reason, amend or terminate the Plan; provided, however, that any amendment
of the Plan shall be subject to the approval of the Company's stockholders to
the extent required by applicable laws, regulations or rules.
15.3 Effect of Amendment or Termination. No Award shall be made under
the Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option, Restricted Share or Performance
Share Award previously granted under the Plan.
ARTICLE 16. DEFINITIONS.
16.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
16.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
16.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
16.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors who
either (i) had been directors of the Company 24 months prior to such
change or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the directors
who had been directors of the Company 24 months prior to such change
and who were still in office at the time of the election or
nomination;
50
(c) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20 percent or
more of the combined voting power of the Company's then outstanding
securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors
(the "Base Capital Stock"); provided, however, that any change in the
relative beneficial ownership of securities of any person resulting
solely from a reduction in the aggregate number of outstanding shares
of Base Capital Stock, and any decrease thereafter in such person's
ownership of securities, shall be disregarded until such person
increases in any manner, directly or indirectly, such person's
beneficial ownership of any securities of the Company.
16.5 "Code" means the Internal Revenue Code of 1986, as amended.
16.6 "Committee" means the Compensation Committee of the Board, as
constituted from time to time.
16.7 "Common Share" means one share of the common stock of the Company.
16.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
16.9 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
16.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
16.11 "Exercise Price" means the amount for which one Common Share may
be purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
16.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite-transactions report for
such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by
the NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue, then the
Fair Market Value shall be equal to the
51
mean between the last reported representative bid and asked prices
quoted by the NASDAQ system for such date; and
(d) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
16.13 "ISO" means an incentive stock option described in section 422(b)
of the Code.
16.14 "Key Employee" means a key common-law employee of the Company or
any Subsidiary, as determined by the Committee.
16.15 "Named Executive Officer" means a Participant who, as of the date
of vesting of an Award is one of a group of "covered employees," as defined in
the Regulations promulgated under Code Section 162(m), or any successor statute.
16.16 "Non-Employee Director" means a member of the Board who is not a
common-law employee.
16.17 "NSO" means an employee stock option not described in sections
422 through 424 of the Code.
16.18 "Option" means an ISO or NSO or, in the case of a Key Employee
who is subject to the tax laws of a foreign jurisdiction, an option qualifying
for favorable tax treatment under the laws of such jurisdiction, including a
Replacement Option, granted under the Plan and entitling the holder to purchase
one Common Share.
16.19 "Optionee" means an individual, or his or her estate, legatee or
heirs at law that holds an Option.
16.20 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
16.21 "Performance Share Award" means the conditional right to receive
in the future one Common Share, awarded to a Participant under the Plan.
16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles Schwab
Corporation, as it may be amended from time to time.
16.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
16.24 "Restricted Share" means a Common Share awarded to a Participant
under the Plan.
52
16.25 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
16.26 "Stock Option Agreement" means the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her option.
16.27 "Subsidiary" means any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
16.28. "Retirement" shall mean any termination of employment of an
Optionee for any reason other than death at any time after the Optionee has
attained fifty (50), but only if, at the time of such termination, the
Participant has been credited with at least seven (7) Years of Service under the
Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing
definition shall apply to all Stock Option Agreements entered into pursuant to
the Plan, irrespective of any definition to the contrary contained in any such
Stock Option Agreement.
53
ADDENDUM A
The provisions of the Plan, as amended by the terms of this
Addendum A, shall apply to the grant of Approved Options to Key U.K. Employees.
1. For purposes of this Addendum A, the following definitions
shall apply in addition to those set out in section 16 of the Plan:
APPROVED OPTION Means a stock option designed to qualify as an
approved executive share option under the Taxes Act;
INLAND REVENUE means the Board of the Inland Revenue in the
United Kingdom.
KEY U.K. EMPLOYEE means a designated employee of Sharelink
Investment Services plc or any subsidiary (as that term is
defined in the Companies Act 1985 of the United Kingdom, as
amended) of which Sharelink Investment Services plc has
control for the purposes of section 840 of the Taxes Act;
TAXES ACT means the Income and Corporation Taxes Act 1988 of
the United Kingdom.
2. An Approved Option may only be granted to a Key U.K.
Employee who:
(i) is employed on a full-time basis; and
(ii) does not fall within the provisions of paragraph 8 of
Schedule 9 to the Taxes Act.
For purposes of this section 2(i) of Addendum A, "full-time"
shall mean an employee who is required to work 20 hours per week, excluding meal
breaks.
3. No Approved Option may be granted to a Key U.K. Employee if
it would cause the aggregate of the exercise price of all subsisting Approved
Options granted to such employee under the Plan, or any other subsisting options
granted to such employee under any other share option scheme approved under
Schedule 9 of the Taxes Act and established by the Company or an associated
company, to exceed the higher of (a) one hundred thousand pounds sterling and
(b) four times such employee's relevant emoluments for the current or preceding
year of assessment (whichever is greater); but where there were no relevant
emoluments for the previous year of
54
assessment, the limit shall be the higher of one hundred thousand pounds
sterling) or four times such employee's relevant emoluments for the period of
twelve months beginning with the first day during the current year of assessment
in respect of which there are relevant emoluments. For the purpose of this
section 3 of Addendum A, "associated company" means an associated company within
the meaning of section 416 of the Taxes Act; "relevant emoluments" has the
meaning given by paragraph 28(4) of Schedule 9 to the Taxes Act and "year of
assessment" means a year beginning on any April 6 and ending on the following
April 5.
4. Common Shares issued pursuant to the exercise of Approved
Options must satisfy the conditions specified in paragraphs 10 to 14 of Schedule
9 to the Taxes Act.
5. Notwithstanding the provisions of Section 5.4 of the Plan,
the exercise price of an Approved Option shall not be less than 100 percent of
the closing price of a Common Share as reported in the New York Stock Exchange
Composite Index on the date of grant.
6. No Approved Option may be exercised at any time by a Key
U.K. Employee when that Key U.K. Employee falls within the provisions of
paragraph 8 of Schedule 9 to the Taxes Act. If at any time the shares under an
Approved Option cease to comply with the conditions in paragraphs 10 to 14 of
Schedule 9 to the Taxes Act, then all Approved Options then outstanding shall
lapse and cease to be exercisable from the date of the shares ceasing so to
comply, and no optionee shall have any cause of action against the Company,
Sharelink Investment Services plc or any subsidiary of the Company or any other
person in respect thereof.
7. An Approved Option may contain such other terms, provisions
and conditions as may be determined by the Committee consistent with the Plan,
provided that the approved option otherwise complies with the requirements for
approved executive option schemes specified in Schedule 9 of the Taxes Act.
8. In relation to an Approved Option, notwithstanding the
terms of section 10.1 of the Plan, no adjustment shall be made pursuant to
section 10.1 of the Plan to any outstanding Approved Options without the prior
approval of the Inland Revenue.
9. In relation to an Approved Option any Key U.K. Employee
shall make arrangements satisfactory to the Company for the satisfaction of any
tax withholding or deduction -- at -- source obligations that arise by reason of
the grant to him or her of such option, or its subsequent exercise.
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10. In relation to an Approved Option, in addition to the
provisions set out in section 15.2 of the Plan, no amendment which affects any
of the provisions of the Plan relating to Approved Options shall be effective
until approved by the Inland Revenue, except for such amendment as are required
to obtain and maintain the approval of Inland Revenue pursuant to Schedule 9 to
the Taxes Act.