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                            SCHEDULE 14A INFORMATION

          Proxy Statement Pursuant to SectionPROXY STATEMENT PURSUANT TO SECTION 14(a) of the Securities Exchange Act ofOF THE SECURITIES
                              EXCHANGE ACT OF 1934

         Filed by the Registrant [X][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)Rule 14a-11(c) or sec. 240.14a-12Rule 14a-12
 
                         The Charles Schwab Corporation
    - -----------------------------------------------------------------------------------------------------------------------------------------------------------
                (Name of Registrant as Specified in itsIts Charter)
 
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     (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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pursuant to Exchange Act Rule 0-11: N/A
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[THE================================================================================










                                 WE ARE BUILDING

                                A BROKERAGE FIRM

                                  LIKE NO OTHER







   
             THE CHARLES SCHWAB CORPORATION                 LOGO]
 
                                                                  March 21, 1997
Dear Stockholder:
 
     You are1999 PROXY STATEMENT
    

================================================================================
   3
   
LETTER TO STOCKHOLDERS
    

[Photo of Charles R. Schwab
and David S. Pottruck]


   
                                                                  MARCH 31, 1999
    




   
DEAR FELLOW STOCKHOLDERS:
    

We cordially invitedinvite you to attend our 1999 Annual Meeting of Stockholders,
whichStockholders. The
meeting will be held on Monday, May 12, 199717, 1999 at 2:00 p.m. inat the Grand Ballroom ofYerba Buena
Center for the ANA
Hotel, located at 50 ThirdArts Theater, 700 Howard 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, we will:

      -     elect four directors,

      -     vote on a proposal to increase the number of authorized shares of
            common stock, and

      -     vote on a proposal to increase the annual, automatic stock option
            grant to non-employee directors.

We will also report on our performance in 1998 and answer your questions. Our
products and services exhibit will be open before and after the meeting.

We are pleased that our Board recently elected Mark Pulido, President and Chief
Executive Officer of McKesson HBOC, Inc., and Arun Sarin, President and Chief
Operating Officer of AirTouch Communications, Inc., as members of the Board. We
are also pleased that Dr. Condoleezza Rice, Provost of Stanford University and a
distinguished professor of political science, will join our Board in July 1999.

Each year, we try to make it easier for stockholders to vote. This year, all
stockholders may vote on the Internet. Simply follow the instructions on your
proxy card. We encourage you to vote on the Internet. It is the least expensive
way for us to process your vote.

   
Next year, we plan to make our proxy statement and annual report widely
available over the Internet. If you vote on the Internet, you will be askedhave the
option at that time to elect three
directors, eachenroll in Internet delivery. We encourage you to enroll
in Internet delivery. It is the least expensive way for a term of three years or until their successors are elected,us 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 enclosedsend you proxy
and return it promptly in the envelope
provided. You may revoke your proxy at any time before it is voted.materials.
    

We look forward to seeing you at the meeting.

Sincerely,



/s/ Charles R. Schwab           /s/ David S. Pottruck



   
CHARLES R. SCHWAB               DAVID S. POTTRUCK
CHAIRMAN OF THE BOARD AND       PRESIDENT AND
CO-CHIEF EXECUTIVE OFFICER      CO-CHIEF EXECUTIVE OFFICER
    


   
[side bar]
EACH YEAR, WE TRY TO
MAKE IT EASIER FOR
STOCKHOLDERS TO VOTE.
THIS YEAR, ALL STOCK-
HOLDERS MAY VOTE ON 
THE INTERNET.
    
                                       1


   4

   
TABLE OF CONTENTS
    

   
                                                                         

                                                                     /s/ David S. Pottruck
     /s/ Charles R. Schwab          /s/ Lawrence J. Stupski            DAVID S. POTTRUCK
       CHARLES R. SCHWAB              LAWRENCE J. STUPSKI                PresidentNOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS..........................      3

PROXY STATEMENT........................................................      4

     Questions and ChairmanAnswers.............................................      5

     Proposals To Be Voted On..........................................     10

     The Board of theDirectors............................................     13

     Board and Vice ChairmanCommittee Meetings......................................     18

     Compensation Committee Interlocks and Insider Participation.......     19

     Director Compensation.............................................     20

     Principal Stockholders............................................     22

     Performance Graph.................................................     25

     Summary Compensation Table........................................     26

     Option Grants.....................................................     29

     Options Exercised.................................................     31

     Compensation Committee Report.....................................     33

     Other Information.................................................     41

        Certain Transactions...........................................     41

        Section 16(a) Beneficial Ownership Reporting Compliance........     41

        Independent Certified Public Accountants.......................     41

        Stockholder Proposals..........................................     42

        Costs of the Board       Chief Operating Officer
    Chief Executive OfficerProxy Solicitation....................................     42

        Incorporation by Reference.....................................     42

TICKETS TO THE ANNUAL MEETING..........................................     43

APPENDIX A - - EMPLOYMENT AND SEVERANCE AGREEMENTS.....................     44

APPENDIX B - - DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN............     48
2 3 THE CHARLES SCHWAB CORPORATION ------------------------5 NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 12, 1997 ------------------------ The 1999 Annual Meeting of Stockholders of The Charles Schwab Corporation a Delaware corporation (the "Company"), will be held on Monday, May 12, 199717, 1999 at 2:00 p.m. inat the Grand Ballroom ofYerba Buena Center for the ANA Hotel, located at 50 ThirdArts Theater, 700 Howard Street, (between Market and Mission Streets) in San Francisco, California forto conduct the following purposes:items of business: 1. Electing threeElect four directors to serve pursuant to the Company's bylaws for three-year terms, or until their successors are elected. 2. Voting on an amendmentAmend the Certificate of Incorporation to increase the number of authorized shares of common stock, 3. Amend the 1992 Stock Incentive Plan. 3. Voting on a stockholder proposal requesting thatPlan to increase the Board of Directors amend the Certificate of Incorporation.annual, automatic stock option grant to non-employee directors, and 4. Transacting suchTransact other business as may properly comecoming before the meeting, and all adjournments and postponements thereof. The Board has fixedmeeting. Stockholders who owned shares of our stock at the close of business on March 13, 1997 as the record date for the determination of stockholders18, 1999 are entitled to notice of,attend and to vote at the Annual Meeting.meeting. A complete list of suchthese stockholders of record will be available at 101 Montgomeryour principal executive offices at 120 Kearny Street, San Francisco, California 94104, prior to the Annual Meeting.meeting. By Order of the Board of Directors, /s/ Mary B. Templeton MARY B. TEMPLETON Corporate Secretary March 21, 1997 - -------------------------------------------------------------------------------- TO ENSURE THAT YOUR SHARES ARE REPRESENTEDCarrie E. Dwyer CARRIE E. DWYER EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY [side bar] THE 1999 ANNUAL MEETING OF STOCKHOLDERS WILL BE HELD ON MONDAY, MAY 17, 1999 AT 2:00 P.M. AT THE MEETING, PLEASE COMPLETE AND PROMPTLY MAIL YOUR PROXYVERBA BUENA CENTER FOR THE ARTS THEATRE 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. - -------------------------------------------------------------------------------- 4 THE CHARLES SCHWAB CORPORATION 101 MONTGOMERY STREET SAN FRANCISCO, CALIFORNIA 94104 ------------------------CALIFORNIA. 3 6 PROXY STATEMENT ------------------------ This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of DirectorsAs a stockholder of The Charles Schwab Corporation, you have a Delaware corporation (the "Company"),right to vote on certain matters affecting the company. This proxy statement discusses the proposals you are voting on this year. Please read it carefully because it contains important information for use atyou to consider when deciding how to vote. Your vote is important. In this proxy statement, we refer to The Charles Schwab Corporation as the Annual Meeting"Company." We also refer to this proxy statement, the proxy card and our 1998 annual report as the "proxy materials." The Board of Stockholders (the "Annual Meeting")Directors is sending proxy materials to be held on May 12, 1997. This Proxy Statementyou and form of proxy are being mailed toall other stockholders on or about March 24, 1997. At31, 1999. The Board is asking you to vote your shares by completing and returning the Annual Meeting, holdersproxy card. Unless we state otherwise, all information in this proxy statement concerning Company common stock reflects the three-for-two stock split that occurred on December 11, 1998. This proxy statement includes summary information on the Company's financial performance. This information is historical and is not predictive of future results. [side bar] STOCKHOLDERS OWNING COMPANY SHARES AT THE CLOSE OF BUSINESS ON MARCH 18, 1999 ARE ENTITLED TO ATTEND AND VOTE AT THE MEETING. 4 7 QUESTIONS AND ANSWERS Q: WHO CAN VOTE AT THE ANNUAL MEETING? A: Stockholders who owned Company common stock on March 18, 1999 may attend and vote at the annual meeting. Each share is entitled to one vote. There were 406,353,252 shares of Company common stock outstanding on March 18, 1999. Q: WHY AM I RECEIVING THIS PROXY STATEMENT? A: This proxy statement describes proposals on which we would like you, as a stockholder, to vote. It also gives you information on these proposals, as well as other information, so that you can make an informed decision. Q: WHAT IS THE PROXY CARD? A: The proxy card enables you to appoint Charles R. Schwab and David S. Pottruck as your representatives at the annual meeting. By completing and returning the proxy card, you are authorizing Mr. Schwab and Mr. Pottruck to vote your shares at the meeting, as you have instructed them on the proxy card. This way, your shares will be voted whether or not you attend the meeting. Even if you plan to attend the meeting, it is a good idea to complete and return your proxy card before the meeting date just in case your plans change. If a proposal comes up for vote at the meeting that is not on the proxy card, Mr. Schwab and Mr. Pottruck will vote your shares, under your proxy, according to their best judgment. Q: WHAT AM I VOTING ON? A: We are asking you to vote on: - the election of four directors, - an amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock, and - an amendment to the 1992 Stock Incentive Plan to increase the annual, automatic stock option grant to non-employee directors. The section appearing later entitled "Proposals To Be Voted On" gives you more information on the nominees for election to our Board and the proposed amendments to the Certificate of Incorporation and the 1992 Stock Incentive Plan. Q: HOW DO I VOTE? A: YOU MAY VOTE BY MAIL. You do this by completing and signing your proxy card and mailing it in the enclosed, prepaid and addressed envelope. If you mark your voting instructions on the proxy card, your shares will be voted as you instruct. If you do not mark your voting instructions on the proxy card, your shares will be voted: - for the four named nominees for directors, - for the proposed amendment to the Certificate of Incorporation to [side bar] WHO CAN VOTE AT THE ANNUAL MEETING? WHY AM I RECEIVING THIS PROXY STATEMENT? WHAT IS THE PROXY CARD? WHAT AM I VOTING ON? HOW DO I VOTE? 5 8 QUESTIONS AND ANSWERS increase the number of authorized shares of common stock, and - for the proposed amendment to the 1992 Stock Incentive Plan to increase the annual, automatic stock option grant to non-employee directors. YOU MAY VOTE BY TELEPHONE. You do this by following the "Vote by Telephone" instructions that came with your proxy statement. If you vote by telephone, you do not have to mail in your proxy card. YOU MAY VOTE ON THE INTERNET. You do this by following the "Vote by Internet" instructions that came with your proxy statement. If you vote on the Internet, you do not have to mail in your proxy card. YOU MAY VOTE IN PERSON AT THE MEETING. We will pass out written ballots to anyone who wants to vote at the meeting. However, if you hold your shares in street name, you must request a proxy from your stockbroker in order to vote at the meeting. Holding shares in "street name" means you hold them in an account at a brokerage firm. Q: HOW DO I VOTE MY DIVIDEND REINVESTMENT PLAN SHARES? A: If you participate in the Dividend Reinvestment and Stock Purchase Plan managed by our transfer agent, Norwest Bank Minnesota, N.A., the proxy card you receive from Norwest will include your shares held under that plan. If you participate in our Dividend Reinvestment and Stock Purchase Plan through the Company's brokerage firm, Charles Schwab & Co., Inc., the proxy card you receive from that firm will include Company shares held in your brokerage account and under that plan. We encourage you to examine your proxy card closely to make sure you are voting all of your Company shares. Q: HOW DO I VOTE MY RETIREMENT PLAN SHARES? A: The proxy card you receive from our transfer agent will include your shares held under The SchwabPlan Retirement Savings and Investment Plan (formerly The Charles Schwab Profit Sharing and Employee Stock Ownership Plan). By completing and returning your proxy card, you provide voting instructions: - - to the transfer agent for shares you hold in your individual name at Norwest Bank Minnesota, N.A., and - - to the plan's purchasing agent for shares you hold through the plan. If you hold Company shares in an account with Charles Schwab & Co., Inc., you will receive a separate proxy card from that brokerage firm specifically for voting the shares in that account. [side bar] HOW DO I VOTE MY DIVIDEND REINVESTMENT PLAN SHARES? HOW DO I VOTE MY RETIREMENT PLAN SHARES? 6 9 QUESTIONS AND ANSWERS Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD? A: It means that you have multiple accounts at the transfer agent or with stockbrokers. Please complete and return all proxy cards to ensure that all your shares are voted. Unless you need multiple accounts for specific purposes, we recommend you consolidate as many of your transfer agent or brokerage accounts as possible under the same name and address. By doing so, you should receive better customer service. Q: WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY? A: You may revoke your proxy and change your vote at any time before the polls close at the meeting. You may do this by: - - signing another proxy with a later date, - - voting by telephone or on the Internet (your latest telephone or Internet vote is counted), or - - voting at the meeting. Q: WILL MY SHARES BE VOTED IF I DO NOT RETURN MY PROXY CARD? A: If your shares are held in street name, your brokerage firm, under certain circumstances, may vote your shares. Brokerage firms have authority under New York Stock Exchange rules to vote customers' unvoted shares on some "routine" matters. The New York Stock Exchange has determined that all three of our proposals described later under "Proposals To Be Voted On" are routine matters. If you do not give a proxy to vote your shares, your brokerage firm may either: - - vote your shares on routine matters, or - - leave your shares unvoted. As a brokerage firm, Charles Schwab & Co., Inc. may vote its customers' unvoted shares on routine matters. But, because our brokerage firm is voting on Company proposals, it must follow a stricter set of New York Stock Exchange rules. Specifically, our brokerage firm can vote unvoted Company shares held in brokerage accounts only in the same proportion as all other stockholders vote. When a brokerage firm votes its customers' unvoted shares on routine matters, these shares are counted to determine if a quorum exists to conduct business at the meeting. A brokerage firm cannot vote customers' unvoted shares on non-routine matters. These shares are considered not entitled to vote on non-routine matters, rather than as a vote against the matters. We encourage you to provide instructions to your brokerage firm by giving your proxy. This ensures your shares will be voted at the meeting. [side bar] WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD? WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY? WILL MY SHARES BE VOTED IF I DO NOT RETURN MY PROXY CARD? 7 10 QUESTIONS AND ANSWERS You may have granted to your stockbroker discretionary voting authority over your account. Your stockbroker may be able to vote your shares depending on the terms of the agreement you have with your stockbroker. A purchasing agent under a retirement plan may be able to vote a participant's unvoted shares. If you are a participant in The SchwabPlan Retirement Savings and Investment Plan, the plan's purchasing agent, under certain circumstances, can vote your shares. The purchasing agent can vote shares you hold under the plan if the purchasing agent does not receive voting instructions from you. The purchasing agent will vote your unvoted shares in the same proportion as all other plan participants vote their shares. Similarly, the purchasing agent will vote shares under the Employee Stock Ownership Plan ("ESOP") component of the overall plan that have not yet been allocated to the ESOP accounts of individual participants. However, the purchasing agent can only vote these shares in the same proportion as all other participants in the overall plan vote their shares (unless the purchasing agent receives specific instructions from a plan fiduciary that has the power to direct the purchasing agent). Q: HOW MANY SHARES MUST BE PRESENT TO HOLD THE MEETING? A: To hold the meeting and conduct business, a majority of the Company's Common Stock, par value $0.01 per share ("Common Stock"),outstanding shares as of March 13, 1997,18, 1999 must be present at the record date,meeting. This is called a quorum. Shares are counted as present at the meeting if the stockholder either: - - is present and votes in person at the meeting, or - - has properly submitted a proxy card. Q: HOW MANY VOTES MUST THE NOMINEES HAVE TO BE ELECTED AS DIRECTORS? A: We use the phrase "yes vote" to mean a vote for a proposal. The four nominees receiving the highest number of yes votes will be askedelected as directors. This number is called a plurality. Q: WHAT HAPPENS IF A NOMINEE IS UNABLE TO STAND FOR ELECTION? A: The Board may reduce the number of directors or select a substitute nominee. In the latter case, if you have completed and returned your proxy card, Charles R. Schwab and David S. Pottruck can vote your shares for a substitute nominee. They cannot vote for more than four nominees. [side bar] HOW MANY SHARES MUST BE PRESENT TO HOLD THE MEETING? HOW MANY VOTES MUST THE NOMINEES HAVE TO BE ELECTED AS DIRECTORS? WHAT HAPPENS IF A NOMINEE IS UNABLE TO STAND FOR ELECTION? 8 11 QUESTIONS AND ANSWERS Q: HOW MANY VOTES MUST THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION HAVE TO PASS? A: To pass, the amendment must receive a yes vote of a majority of the Company's shares outstanding as of March 18, 1999. Q: HOW MANY VOTES MUST THE AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN HAVE TO PASS? A: To pass, the amendment must receive a yes vote of a majority of the shares present at the meeting in person or by proxy. Q: HOW ARE VOTES COUNTED? A: You may vote either "for" or "against" each nominee. You may vote "for," "against" or "abstain" on the proposals to elect threeamend the Certificate of Incorporation and the 1992 Stock Incentive Plan. If you abstain from voting on either amendment, it has the same effect as a vote against. If you give your proxy without voting instructions, your shares will be counted as a yes vote for each nominee and for each amendment. Voting results are tabulated and certified by our transfer agent, Norwest Bank Minnesota, N.A. Q: IS MY VOTE KEPT CONFIDENTIAL? A: Proxies, ballots and voting tabulations identifying stockholders are kept confidential and will not be disclosed except as may be necessary to meet legal requirements. Q: WHERE DO I FIND THE VOTING RESULTS OF THE MEETING? A: We will announce preliminary voting results at the meeting. We will publish the final results in our quarterly report on Form 10-Q for the second quarter of 1999. We will file that report with the Securities and Exchange Commission, and you can get a copy by contacting our Investor Relations Hotline at (415) 627-8786 or the SEC at (800) SEC-0330 for the location of its nearest public reference room. You can also get a copy on the Internet through the SEC's electronic data system called EDGAR at www.sec.gov. [side bar] HOW MANY VOTES MUST THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION HAVE TO PASS? HOW MANY VOTES MUST THE AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN HAVE TO PASS? HOW ARE VOTES COUNTED? IS MY VOTE KEPT CONFIDENTIAL? WHERE DO I FIND THE VOTING RESULTS OF THE MEETING? 9 12 PROPOSALS TO BE VOTED ON 1. ELECTION OF DIRECTORS Nominees for directors this year are Frank C. Herringer, Stephen T. McLin, Charles R. Schwab, and Roger O. Walther. The Board recommends a vote for these nominees. Each nominee is presently a director of the Company and has consented to serve a new three-year term. 2. AMENDMENT TO THE CERTIFICATE OF INCORPORATION We are asking stockholders to approve an amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 500 million to 2 billion. As of December 31, 1998, 452 million of the 500 million authorized shares had been used or reserved for use as follows: - - 402 million issued and outstanding shares; - - 33 million shares under stock options that have been granted; and - - 17 million shares reserved for future grants under incentive plans. Accordingly, the Company is now limited to issuing 48 million shares of common stock under the current authorized number of shares. Increasing the number of authorized shares of common stock will give the Company greater flexibility for: - - stock splits and stock dividends, - - grants under employee benefit and employee stock incentive plans, - - financings, corporate mergers and acquisitions of property, - - issuance of shares under the Company's Dividend Reinvestment and Stock Purchase Plan, and - - other general corporate purposes. Having this additional authorized capital stock available for future use will allow the Company to issue additional shares of common stock without the expense and delay of a special meeting of stockholders. The additional authorized shares will: - - be part of the existing class of common stock, - - not affect the terms of the common stock or until their successorsthe rights of the holders of common stock, and - - have the same rights and privileges as the shares of common stock presently outstanding. Stockholders' current ownership of common stock will not give them automatic rights to purchase any of the additional authorized shares. Any future issuance of additional authorized shares of common stock may, among other things, have a dilutive effect on earnings per share of common stock and on the equity and voting rights of those holding common stock at the time the additional authorized shares are elected,issued. Although not a factor in the Board's decision to propose the amendment to the Certificate of Incorporation, one of [side bar] ELECTION OF DIRECTORS - - FRANK C. HERRINGER - - STEPHEN T. MCLIN - - CHARLES R. SCHWAB - - ROGER O. WALTHER AMENDMENT TO THE CERITIFCATE OF INCORPORATION 10 13 PROPOSALS TO BE VOTED ON the effects of the amendment may be to enable the Board to make more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and as a result protect the continuity of present management. The Company is not presently negotiating with anyone concerning the issuance or use of any of the additional authorized shares of common stock, and the Company has no present arrangements, understandings or plans concerning the issuance or use of the additional authorized shares. The Board recommends a vote for the amendment to the Company's Certificate of Incorporation. 3. AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN We are asking you to approve an amendment to the 1992 Stock Incentive Plan to increase by 1,000 the number of shares covered by stock option grants to non-employee directors under the annual, automatic option grant. Each year, our non-employee directors receive an automatic grant of options to purchase Company common stock. Currently, each non-employee director receives options on: - - 1,500 shares if the option exercise price is $35 or more, or - - 2,500 shares if the option exercise price is less than $35. The amendment to the plan would increase the grant to options on: - - 2,500 shares if the option exercise price is $35 or more, or - - 3,500 shares if the option exercise price is less than $35. STOCKHOLDER APPROVAL IS NOT REQUIRED BY THE PLAN OR LAW. HOWEVER, THE BOARD WOULD LIKE TO GIVE STOCKHOLDERS THE OPPORTUNITY TO VOTE ON THE AMENDMENT. THE AMENDMENT WILL BECOME EFFECTIVE ONLY IF IT IS APPROVED BY THE STOCKHOLDERS. The Company compensates its directors with both cash and to consider a stockholder proposal requestingstock option grants and believes that the Board of Directors amend the Certificate of Incorporation.stock option grants help to align directors' and stockholders' interests. The Board of Directors knows of no other business for consideration atrecently reviewed non-employee directors' compensation, which included a comparison to peer group companies. The disinterested directors approved an increase in the Annual Meeting. If any other matters are properly presented atnon-employee directors' fees beginning in 1999. They also recommended an increase in the Annual Meeting or any adjournment or postponement thereof, it isannual, automatic stock option grant to our non-employee directors. The Company believes that this increase in the intentionsize of the persons namedoption grant will better align our non-employee directors' compensation with stockholders' interests and peer group compensation. The Board had last reviewed the directors' compensation program in the proxy to vote, or otherwise to act, on your behalf in accordance with their judgment on such matters. As used1995. Our non-employee directors have an interest 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 toamendment. [side bar] AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN 11 14 PROPOSALS TO BE VOTED ON The Board recommends a 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 -- ELECTIONIf you would like more information about the 1992 Stock Incentive Plan, a summary of its terms is included as Appendix B to this proxy statement. OTHER BUSINESS THE BOARD KNOWS OF NO OTHER BUSINESS TO BE CONSIDERED AT THE MEETING. HOWEVER, IF: - - OTHER MATTERS ARE PROPERLY PRESENTED AT THE MEETING, OR FOR ANY ADJOURNMENT OR POSTPONEMENT OF THE MEETING, AND - - YOU HAVE COMPLETED AND RETURNED YOUR PROXY CARD, THEN CHARLES R. SCHWAB AND DAVID S. POTTRUCK WILL, WITH YOUR PROXY, VOTE YOUR SHARES ON THOSE MATTERS ACCORDING TO THEIR BEST JUDGMENT. [side bar] OTHER BUSINESS 12 15 THE BOARD 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 1 5 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, NancyNANCY 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 DIRECTOR SINCE 1992 Ms. 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. Bechtle61, 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,Ms. Bechtle also has beenserved as Chairman and Chief Executive Officer of Sugar Bowl Ski Resort, and as a director of Sugar Bowl Corporation, since February 1998. Ms. Bechtle's term expires in the year 2000. C. PRESTON BUTCHER DIRECTOR SINCE 1988 Mr. Butcher, age 60, is Chairman and Chief Executive Officer of the newly formed Legacy Partners (formerly Lincoln Property Company since October 1988N.C., Inc.), a real estate development and hasmanagement firm. Mr. Butcher 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 from 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 2 6 the Company (November 1986 to March 1994) and President of the Company (November 1986 to July 1992).until 1998. Mr. Stupski was a director of Schwab from September 1981 to February 1995 andButcher's term expires in the last five years also has served as Chief Operating Officer (September 1981 to July 1992), Chief Executive Officer (Julyyear 2000. DONALD G. FISHER DIRECTOR SINCE 1988 to July 1992), and Vice Chairman (July 1992 to August 1994) of Schwab. Donald G.Mr. 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. Fisher70, is the Chairman of the Board of The Gap, Inc., a nationwide specialty retail clothing chain. Mr. FisherHe 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. AnthonyCommunications, Inc., a wireless telecommunications services company, and Cornerstone Properties, Inc., a real estate development company. Mr. Fisher's term expires in the year 2001. ANTHONY M. FRANK DIRECTOR SINCE 1993 Mr. Frank, age 65,67, 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 aan investment fund specializing in financial institutions, investment fund.since 1993. 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 CentersTemple-Inland, Inc., a maker of America Temple-Inland, Inc.;containers and cardboard and building products and a provider of financial services; General American Investors, a closed-end investment company; and Bedford Properties Investors, Irvine Apartment Communities and Crescent Real Estate Equities, bothall real estate investment trusts. (TERMS EXPIRING IN 1999)Mr. Frank served as a director of the Company from April 1987 until February 1988 and from March 1992 until April 1993. He rejoined the Board in December 1993. Mr. Frank's term expires in the year 2001. [side bar] BIOGRAPHIES - - NANCY H. BECHTLE - - C. PRESTON BUTCHER - - DONALD G. FISHER - - ANTHONY M. FRANK 13 16 THE BOARD OF DIRECTORS FRANK C. HERRINGER DIRECTOR SINCE 1996 Mr. Herringer, age 56, is Chairman of the Board, Chief Executive Officer and President of Transamerica Corporation, a life insurance and financial services company. At Transamerica, he has been Chairman since 1996, Chief Executive Officer since 1991 and President since 1986. Mr. Herringer is also a director of Unocal Corporation, an oil company. Mr. Herringer is a nominee for election this year. STEPHEN T. MCLIN DIRECTOR SINCE 1988 Mr. McLin, age 52, has been Chairman and Chief Executive Officer of STM Holdings LLC, which offers merger and acquisition advice for the financial services industry, since 1998. From 1987 until 1998, he was the President and Chief Executive Officer of America First Financial Corporation, a finance and investment banking firm. Mr. McLin is a director of Bay View Capital Corporation, which conducts a savings bank business and offers commercial and consumer financing. Mr. McLin is a nominee for election this year. DAVID S. POTTRUCK DIRECTOR SINCE 1994 Mr. Pottruck, age 50, is the President and Co-Chief Executive Officer of the Company. He became the President in 1992, and the Co-Chief Executive Officer in January 1998. He was also the Company's Chief Operating Officer from 1994 until September 1998. He became the Chief Executive Officer of Charles Schwab & Co., Inc. in 1992. Mr. Pottruck is currently a director of McKesson HBOC, Inc., the world's largest healthcare services company; Intel Corporation, a maker of microcomputer components and related products; and Preview Travel, Inc., an online travel services provider. In 1998, he was named to the Federal Advisory Commission on Electronic Commerce. Mr. Pottruck's term expires in the year 2000. [side bar] BIOGRAPHIES - - FRANK C. HERRINGER - - STEPHEN T. McLIN - - DAVID S. POTTRUCK 14 17 THE BOARD OF DIRECTORS MARK A. PULIDO DIRECTOR SINCE DECEMBER 1998 Mr. Pulido, age 46, is President and Chief Executive Officer of McKesson HBOC, Inc., which was formed from the merger of McKesson Corporation and HBO & Company in January 1999. He served as Chief Executive Officer of McKesson Corporation from April 1997 until the merger; President from April 1996 until the merger; and Chief Operating Officer from April 1996 to April 1997. Between 1992 and 1994, Mr. Pulido held the positions of Chairman, President and Chief Executive Officer of Red Line Healthcare Corporation, an affiliate of Sandoz International Ltd., the nation's largest provider of medical supplies and reimbursement services to the long-term care industry. In 1994, he became Chief Operating Officer of Sandoz Pharmaceuticals Corporation, and in 1996, he became Chief Executive Officer. Mr. Pulido's term expires in the year 2001. ARUN SARIN DIRECTOR SINCE DECEMBER 1998 Mr. Sarin, age 44, is President and Chief Operating Officer of AirTouch Communications, Inc. Prior to his appointment to these positions in 1997, Mr. Sarin was President and Chief Executive Officer of AirTouch International. Mr. Sarin joined AirTouch (formerly Pacific Telesis Group) in 1984 and held a variety of positions, including Vice President and General Manager, Vice President - Chief Financial Officer and Controller, and Vice President of Corporate Strategy. Mr. Sarin is a member of the board of directors of AirTouch Communications; PrimeCo Personal Communications, L.P., a wireless telecommunications services company; and Cisco Systems, Inc., a computer networking company. Mr. Sarin's term expires in the year 2001. CHARLES R. SCHWAB DIRECTOR SINCE 1986 Mr. Schwab, age 59,61, was a founder of Charles Schwab & Co., Inc. 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 also served as the Chief Executive Officer from 1986 until January 1998, when he has been a member of the Customer Quality Assurance Committee of the Board of Directors.and David S. Pottruck became Co-Chief Executive Officers. Mr. Schwab currently serves asis a director of The Gap, Inc., Transamerica Corporation, AirTouch Communications, Inc. and Siebel Systems, Inc., a company that provides support for software systems, 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,Mr. Schwab is a nominee for election this year. [side bar] BIOGRAPHIES - - MARK A. PULIDO - - ARUN SARIN - - CHARLES R. SCHWAB 15 18 THE BOARD OF DIRECTORS GEORGE P. SHULTZ DIRECTOR SINCE 1997 Dr. Shultz, age 54,78, is Professor Emeritus of International Economics at the Graduate School of Business at Stanford University, and a Distinguished Fellow at the Hoover Institution. He has beenheld government positions as the Secretary of Labor (1969-1970), Director of the Office of Management and Budget (1970-1972), Secretary of the Treasury (1972-1974) and Secretary of State (1982-1989). In 1989, he was awarded the Medal of Freedom, the nation's highest civilian honor. Dr. Shultz is a director of the CompanyAirTouch Communications, Inc.; Bechtel Group, Inc., a provider of engineering, construction and related management services; Gulfstream Aerospace Corporation, a membermaker of the Customer Quality Assurance Committeeintercontinental business jet aircraft; and Audit Committee since October 1996. Mr. HerringerGilead Sciences, Inc., a developer of treatments for viral diseases. He is also Chairman of the Board, Chief Executive Officer andJ.P. Morgan's International Advisory Council. He was President of Transamerica Corporation. At Transamerica, he has been Chairman since January 1, 1996, Chief Executive Officer since 1991 and President since 1986.Bechtel Group, Inc. from 1974 to 1982. Dr. Shultz's term expires in the year 2000. ROGER O. WALTHER DIRECTOR SINCE 1989 Mr. Herringer is also a director of Pacific Telesis Group and Unocal Corporation. 3 7 Stephen T. McLin,Walther, age 50, has been a director of the Company and63, 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 FinancialTusker Corporation, a financereal estate 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 Committeebusiness management company, since April 1989 and hasAugust 1997. He 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.States, from April 1992 through August 1997. 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,Bank. Mr. Walther is a bank holding company. INFORMATION ABOUTnominee for election this year. [side bar] BIOGRAPHIES - - GEORGE P. SHULTZ - - ROGER O. WALTHER 16 19 THE BOARD OF DIRECTORS NUMBER OF DIRECTORS AND COMMITTEES OF THE BOARD During 1996,TERMS The Company currently has twelve directors. Four directors are nominees for election this year. The remaining eight directors will continue to serve the terms described in their biographies. Our directors serve staggered terms. This is accomplished as follows: - each director serves a three-year term, - the directors are divided into three classes, - the classes are as nearly equal in number as possible, and - the term of each class begins on a staggered schedule. CONDOLEEZZA RICE Based on discussions between Board members and Dr. Condoleezza Rice, an understanding exists between the Board and Dr. Rice that she will join the Board in July 1999. Biographical information on Dr. Rice appears below. Dr. Rice, age 44, has been Provost of DirectorsSanford University since 1993, and a professor of political science at Stanford since 1981. In 1984, she was the recipient of the Walter J. Gores Award for Excellence in Teaching, and in 1993, she was awarded the School of Humanities and Sciences Dean's Award for Distinguished Teaching. Dr. Rice is a member of the board of directors of the Chevron Corporation, Transamerica Corporation, the William and Flora Hewlett Foundation, the University of Notre Dame, J.P. Morgan's International Advisory Council and the San Francisco Symphony Board of Governors. [side bar] NUMBER OF DIRECTORS AND TERMS BIOGRAPHY - - CONDOLEEZZA RICE 17 20 BOARD AND COMMITTEE MEETINGS The Board held eight regular meetings in 1998. Each director, except Donald G. Fisher and one special meeting. During 1996, each of the directors, except Mr. Fisher,Roger O. Walther, attended at least 75% of all Board and applicable committee meetings ofduring 1998. This table describes the Board of Directors and the Committees on which they served.Board's committees. 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 anya 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
NAME OF COMMITTEE FUNCTIONS NUMBER OF AND MEMBERS OF THE COMMITTEE MEETINGS IN 1998 - ----------------------------------------------------------------------------------------------- AUDIT - confers with independent 4 accountants and internal Nancy H. Bechtle auditors regarding scope of C. Preston Butcher examinations Donald G. Fisher - reviews reports of the Company's independent accountants and internal auditors, and reviews recommendations concerning internal controls. The Audit Committee reports of independent Anthony M. Frank accountants and internal Frank C. Herringer auditors Stephen T. McLin * - reviews recommendations about Mark A. Pulido ** internal controls Arun Sarin ** - recommends selection of independent accountants to the Board - ----------------------------------------------------------------------------------------------- COMPENSATION - determines the compensation of 8 the Co-Chief Executive Officers Nancy H. Bechtle - reviews and approves: C. Preston Butcher - compensation philosophy Stephen T. McLin - programs for annual and George P. Shultz long-term executive Roger O. Walther * compensation - has authority to grant options and other equity awards under stock incentive plans and bonus awards under cash-based incentive plans - ----------------------------------------------------------------------------------------------- CUSTOMER - monitors service quality 2 QUALITY - assesses customer satisfaction ASSURANCE and reviews results of Charles Schwab & Co., Inc. customer Nancy H. Bechtle surveys Donald G. Fisher - proposes initiatives to Anthony M. Frank* research service quality Frank C. Herringer Charles R. Schwab George P. Shultz Roger O. Walther
* Chairperson ** Elected to the Boardcommittee in January 1999 [side bar] THIS TABLE DESCRIBES THE BOARD'S COMMITTEES. 18 21 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1998: - - none 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 Compensation Committee was an officer (or former officer) or employee of Directors and key employees underthe Company or any of its subsidiaries; - - none of the members of the Board Compensation Committee entered into (or agreed to enter into) any transaction or series of transactions with the Company or any of its subsidiaries in which the amount involved exceeds $60,000; - - none of the Company's stock option plans. Theexecutive officers served on the compensation committee (or another board committee with similar functions or, if there was no committee like that, the entire board of directors) of another entity where one of that entity's officers served on the Company's Board Compensation Committee held seven meetings in 1996. The Customer Quality Assurance Committee monitors service qualityCommittee; - - none of the Company's executive officers was a director of another entity where one of that entity's officers served on the Company's Board Compensation Committee; and customer satisfaction. The Customer Quality Assurance Committee proposes initiatives to research service quality and reviews- - none of the resultsCompany's executive officers served on the compensation committee (or another board committee with similar functions or, if there was no committee like that, the entire board of Schwab customer surveys. The Customer Quality Assurance Committee held two meetings in 1996. 4directors) of another entity where one of that entity's executive officers served as a director on the Company's Board. [side bar] DURING 1998, OUR BOARD COMPENSATION COMMITTEE CONSISTED OF ALL NON-EMPLOYEE MEMBERS, AND WE DID NOT HAVE ANY COMPENSATION COMMITTEE INTERLOCKS. 19 822 DIRECTOR COMPENSATION DirectorsWe do not pay directors who are also officers of the Company or its subsidiaries do not receive any additional compensation for their servicesservice as directors. In 1996,1998, compensation for non-employee directors receivedincluded the following: - 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 followingon the same day as a Board meeting, and $1,000 for each other 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.$3,000 to committee chairpersons, and - expenses of attending Board and committee meetings. Non-employee directors may participate in the Directors' Deferred Compensation Plan, under whichPlan. This plan permits non-employee directors may elect to defer receipt of all or a portion of their directors' fees and receive either: - a grant of stock options which have: - a grant value equal to the amount of the deferred fees (as determined under an appropriate options valuation method), and - an option exercise price equal to the fair market value of Company common stock on the date the deferred fee amount would have been paid, - or - - upon ceasing to serve as a director, the amount that would have resulted from investing the deferred amountsfee amount in the Company's Common Stock.Company common stock. In addition, the Company's non-employee directors receive an annual, automatic grant of options1998, under the 1992 Stock Incentive Plan, non-employee directors were entitled to an annual, automatic grant of either: - options on 1,500 shares of Common Stock (2,500Company common stock if the fair market value of the stock on the grant date was $35 or more, or - options on 2,500 shares of Common StockCompany common stock if the exercise price isfair market value of the stock on the grant date was less than $35).$35. "Fair market value" is defined in the 1992 Stock Incentive Plan as the closing price of Company common stock on the date the option is granted. [side bar] THE COMPANY COMPENSATES ITS DIRECTORS WITH CASH AND STOCK OPTION GRANTS. 20 23 DIRECTOR COMPENSATION The annual, automatic option grant to non-employee directors of 2,5001,500 shares of Common Stockcommon stock was made on May 15, 19961998 at an exercise price of $36.44 per share. As a fair market value (as defined inresult of the December 11, 1998 three-for-two stock split, this stock option grant was adjusted to 2,250 shares with an exercise price of $24.29. If the amendment to 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 bybeing voted on at the Board of Directors andannual meeting is 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 Plannon-employee directors 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. 5 9 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)entitled 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 nonqualifiedeither: - options each year. Ason 2,500 shares of December 31, 1996, approximately 1,324 persons were recipients of awards underCompany common stock if 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,$35 or pursuant to Performance Share Awards andmore, or - 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 6 10 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 1,500on 3,500 shares of Common Stock (2,500 shares of Common StockCompany common stock if the option exercise price is less than $35).$35. (See "Proposals To Be Voted On" discussed earlier in this proxy statement.") [side bar] SINCE THE INITIAL CASH DIVIDEND IN 1989, THE COMPANY HAS PAID 39 CONSECUTIVE QUARTERLY CASH DIVIDENDS AND HAS INCREASED THE CASH DIVIDEND 11 TIMES. SINCE 1989, CASH DIVI- DENDS HAVE GROWN AT A 38% COMPOUNDED ANNUAL RATE. 21 24 PRINCIPAL STOCKHOLDERS This granttable shows how much Company common stock 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. 7 11 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 pricedirectors, certain executive officers and owners 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. 8 12 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 9 13 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 - -------------------------------------------------------- ------------------ ---------------------- 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 14 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. 11 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. 12 16 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, eachCompany's outstanding common stock, as 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.March 18, 1999. AMOUNT AND NATURE OF SHARES BENEFICIALLY OWNED
NUMBER OF SHARESRIGHT TO RESTRICTED PERCENT OF OF BENEFICIALLYSHARES ACQUIRE (2) STOCK (3) OUTSTANDING OWNED (1) SHARES NAME OF BENEFICIAL OWNER(1) OWNED(2) COMMON STOCK - ---------------------------------------------------------------- ---------------- ------------------------------------------------------------------------------------------------------------------------------- Charles R. Schwab(3)(4)(5)...................................... 36,662,535 20.8% Charles Schwab Profit SharingSchwab(4) 74,653,296 1,106,250 -- 18.6 SchwabPlan Retirement Savings 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.Investment Plan (5) 29,921,306 -- -- 7.4 Transamerica Corporation and Transamerica Investment Services, Inc.(8)....................................................... 9,096,350 5.2% Lawrence J. Stupski(3)(4)....................................... 4,725,926 2.7%(6) 21,455,829 -- -- 5.3 David S. Pottruck(3)(4)(9)...................................... 3,247,957 1.8%Pottruck(7) 2,229,251 3,368,040 -- 1.4 Nancy H. Bechtle(3)............................................. 80,250Bechtle 9,760 144,500 -- * C. Preston Butcher(3)(10)....................................... 171,750Butcher(8) 349,784 42,750 -- * Donald G. Fisher(3)(11)......................................... 499,250Fisher(9) 1,086,187 42,750 -- * Anthony M. Frank(3)(12)......................................... 301,798Frank 202,500 40,625 -- * Frank C. Herringer(3)(13)....................................... 24,850Herringer(10) 33,412 28,125 -- * Stephen T. McLin(3)(14)......................................... 39,037McLin(11) 50,612 42,750 -- * Mark A. Pulido(12) 1,950 10,000 -- * Arun Sarin(13) 1,000 10,000 -- * George P. Shultz 22,500 24,750 -- * Roger O. Walther(3)(15)......................................... 36,339Walther(14) 44,997 17,625 -- * Tom D. Seip(3)(4)............................................... 520,314John Coghlan 207,045 1,183,104 69,375 * TimothyLinnet F. McCarthy(3)(4)....................................... 40,000Deily 15,014 69,752 79,500 * Luis E. Valencia(3)(4).......................................... 204,777Valencia 102,095 158,417 71,250 * All executive officersSteven L. Scheid 573 133,125 60,000 * Directors and directorsExecutive Officers as a group (18 persons)(16).................................................. 63,788,182 36.2%Group (22 Persons) (15) 79,538,865 7,286,687 781,125 21.2
- ------------------------------- * Less*Less than 1%. + Members of (1) Includes shares for which the Administrative Committee for the Profit Sharing Plan. For information regarding shares beneficially owned by such persons, see Note 7 below. (1) All informationnamed person: - has sole voting and investment power, - has shared voting and investment power with respect to beneficial ownership of the shares is based upon filings made by the respective beneficial owners with the SEChis or information provided by such beneficial owners to the 13 17 Company. Except asher spouse, or - holds in an account under The SchwabPlan Retirement Savings and Investment Plan, unless otherwise indicated in the notesfootnotes. [side bar] NET INCOME FOR 1998 WAS $348 MILLION, A 29% INCREASE OVER 1997. 22 25 PRINCIPAL STOCKHOLDERS Excludes shares that: - may be acquired through stock option exercises, or - are restricted stock holdings. (2) Shares that can be acquired through stock option exercises through May 17, 1999. (3) Shares subject to this table,a vesting schedule, forfeiture risk and other restrictions. (4) Includes 2,755,806 shares held by Mr. Schwab's spouse and children. Includes the following shares for which Mr. Schwab disclaims beneficial ownership: - 5,251,895 shares held by non-profit public benefit corporations. - 32,915 shares held in trusts for which Mr. Schwab acts as trustee. Includes the following shares for which Mr. Schwab may be deemed to have shared voting and investment power, but disclaims beneficial ownership: - 453,329 shares held by investment companies and managed by a wholly-owned subsidiary of the Company. Mr. Schwab's address is c/o The Charles Schwab Corporation, 120 Kearny Street, San Francisco, California 94104. (5) As of March 18, 1999, The SchwabPlan Retirement Savings and Investment Plan held a total of 29,921,306 shares of which: - 29,564,853 shares were held by participants under the plan, and - 356,453 unallocated shares were held under the Employee Stock Ownership Plan ("ESOP") component of the plan. Participants direct the voting and disposition of shares held for their benefit or allocated to their plan accounts. The purchasing agent votes and disposes of plan participants' unvoted shares and unallocated shares held under the ESOP component of the plan. The plan's purchasing agent may only vote or dispose of these unvoted and unallocated shares in the same proportion as shares directed by plan participants. The address of each beneficial owner of more than 5% of the Common StockThe SchwabPlan Retirement Savings and Investment Plan 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(6) Based on information contained in a report on Schedule 13-G filed with 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)SEC on February 16, 1999. 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(7) Includes 30,288 shares held by Mr. Pottruck's family members, as tospouse and children. Includes the following shares for which he shares investment power butMr. Pottruck disclaims beneficial ownership. (10) This amount includes 113,250ownership: - 203,634 shares held in trusts for which Mr. Pottruck acts as trustee. - 115,312 shares held by Mr. Butcher and his spouse as joint tenants, and 42,000a non-profit public benefit corporation. (8) Includes 94,972 shares held by Mr. Butcher's spouse as her separate property. (11) This amount includes 408,500spouse. [side bar] SINCE 1998, THE SHARE PRICE OF THE COMPANY'S COMMON STOCK HAS GROWN AT A COMPOUNDED ANNUAL RATE OF 62%. THIS INCREASE CREATED $22 BILLION IN STOCKHOLDER WEALTH 23 26 PRINCIPAL STOCKHOLDERS (9) Includes 919,125 shares held in certain charitable remainder trusts by Mr. Fisher and his spouse as trustees of a charitable remainder trust. (12) This amount includes 41,298spouse. (10) Includes 16,875 shares held by Mr. Frank's daughter, as to which heHerringer's spouse. (11) Includes 4,567 shares investment power but disclaims beneficial ownership.held by a non-profit public benefit corporation established by Mr. McLin. (12) Mr. Pulido became a director in December 1998. (13) This amount includes 3,750Mr. Sarin became a director in December 1998. (14) Includes 8,870 shares held by Mr. Herringer as custodian for his children. (14) This amount includes 22,312 shares held by Mr. McLin underWalther's spouse. (15) In addition to the Company's Dividend Reinvestmentofficers 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. 15 19 (16) Messrs. Schwab, Stupski, Pottruck, Butcher, Fisher, Frank, Herringer, McLin, Walther, Seip, McCarthy, and Valencia, Ms. Bechtle and fivedirectors named in this table, six other executive officers are members of the group. [side bar] A FUNDAMENTAL TENET OF THE COMPANY'S COMPENSATION POLICY IS THAT SIGNIFICANT EQUITY PARTICIPATION CREATES A VITAL LONG-TERM PARTNERSHIP BETWEEN MANAGEMENT AND OTHER STOCKHOLDERS. 24 27 PERFORMANCE GRAPH The following graph shows a five-year comparison of cumulative total numberreturns for Company common stock, the Dow Jones Securities Brokerage Group Index and the Standard & Poor's 500 Index, each of shares shown on this line includes the group's direct share holdings (except individual Profit Sharing Plan holdings)which assumes an initial value of $100 and shares issuable upon exercisereinvestment of options within 60 days of March 13, 1997. The 15,662,770 allocated and 797,187 unallocated shares held by the Trusteedividends. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN * - -- THE CHARLES SCHWAB CORPORATION - -- DOW JONES SECURITIES BROKERAGE GROUP INDEX - -- STANDARD & POOR'S 500 INDEX [Graph Appears Here]
12/93 12/94 12/95 12/96 12/97 12/98 THE CHARLES SCHWAB CORPORATION $ 100 $ 109 $ 190 $ 304 $ 600 $1,211 DOW JONES SECURITIES BROKERAGE GROUP INDEX $ 100 $ 88 $ 121 $ 182 $ 332 $ 377 STANDARD & POOR'S 500 INDEX $ 100 $ 101 $ 139 $ 171 $ 229 $ 294
* Information presented is as of the Profit Sharing Plan are also included in this total numberend of shares. 16each fiscal year ended December 31. [side bar] ON A DIVIDEND REIN- VESTED BASIS, THE VALUE OF OUR COMMON STOCK INCREASED 102% IN 1998, COMPARED WITH AN INCREASE OF 14% FOR THE DOW JONES SECURITIES BROKERAGE GROUP INDEX AND AN INCREASE OF 29% FOR THE STANDARD & POOR'S 500 INDEX. 25 20 EXECUTIVE28 SUMMARY COMPENSATION The followingTABLE This table shows, specificfor the last three fiscal years, compensation information for the Company's ChiefCo-Chief Executive OfficerOfficers and the next four most highly compensated executive officers. We refer to each of these officers in 1996 for fiscal years ending December 31, 1996, 1995, and 1994.as a "named executive officer." SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS ---------------------------------------- AWARDS ANNUAL ------------------------ PAYOUTS COMPENSATION RESTRICTED SECURITIES ------------- ------------ STOCK UNDERLYING LTIP ALL OTHER- ------------------------------------------------------------------------------------------------------------------------------- NAME AND PRINCIPAL POSITION YEAR SALARY($SALARY BONUS ($)(1) BONUS($OTHER RESTRICTED SECURITIES ALL OTHER ($) ANNUAL STOCK UNDERLYING COMPENSATION COMPEN- AWARDS ($) OPTIONS (#) ($) (6) SATION (4)(5) (5) ($) (2) AWARDS($)(3) OPTIONS(#) PAYOUTS($)(4) COMPENSATION($)(5) - ------------------------------ ---- ------------ ----------- ----------- ---------- ------------- ------------------------------------------------------------------------------------------------------------------------------------------------- CharlesCHARLES R. Schwab,............SCHWAB 1998 $800,004 $6,145,225 - 0 1,050,000 $19,472 CHAIRMAN AND CO-CHIEF EXECUTIVE 1997 $800,004 $6,362,225 - 0 0 $16,601 OFFICER 1996 $800,004 $9,387,225 - 0 0 $18,280 DAVID S. POTTRUCK 1998 $800,004 $6,145,225 - 0 $ 18,810 Chairman and 1995 $800,004 $8,606,225 0 500,000 0 $ 24,699 Chief Executive Officer 1994 $772,506 $2,500,2252,850,000 $19,472 PRESIDENT AND CO-CHIEF EXECUTIVE 1997 $695,004 $4,319,225 - 0 0 0 $ 18,890 David S. Pottruck,............$16,601 OFFICER 1996 $695,004 $6,436,225 - 0 0 $18,280 JOHN COGHLAN 1998 $387,000 $ 790,225 $609,308 $1,406,559 97,501 $19,472 EXECUTIVE VICE PRESIDENT 1997 $381,667 $ 714,120 $119,834 0 33,751 $16,601 1996 $362,500 $ 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 $1,395,572534,541 - 0 0 $18,280 LINNET F. DEILY (7) 1998 $369,167 $ 800,225 $ 59,957 $1,373,747 97,501 $19,472 EXECUTIVE VICE PRESIDENT 1997 $313,334 $ 479,637 $243,155 $ 117,374 53,250 $14,389 1996 $ 62,500 $ 80,265 - $ 244,998 112,500 0 LUIS E. VALENCIA 1998 $391,667 $ 18,810 Executive Vice President 1995 $366,668 $1,046,288765,225 $406,464 $1,569,996 97,501 $19,472 EXECUTIVE VICE PRESIDENT 1997 $368,334 $ 384,375 75,000752,000 $ 79,889 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,.............78,751 $16,601 1996 $329,167 $ 938,084 - 0 0 $18,280 STEVEN L. SCHEID(8) 1998 $379,167 $ 775,225 $ 620 $1,569,996 112,501 $19,472 EXECUTIVE VICE PRESIDENT AND 1997 $345,833 $ 749,945 132,597 0 67,500 $16,601 CHIEF FINANCIAL OFFICER 1996 $189,583 $ 18,810 Executive Vice President and 1995 $295,000504,499 - 0 157,500 $ 762,695 $ 256,250 60,000 0 $ 24,699 Chief Administrative Officer 1994 $228,750 $ 182,546 0 240,000 0 $ 2,0006,644
- ------------------------------- (1) Mr. McCarthy joined the Company in September of 1995, and Mr. Valencia joined the Company in February of 1994. (2) Includes, with respect toFor Mr. Schwab, includes amounts paid pursuant tounder his Employment Agreement with the Companyemployment agreement dated March 31, 1995. See(See "Employment Agreement and Name Assignment."Assignment" in Appendix A.) 26 29 SUMMARY COMPENSATION TABLE (2) "Other Annual Compensation" includes payments, not properly categorized as salary or bonus, to the named executive officers. The following chart explains payments, which started in 1997, arising out of certain restricted stock grants.
CASH PAYMENT BASED ON PAR VALUE PAYMENT ON SCHWAB PERFORMANCE* RESTRICTED STOCK** TOTAL 1998 1997 1998 1997 1998 1997 MR. SCHWAB 0 0 0 0 0 0 MR. POTTRUCK 0 0 0 0 0 0 MR. COGHLAN $608,766 $119,602 $542 $232 $609,308 $119,834 MS. DEILY 0 0 $542 $201 $ 542 $ 201 MR. VALENCIA $405,844 $ 79,734 $620 $155 $406,464 $ 79,889 MR. SCHEID 0 0 $620 0 $ 620 0
* Some executive officers received cash payments based on the return on Company stock (including price appreciation and dividend reinvestment) outperforming, by a specified margin, the return on the Standard & Poor's 500 Index. These payments are intended to encourage executives to continue holding Company stock after vesting by helping them satisfy the income tax liability resulting from the vesting of the shares. ** Consists of payment by the Company of the par value of restricted stock awarded to named executive officers. (3) "Other Annual Compensation" includes relocation expenses and related tax gross-up payments (explained below), in addition to other perquisites, as shown in the following chart.
RELOCATION TAX GROSS-UP OTHER EXPENSES PAYMENTS PERQUISITES TOTAL 1998 1997 1998 1997 1998 1997 1998 1997 ----------- ------------ ------------- --------------- MS. DEILY $21,277 $163,252 $2,059 $42,032 $36,079 $37,670 $59,415 $242,954 MR. SCHEID -- $ 93,943 -- $ 8,962 -- $29,692 -- $132,597
SEC regulations exclude from proxy statement reporting requirements a named executive officer's perquisites if their value in any year does not exceed the lesser of (a) $50,000 or (b) 10% of the total of the named executive officer's annual salary and bonus for that year. Based on these regulations, we have reported perquisites only for Ms. Deily for 1997 and 1998 and Mr. Scheid for 1997. Ms. Deily's expenses were for relocation from Houston, Texas to San Francisco, California, and Mr. Scheid's expenses were for relocation from Scottsdale, Arizona to San Francisco. Because some of the relocation expense payments were considered taxable income, Ms. Deily and Mr. Scheid received tax gross-up payments to cover the taxes on that income. [side bar] DURING 1998, THE COMPANY ACHIEVED ITS NINTH CONSECUTIVE YEAR OF RECORD REVENUES AND EIGHTH CONSECUTIVE YEAR OF RECORD EARNINGS. 27 30 SUMMARY COMPENSATION TABLE (4) RESTRICTED STOCK - - DATE OF GRANT VALUE. This column shows the market value of restricted stock awards on date of grant. RESTRICTED STOCK - - YEAR-END VALUE. The year endfollowing chart shows the number and year-end value of Messrs. Seip, McCarthy and Valencia'sall shares were $480,000, $480,000 and $320,000, respectively,of unvested restricted stock held by named executive officers on December 31, 1998. The year-end value is based on the closing sale price of the Company's Common StockCompany common stock on December 31, 1996that date ($32.00). This per share price does not reflect any additional diminution in value resulting from the restrictions placed on such shares. The holders56.1875):
NUMBER OF YEAR-END VALUE SHARES MR. SCHWAB 0 0 MR. POTTRUCK 0 0 MR. COGHLAN 69,375 $3,898,008 MS. DEILY 79,500 $4,466,906 MR. VALENCIA 71,250 $4,003,359 MR. SCHEID 60,000 $3,371,250
RESTRICTED STOCK - - RIGHTS. Restricted stockholders have voting and dividend rights with respect to the restricted shares.rights. RESTRICTED STOCK - - ORIGINAL VESTING SCHEDULE. The restricted shares, when originally issued, vested over a five-year period, withwith: - 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, ifdepending on certain stock performance criteria are not met.criteria. 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 effectiveRESTRICTED STOCK - - AMENDED VESTING SCHEDULE. Effective January 1, 1997, the Board Compensation Committee of the Board of Directors shortened the vesting period to four years for all restricted grants madestock granted after December 31, 19931993. The following vesting schedule applies to four years. The restricted shares outstanding onstock granted between January, 1, 1994 and December 31, 1996 now have a vesting schedule with1996: - 10% of the shares vestingvest two years after the grant date, - an additional 40% of the shares vestingvest three years after the grant date, and - the remaining 50% of the shares vest four years after the grant date. For restricted stock granted after December 31, 1996, the following vesting schedule applies: - 50% of the shares vest three years after the grant date, and - the remaining 50% of the shares vest four years after the grant date. Any restricted shares granted subject towith pre-existing stock performance criteria remainconditions remained subject to those conditions. (4)(5) Adjusted for the December 11, 1998 three-for-two stock split of Company common stock. (6) Represents Company contributions under The disclosure rulesSchwabPlan Retirement Savings and Investment Plan. (7) Ms. Deily joined the Company in October 1996. (8) Mr. Scheid joined the Company in June 1996. [side bar] AT YEAR-END 1998, CUSTOMER ASSETS INVESTED IN SCHWABFUNDS*, MUTUAL FUND ONESOURCE* AND OTHER MUTUAL FUND MARKETPLACE* FUNDS TOTALED $210.6 BILLION, UP 31% OVER YEAR-END 1997. 28 31 OPTION GRANTS This table shows stock option grants to the named executive officers during the last fiscal year. OPTIONS GRANTED IN 1998
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM (3) NAME NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION GRANTED (#) FISCAL YEAR ($/SH) (2) DATE 5% 10% (1) - -------------------------------------------------------------------------------------------------------------------------------- CHARLES R. SCHWAB 1,050,000 10.43% $23.1250 5/11/2008 $15,448,509 $38,981,751 DAVID S. POTTRUCK (4) 1,050,000 10.43% $23.1250 5/11/2008 $15,448,509 $38,981,751 300,000 2.98% $33.3333 5/11/2008 $ 1,351,360 $ 8,075,143 300,000 2.98% $40.0000 5/11/2008 0 $ 6,075,143 300,000 2.98% $46.6667 5/11/2008 0 $ 4,075,143 300,000 2.98% $53.3333 5/11/2008 0 $ 2,075,143 300,000 2.98% $60.0000 5/11/2008 0 $75,143 300,000 2.98% $66.6667 5/11/2008 0 0 JOHN COGHLAN 97,501 0.97% $26.7917 7/24/2008 $ 1,573,330 $ 4,052,565 LINNET F. DEILY 97,501 0.97% $26.1667 2/23/2008 $ 1,581,323 $ 4,029,197 LUIS E. VALENCIA 97,501 0.97% $26.1667 2/23/2008 $ 1,581,323 $ 4,029,197 STEVEN L. SCHEID 112,501 1.12% $26.1667 2/23/2008 $ 1,824,601 $ 4,649,067
(1) Option grants in 1998 were made under the 1992 Stock Incentive Plan. The grants have been adjusted for the December 11, 1998 three-for-two stock split of Company common stock. Except as noted in footnote 4, these options: - are generally granted as 50% non-qualified stock options and 50% incentive stock options (except as limited by tax law), - are granted at an exercise price equal to 100% 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 thefair market value of such participant's units on December 31, 1994 less the value of such unitscommon stock 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 ongrant, - expire ten years from the date of grant. Participants at the executive officer level were permittedgrant, unless otherwise earlier terminated because of certain events related to defer receipttermination of all or a portion of their LTIP cash bonuses until the earlier of a specified date certain or theemployment, and - vest in 25% increments on each anniversary date of the participant's termination of employment, provided that deferrals will be paid immediately upon a change of control. (5) Represents employer contributionsgrant, subject to the retirement plans forterms and conditions of the years 1994, 1995,plan. (2) Options with exercise prices of: - $26.1667 were granted on February 23, 1998. - $26.7917 were granted on July 24, 1998; and 1996. 18- $23.1250 were granted on May 11, 1998, except as noted in footnote 4. 29 22 STOCK32 OPTION TABLES There were no grants to purchaseGRANTS (3) Based on the SEC's rules, we use a 5% and 10% assumed rate of appreciation over the ten-year option term. This does not represent the Company's Common Stock toestimate or projection of the personsfuture common stock price. If the Company common stock does not appreciate above the exercise prices, the named executive officers will receive no benefit from the options. (4) 1,800,000 of Mr. Pottruck's options were premium price options. This means they were options with a series of escalating exercise prices that exceeded the Company common stock closing price of $23.1250 on the May 11, 1998 grant date. One-sixth of Mr. Pottruck's premium price options vest each year beginning in the Summary Compensation Table during the fiscal year ended December 31, 1996. The following2000. [side bar] OUR BOARD COMPENSATION COMMITTEE BELIEVES THAT AN EMPHASIS ON LARGE, BUT INFREQUENT, AWARDS PROVIDES A MORE POWERFUL INCENTIVE TO EXECUTIVE OFFICERS. 30 33 OPTIONS EXERCISED This table shows information concerning the exercise of stock options during 1996option exercises and the value of unexercised stock options held by the individuals named inexecutive officers during the Summary Compensation Table above as of December 31, 1996. AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUESlast fiscal year.
NUMBERAGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES(1) SHARES ACQUIRED VALUE NO. OF SECURITIES VALUE OF UNEXERCISED ON EXERCISE (#) REALIZED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ($)(2) AT 12/31/96FISCAL YEAR-END (#) AT 12/31/96(1)(2)YEAR-END ($)(3) ------------------- --------------------- SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(4) REALIZEDEXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------- ----------- -------- ------------------- -------------------------------------------------------------------------------------------------------------------------------------------------------- Charles CHARLES R. Schwab......................SCHWAB 1,500,000 $31,971,546 1,621,875 1,331,250 $ 81,177,316 $48,272,137 DAVID S. POTTRUCK 0 N/A 1,137,499 $28,781,244 375,0010 3,405,540 3,053,461 $179,747,114 $61,018,943 JOHN COGHLAN 95,625 $ 2,390,631 David S. Pottruck......................2,580,066 1,174,668 171,585 $ 62,326,615 $ 6,115,324 LINNET F. DEILY 28,123 $ 425,557 41,440 193,688 $ 1,755,164 $ 6,968,084 LUIS E. VALENCIA 223,524 $ 4,551,777 430,831 196,898 $ 21,634,478 $ 7,071,101 STEVEN L. SCHEID 0 N/A 1,190,524 $30,100,341 413,4760 95,625 241,876 $ 4,860,909 Tom D. Seip............................ 0 N/A 420,024 $10,576,365 149,4764,293,932 $ 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 $ 2,913,0979,031,037
(1) Adjusted for the December 11, 1998 three-for-two stock split of Company Common stock. (2) This number is calculated as follows: - ------------------------------- (1) The amount in this column reflectsif upon exercising the difference betweenstock options, the average ofnamed executive officer kept the shares he or she acquired, then by averaging the high and low market prices of Company stock on December 31, 1996 andthe date of exercise to get the "market price," or - if upon exercising the stock options, the named executive officer sold the shares he or she acquired, then by using the sale price as the "market price," - then subtracting the option exercise price from the market price to get the "value realized per share," and - then multiplying the value realized per share by the number of options exercised. The amounts in this column 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 19 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.executive officers. (3) The value of unexercised optionsThis number is calculated by multiplying the number of options outstanding by the difference betweenby: - subtracting the option exercise price andfrom the Company's December 31, 1996 closing1998 average market price of $32.00($56.9063 per share, of the Company's Common Stock as reported onin the New York Stock Exchange Composite Transactions Index,Index) to get the "average value per option," and 31 34 OPTIONS EXERCISED - multiplying the average value per option by the number of exercisable and unexercisable options. The amounts in this column may not represent amounts that will actually be realized by the named individual. (4) No named individual exercised stock options in 1996. 20executive officers. [side bar] ON A DIVIDEND REIN- VESTED BASIS, FROM DECEMBER 31, 1993 THROUGH DECEMBER 31, 1998, THE CUMULATIVE TOTAL RETURN OF THE COMPANY'S STOCK WAS 1,111%, COMPARED TO 277% FOR THE DOW JONES SECURITIES BROKERAGE GROUP INDEX AND 194% FOR THE STANDARD & POOR'S 500 INDEX. 32 2435 COMPENSATION COMMITTEE REPORT In this section, we describe our executive compensation policies and practices, including the compensation we pay our Co-Chief Executive Officers and the next four most highly compensated executive officers. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION During 1996,1998, the Compensation Committee (the "Committee") of the Company's Board of Directors consisted of Mr.Roger O. Walther, Ms.Nancy H. Bechtle, Mr.C. Preston Butcher, Stephen T. McLin and Mr. McLin. In addition, Mr. James Harvey was aGeorge P. Shultz. No member of the Committee until June of 1996. All members of the Committeeour committee during 1996 were not employees1998 was an employee of the Company or any of its subsidiaries. The CommitteeEach member qualifies as a "non-employee director" under Rule 16b-3 of the Securities Exchange Act of 1934 and as an "outside director" under Section 162(m) of the Internal Revenue Code. Our 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 determinesOur committee's functions include: - determining the compensation of the Chairman of the CompanyCo-Chief Executive Officers, Charles R. Schwab and uponDavid S. Pottruck, - on recommendation of the ChairmanCo-Chief Executive Officers, reviewing and the President, reviews and approvesapproving all executive officers' compensation, including salary and payments under the annual executive bonus plans, and - granting awards under stock option andthe Company's stock incentive plans. The Committee has providedOur committee is providing the following report on the Chairman'sCompany's executive compensation the compensation policies, of the Company as they apply to its executive officers and the relationship of Companythe Company's performance to executive compensation, and the Co-Chief Executive Officers' compensation. COMPENSATION POLICIES The Company's executive 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.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 uponon meeting stated financial objectives. When establishing salaries, bonus levels and stock-based awards for executive officers, the Committeeour 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 CommitteeOur committee reviews companies of similarwhose size, rates of growth and financial returns are similar to the Company,Company's, including but not limited to, some of the companies included in the Dow Jones Securities Brokerage Group Index. Companies[side bar] IN THIS SECTION, WE DESCRIBE THE COMPENSATION WE PAY OUR CO-CHIEF EXECUTIVE OFFICERS AND THE NEXT FOUR MOST HIGHLY COMPENSATED EXECUTIVE OFFICERS. COMPENSATION POLICIES 33 36 COMPENSATION COMMITTEE REPORT Our committee selects companies outside the financial services industry are selected for inclusion in the review based uponon the extent to which they satisfy a list of selection criteria, which includesincluding 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, notexecutives. Not all of whichthese criteria will necessarily be satisfied in any particular case. The Committee believes it is necessary to includeOur committee includes in its review companies other than those included in the Dow Jones Securities Brokerage Group Index because the Company frequently recruits employeesexecutives from outside the financial services industry, depending uponon the specific skills required for the position. The CommitteeOur committee uses comparative data to set compensation targets that will provide executive officers with total compensation thatthat: - exceeds the average amounts paid to similar executives of comparable companies in years in which the Company achieves superior performance, and with compensation- falls 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 Committeeour 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 theMr. Pottruck's case, of the compensation of the President, the Committeeour committee places considerable weight on the recommendations of Mr. Schwab, and in the Chairman, and with respect tocase of executive officers other than the ChairmanMr. Schwab and the President, the CommitteeMr. Pottruck, our committee places considerable weight uponon the recommendations of the ChairmanMr. Schwab and the President.Mr. Pottruck. THE IMPORTANCE OF OWNERSHIP A fundamental tenet of the Company's compensation policy is that significant equity participation creates a vital long termlong-term partnership between management/ownersmanagement and other stockholders. Through the Profit SharingThe SchwabPlan Retirement Savings and Investment 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, 1997,18, 1999, the directors executive officers and other seniorexecutive officers of the Company and its subsidiaries owned an aggregate of 44,885,17380,319,990 shares (including restricted shares) and had the right to acquire an additional 5,955,9757,286,687 shares upon the exercise (on or before May 17, 1999) of employee stock optionsoptions. [side bar] THE IMPORTANCE OF OWNERSHIP 34 37 COMPENSATION COMMITTEE REPORT The SchwabPlan Retirement Savings and Investment Plan held 29,564,853 shares which were exercisableallocated to participants' accounts 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.18, 1999. The Company intends to continue its strategy of encouraging its employees to become stockholders. The chart which followsperformance graph on page 25 of this reportproxy statement 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 and the Standard & Poor's 500 Index. From December 31, 19911993 through December 31, 19961998, the cumulative total return of the Company's stock was 394%1,111%. By comparison, in the same period the Dow Jones Securities Brokerage Group Index grew 143%277% and the S&PStandard & Poor's 500 Index grew 103%194%. The CommitteeOur committee believes that the executive officers'employees' 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 Committeeour 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."Policies" earlier in this report.) VARIABLE COMPENSATION Corporate Executive Bonus Plan.Plan The Corporate Executive Bonus Plan ("the Bonus Plan")covers all executive officers except Mr. Schwab, and pays bonuses each year to executive officers (other than the Chairman, whobased on corporate performance. (Mr. Schwab is covered under an employment agreement with the Company, see "Chairman'sCompany. See "Co-Chief Executive Officers' Compensation" below) basedlater in this report.) Depending on the Company's performance. Depending upon the Company'spre-tax profit margin and net revenue growth, and pre-tax profit margin, the Bonus Planbonus 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 Committeeour committee determines based on the factors discussed above (seeearlier in this report. (See "Compensation Policies"Policies."). The Committee Our committee sets target bonuses in the first quarter of each year based uponon the recommendations of Mr. Schwab and Mr. Pottruck (except that Mr. Pottruck's target bonus is based on the recommendation of the Chairman and, where appropriate, the President.Mr. Schwab only). In the case of the President,Mr. Pottruck, who receives all of his annual incentive compensation under the Bonus Plan, thethis bonus plan, our committee determined that it would be appropriate to set a target bonus can be upfor 1998 that would result in an annual bonus payment to 300% of base salary.Mr. Pottruck equal [side bar] ANNUAL BASE SALARY VARIABLE COMPENSATION 35 38 COMPENSATION COMMITTEE REPORT to the annual bonus payable to Mr. Schwab under his employment agreement, depending on our corporate performance. (See "Co-Chief Executive Officers' Compensation" later in this report.) In the case of the remaining executive officers, whothe target bonuses under this bonus plan can be up to 50% of base salary. These remaining executive officers also participate in the Annual Executive Individual Performance Plan (discussed below), the target bonuses can be up to 50% of base salary.later in this report). The target bonus is adjusted upward or downward, in accordance withaccording to a payout matrix our committee adopted by the Committee at the timewhen we set the target bonus is established, resultingbonus. This results in a payout of a multiple (or fraction) of the target bonus depending upon the Company'son our corporate 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 1996,1998, the Company achieved a pre-tax profit margin of 21.3%21% and net revenue growth of 30.4%19%. Based on this performance, executive officers received bonuses in excess of 100% ofexceeding their target bonus amounts in 1996.1998. Annual Executive Individual Performance Plan.Plan The Annual Executive Individual Performance Plan (the "Individual Performance Plan") pays bonuses to executive officers other than the Chairman, Vice ChairmanMr. Schwab and PresidentMr. Pottruck based on a subjective determination of each such officer's individual contribution to the attainment of corporate performance objectives. Our committee makes this determination based on the Company's performance objectives, made by the Committee upon the recommendationrecommendations of the ChairmanMr. Schwab and the President.Mr. Pottruck. In general, suchtheir recommendations are based in significant part upon suchon the officer's success in achieving specific goals identified in suchthe officer's business plan. The amount available for payments under the Individual Performanceindividual performance plan is generally calculated by multiplying the amounts payable to the participants (other than Mr. Pottruck) under the Corporate Executive Bonus Plan is determined in accordance withby 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 individualfixed amount. Individual bonuses under the Individual Performance Planindividual performance plan may vary, in recognition ofdepending on individual achievements,achievements. However, the aggregate amount of executive officer bonuses payable to executive officers, as a group, under the Individual Performance Planindividual performance plan is based strictly on the Company'sour corporate performance. [side bar] VARIABLE COMPENSATION 36 39 COMPENSATION COMMITTEE REPORT 1992 Stock Incentive Plan.Plan In 1992, the Board of Directors approved a stock incentive plan (the "1992 Plan"),the 1992 Stock Incentive Plan, which was approved by the Company's stockholders of the Company at the 1992 Annual Meetingannual meeting and became effective on May 8, 1992. Under the 1992 Plan,plan our committee grants stock option grants are madeoptions and restricted stock to executive officers, by the Committee, based uponon the factors discussed above (seeearlier in this report. (See "Compensation Policies"Policies."). The Committee Our committee has adopted a policy of granting infrequent and large stock option and restricted stock awards to executive officers, rather thansupplemented with smaller annual smaller grants. The CommitteeOur committee believes that an emphasis on large, but infrequent, awards provideprovides a more powerful incentive to executive officers to achieve sustained growth over the long term. The CommitteeOur committee intends that stock-based incentives will be the sole long-term incentives payable to executive officers. During 1996,1998, our committee granted stock option grants were madeoptions to certaineach of the Company's executive officers. In addition, certain of the Company'sour committee granted restricted shares to each executive officers received grants of restricted shares.officer (except Mr. Schwab and Mr. Pottruck). To determine the size of the grants, the Companyour committee reviewed and presented to the Committee data obtained from an independent consultant concerning levels of long termlong-term compensation for executive officers of selected financial services companies and 23 27 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'Sreturns. CO-CHIEF EXECUTIVE OFFICERS' COMPENSATION The Company's Chairman, Charles R. Schwab Mr. Schwab, Chairman and Co-Chief Executive Officer, 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 (see1995. (See "Employment Agreement and Name Assignment" in Appendix A.). Under the terms of his Employment Agreement,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 performanceour corporate pre-tax profit margin and net revenue growth for the year, relative to net revenue growth and pre-tax profit margin, and is determined under a matrix adopted by the Committee whichour committee. Our committee has the authority to adjust the matrix from time to time (in advance)(provided that for any year we may not change the matrix more than 90 days after the beginning of the year). The CommitteeOur committee believes that Mr. Schwab's leadership is a vital factor in the Company'sour corporate success. The CommitteeSpecifically, our committee believes thatthat: - - Mr. Schwab provides the Company with the leadership, vision and inspiration for innovation that has generated the Company'scorporate growth and superior performance, and that the Company's- - The overall strategic direction as developed by Mr. Schwab is critical to enhancing the future long termlong-term value of the Company for its stockholders.stockholders, and [side bar] CO-CHIEF EXECUTIVE OFFICERS' COMPENSATION 37 40 COMPENSATION COMMITTEE REPORT - - 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 and the Standard & Poor's 500 Index over the past five yearfive-year period. Based uponBecause the Company's attainment in 1996 ofCompany attained a pre-tax profit margin of 21.3%21% and net revenue growth of 30.4%,19% in 1998, which resulted in pre-tax profit of over $394,000,000,$577 million, the amount of Mr. Schwab's annual bonus for 1996,1998, calculated pursuantaccording to the matrix, was $9,387,000.$6,145,000. During 1998, our committee approved a grant to Mr. Schwab of 700,000 stock options (which resulted in 1,050,000 stock options after being adjusted for the three-for-two stock split which occurred in December 1998), with a term of ten years, exercisable at a price equal to the closing price of the stock of the Company on the date the options were granted. In determining the size of the grant, our committee applied the same considerations that we apply generally in determining the size of grants to executive officers. (See "1992 Stock Incentive Plan" discussed earlier in this report.) In making the grant to Mr. Schwab, our committee also took account of Mr. Schwab's leadership over the past six years and the Company's superior performance compared to the Dow Jones Securities Brokerage Group Index and the Standard & Poors 500 Index. The grant also reflects our committee's desire to provide Mr. Schwab with incentives which are comparable to similarly situated executives. David S. Pottruck Mr. Pottruck, President and Co-Chief Executive Officer, is compensated in the form of a base salary and an annual bonus payable under the Corporate Executive Bonus Plan that is dependent on our corporate pre-tax profit margin and net revenue growth. (See "Corporate Executive Bonus Plan" earlier in this report.) For 1998, our committee determined that, based on the relative responsibilities of Mr. Schwab and Mr. Pottruck, it was appropriate for Mr. Pottruck to receive a base salary equal to the base salary payable to Mr. Schwab under his employment agreement. For the same reason we determined it to be appropriate to set a target bonus for Mr. Pottruck under the Corporate Executive Bonus Plan that would cause Mr. Pottruck to receive an annual bonus equal to the annual bonus payable to Mr. Schwab under his employment agreement, depending on our corporate performance. Specifically, our committee believes that: - - Mr. Pottruck provides strategic and day-to-day leadership that has contributed and continues to contribute significantly to the Company's growth and superior performance, [side bar] CO-CHIEF EXECUTIVE OFFICERS' COMPENSATION 38 41 COMPENSATION COMMITTEE REPORT - - Mr. Pottruck guides the Company in the delivery of highly competitive products and services to its customers, and this ability to compete is imperative to building future long-term value for stockholders, and - - Over the past six years, the combination of Mr. Pottruck's and Mr. Schwab's leadership has enabled the Company to substantially outperform both the Dow Jones Securities Brokerage Group Index and the Standard & Poor's 500 Index. During 1998, our committee approved a grant to Mr. Pottruck of 700,000 stock options (which resulted in 1,050,000 stock options after being adjusted for the three-for-two stock split which occurred in December 1998), with a term of ten years, exercisable at a price equal to the closing price of the stock of the Company on the date the options were granted. In determining the size of this grant, our committee applied the same considerations that we apply generally in determining the size of the grants to the executive officers. (See "1992 Stock Incentive Plan" discussed earlier in this report.) During 1998, our committee also approved a special recognition grant to Mr. Pottruck of 1,200,000 additional stock options (which resulted in 1,800,000 additional stock options after being adjusted for the three-for-two stock split which occurred in December 1998). We granted these additional stock options with a term of ten years, but in contrast with other option grants approved by our committee, these options have a series of escalating exercise prices that were all set higher than the closing price of the stock of the Company on the date the options were granted. One-sixth of these options will vest each year, beginning in the year 2000. In approving this special recognition grant with significant hurdles before any value would be realized by Mr. Pottruck, we intended to provide Mr. Pottruck with the incentive to produce superior long-term performance, and to reward Mr. Pottruck only if those long-term performance goals were achieved. In making both grants to Mr. Pottruck, our committee also took account of Mr. Pottruck's leadership over the past six years and the Company's superior performance compared to the Dow Jones Securities Brokerage Group Index and the Standard & Poor's 500 Index. [side bar] CO-CHIEF EXECUTIVE OFFICERS' COMPENSATION 39 42 COMPENSATION COMMITTEE REPORT TAX LAW LIMITS ON EXECUTIVE COMPENSATION Section 162(m) of the Internal Revenue Code limits tax deductions for certain executive compensation in excess ofover $1 million. Certain types of compensation are deductible only if performance criteria are specified in detail, and payments are contingent on stockholder approval ofstockholders have approved the compensation arrangement.arrangements. The Company believes that while it is generally in the best interests of its stockholders to structure compensation plans to achieve deductibilityso that compensation is deductible under Section 162(m), except wherethere may be times when the benefit of such deductibility isthe deduction would be outweighed by other corporate objectives, such as the need for flexibility or the attainment of other corporate objectives.flexibility. 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 inand 1995, and the Company'sMr. Schwab's employment agreement with Mr. Schwab was approved by the stockholders in 1995 (see1995. (See "Employment Agreement and Name Assignment" in Appendix A.). The Committee Our committee will continue to monitor issues concerning the tax deductibility of executive compensation and will take appropriate action if and whenwe believe it is warranted. Since corporate objectives may not always be consistent with the requirements for full deductibility, the Committeeour committee is prepared, if we believe it deemsis appropriate, to enter into compensation arrangements or provide compensation under which payments may not be 24 28 deductible under Section 162(m);. Tax deductibility will not be the sole factor used by the Committeewe consider in ascertainingdetermining appropriate levels or modestypes of compensation. Compensation Committee of the Board of Directors Roger O. Walther, Chairman Nancy H. Bechtle C. Preston Butcher Stephen T. McLin 25George P. Shultz [side bar] TAX LAW LIMITS ON EXECUTIVE COMPENSATION 40 29 PERFORMANCE GRAPH43 OTHER INFORMATION CERTAIN TRANSACTIONS Directors and executive officers may maintain margin trading accounts with Charles Schwab & Co., Inc. Extensions of credit in such accounts: - - are made in the ordinary course of 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. Employees and directors of the Company who engage in brokerage transactions at Charles Schwab & Co., Inc. receive a 20% discount from its standard commission rates for brokerage transactions. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company believes that during 1998, all filings with the SEC by its officers, directors and 10% stockholders complied with requirements for reporting ownership and changes in ownership of Company common stock under Section 16(a) of the Securities Exchange Act of 1934, except for Mark A. Pulido's and Gideon Sasson's initial beneficial ownership reports. The Company filed the initial report on Mr. Pulido's behalf following graph shows a five-year comparisonhis election to the Board in December 1998. The Company filed the initial report on Mr. Sasson's behalf following his appointment as an executive officer in November 1997. Although the reports were filed on time, they inadvertently omitted shares of cumulative total returnsCompany common stock held indirectly by Mr. Pulido and Mr. Sasson. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Our Board has selected Deloitte & Touche LLP as the Company's independent public accountants for the current fiscal year. They have served as accountants for Charles Schwab & Co., Inc. or the Company since 1976. We expect representatives of Deloitte & Touche LLP to attend the meeting in order to respond to questions from stockholders, and they will have the opportunity to make a statement. [side bar] CERTAIN TRANSACTIONS SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 41 44 OTHER INFORMATION STOCKHOLDER PROPOSALS If you want us to consider including a proposal in our proxy statement next year, you must deliver it to the Company's Common Stock,Corporate Secretary at our principal executive office no later than December 2, 1999. The Company's bylaws contain specific procedural requirements regarding a stockholder's ability to nominate a director or submit a proposal to be considered at a meeting of stockholders. If you would like a copy of 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* Amongprocedures contained in our bylaws, please contact: Assistant Corporate Secretary The Charles Schwab Corporation S&P 500 Index101 Montgomery Street (88/5) San Francisco, California 94104 (415) 636-1406 COSTS OF PROXY SOLICITATION The Company is paying for distributing 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 reinvestmentsoliciting proxies. As a part of dividends. ** Information presented asthis process, the Company reimburses brokers, nominees, fiduciaries and other custodians reasonable fees and expenses in forwarding proxy materials to stockholders. The Company is not using an outside proxy solicitation firm this year, but employees of the endCompany or its subsidiaries may solicit proxies through mail, telephone or other means. Employees do not receive additional compensation for soliciting proxies. INCORPORATION BY REFERENCE The Company's filings with the SEC sometimes "incorporate information by reference." This means that the Company is referring you to information that has previously been filed with the SEC, so the information should be considered as part of each fiscal year ended December 31. 26the filing you are reading. Based on the SEC's rules, the performance graph on page 25 of this proxy statement and the "Board Compensation Committee Report on Executive Compensation" on page 33 specifically are not incorporated by reference into any other filings with the SEC. You are receiving this proxy statement as part of the proxy materials for the annual meeting of stockholders. You may not consider this proxy statement as material for soliciting the purchase or sale of Company stock. [side bar] STOCKHOLDER PROPOSALS COSTS OF PROXY SOLICITATION INCORPORATION BY REFERENCE 42 3045 TICKETS TO THE ANNUAL MEETING TICKETS TO THE ANNUAL MEETING Seating is limited and therefore, admission is by ticket only on a first-come, first-served basis. Please complete and return to us the ticket request postcard included with your proxy materials. When we receive your postcard, we will mail you a ticket. If you did not receive a ticket request postcard and would like to attend the annual meeting, please contact: Assistant Corporate Secretary The Charles Schwab Corporation 101 Montgomery Street (88/5) San Francisco, CA 94104 (415) 636-1406 By Order of the Board of Directors, /s/ Carrie E. Dwyer CARRIE E. DWYER EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY MARCH 31, 1999 SAN FRANCISCO, CALIFORNIA [side bar] ADMISSION IS BY TICKET ONLY ON A FIRST-COME, FIRST-SERVED BASIS. 43 46 APPENDIX A - - EMPLOYMENT AND SEVERANCE AGREEMENTS This Appendix A includes descriptions of: - - agreements between the Company and Charles R. Schwab relating to his employment and the use of the name "Schwab" by The Charles Schwab Corporation, and - - certain severance arrangements between the Company and other executives. EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT The Company hasand Mr. Schwab entered into an employment agreement with Mr. Schwab, effective March 31, 1995 (the "Employment Agreement"), which was1995. Stockholders approved by the Company's stockholders and replaced an earlier employment agreement. The Employment AgreementIt has an initial term of five years, and provides that as of each March 31, the term of the Employment Agreementemployment agreement is automatically extended by an additional year, subject tounder the same terms and conditions, unless beforehand either party provides notice to the other by that date, of an intention not to extend the agreement.it. The Employment Agreementemployment 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 lieuInstead 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 performanceour corporate pre-tax profit margin and net revenue growth for the year, relative to net revenue growth and pre-tax profit margin, and is determined under a matrix adopted by the Committee whichBoard Compensation Committee. The committee has the authority to adjust the matrix from time to time (in advance)periodically (except the committee may not change the matrix more than 90 days after the beginning of any year). The matrix is also subject to annual, automatic adjustmentadjusted automatically each year, based on increases in the Consumer Price Index. The Employment Agreementemployment agreement also provides that certain compensation and benefits will be paid or provided to Mr. Schwab (or his immediate family or estate) in the eventif his employment is terminated involuntarily, other thanexcept for cause, prior tobefore the expiration of the Employment Agreement. For these purposes, "cause"employment agreement. "Cause" is defined as the commission of a felonious act,felony, or willful and gross negligence, or misconduct that results in material harm to the Company. "Involuntary termination" includes 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."or Charles Schwab & Co., Inc. If an involuntary termination is for reasons other thannot due to death, disability or for "cause,""cause": [side bar] EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT 44 47 APPENDIX A -- EMPLOYMENT AND SEVERANCE AGREEMENTS - - 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,, and - - all his outstanding, unvested awards under the Company's stock incentive plans will vest fully on the effective date of the termination.termination date. If an involuntary termination is by reason ofdue to disability, Mr. Schwab will be entitled to receivereceive: - - his base salary, less any payments under the Company's long termcorporate long-term disability plan, and benefits (but not bonuses or other incentive compensation) for a period of 36 months from suchthe termination date, and shall also receive- - a pro-ratedprorated portion of any bonus or incentive payments payable with respect tofor the year in which the disability occurs. If an involuntary termination is by reason ofdue to 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 resignresigns his employment within 24 months of a change in control of the Company, he shallwill be entitled to receive a pro-ratedprorated portion of any bonus or incentive payments payable with respect tofor the year in which the resignation occurs. In addition, if Mr. Schwab'sSchwab voluntarily resigns his employment, should terminate on account of any voluntary resignation, or on account of an involuntary termination occurringhis employment is involuntarily terminated within 24 months of a change in control of the Company, 27 31 Mr. Schwab shallhe will have the right (but not the obligation) to enter into a consulting arrangement under which hewith the Company. Under that arrangement Mr. Schwab 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.salary, whichever is less. The Employment Agreement precludesemployment agreement prohibits Mr. Schwab from becoming associated with any business competing with the Company for a period of five years following a voluntary resignation of employment (exceptemployment. (However, that such covenantrestriction would not apply in the event of a resignation ofif Mr. Schwab resigns his employment occurring within 24 months of a change in control of the Company).Company.) [side bar] EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT 45 48 APPENDIX A -- EMPLOYMENT AND SEVERANCE AGREEMENTS The Company and Charles Schwab & Co., Inc. 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 toUnder the Name Assignment,agreement, 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)on the name) and likeness, subject tolikeness. However, Mr. Schwab'sSchwab has retained the perpetual, exclusive, irrevocable right to use his name and likeness for any activity other than the financial services business. In addition,Beginning immediately after any termination of his employment, 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 aredo not in direct competitiondirectly compete with any business in which the Company or its subsidiaries are then engaged or plan to enter within three months), and beginning. Beginning two years after any termination of his employment, Mr. Schwab may use his likeness for all other purposes, providedas long as that Mr. Schwab mayuse does not use his likeness in a way that causescause confusion as toabout 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 againstSo long as Mr. Schwab does not cause actual confusion ofamong customers, Mr. Schwabhe will 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 Assignment and License agreement defines the "financial services business" is defined in the Name Assignment as the business in which Charles Schwab & Co., Inc. is currently engaged and any additional and related businesses in which that firm or the Company or Schwab is permitted to engage under rules and regulations of applicable regulatory agencies. The Company's rightability to assign or license the right to use Mr. Schwab's name and likeness areis severely constrainedlimited during Mr. Schwab's lifetime. No cash consideration is to be paid to Mr. Schwab for the Name Assignmentname assignment while he is employed by the Company or, after that employment terminates, while he is receiving compensation pursuant tounder 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 tenthsthree-tenths of one percent (0.3%) of the aggregate net revenues of the Company (on a consolidated basis) and those of its unconsolidated [side bar] EMPLOYMENT AGREEMENT AND NAME ASSIGNMENT 46 49 APPENDIX A -- EMPLOYEE AND SEVERANCE AGREEMENTS assignees and licensees that use the name or likeness. These payments may not, however, exceed $2,000,000$2 million 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. 28 32 CERTAIN SEVERANCE ARRANGEMENTS The Company has a Change in Control Severance Plan, (the "Severance Plan"), which covers thecertain executive officers, including those named in the Summary Compensation Table (except Mr. Schwab). The Severance Planplan provides that ifif: - 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, as defined in the plan, within suchthat three-year period, or - the executive voluntarily resigns during the thirty-day period following the first anniversary of the change in control, then the executive is entitled to receivereceive: - 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. Anbenefits, and - an additional payment is required to compensate the executivehim or her for any excise taxes imposed uponon payments under the agreements.severance arrangements. [side bar] 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. 29SEVERANCE ARRANGEMENTS 47 33 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. APPOINTMENT50 APPENDIX B - - DESCRIPTION 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 30 34 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 31 35 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.GENERAL DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN Purpose The purpose of the 1992 Stock Incentive Plan is to promote the long-term success of the Company and the creation of incrementalincrease stockholder value by (a)by: - - encouraging Non-Employee Directorsnon-employee directors and Key Employeeskey employees to focus on long-range objectives, (b) encouraging the attraction- - attracting and retention of Non-Employee Directorsretaining non-employee directors and Key Employeeskey employees with exceptional qualifications, and (c)- - linking Non-Employee Directorsthe interests of non-employee directors and Key Employeeskey 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 plan. Non-employee directors are eligible for an annual, automatic grant of non-qualified stock options. As of December 31, 1998, approximately 3,132 persons had received awards under the plan. Limits on Awards The following are the limits on the number of shares that may be granted to any one participant in any one year: - 3,375,000 shares under options, - 1,350,000 restricted shares, and - 1,350,000 performance share awards. These annual limits are adjusted automatically for any stock split, declaration of a stock dividend or other similar event. Types of Awards Awards under the 1992 Stock Incentive Plan seeks to achieve this purpose by providing for Awards inmay take the form of restricted shares, performance share awards and options to acquire the Company's common stock. - - Restricted Shares,shares are similar to common stock in that they have the same voting and dividend rights, but the recipient will forfeit the restricted shares if the applicable vesting conditions are not satisfied. - - Performance Share Awards orshare awards are obligations of the Company to issue and deliver in the future shares of common stock if the applicable conditions are satisfied. - - Options which may constituteare the rights to acquire common stock at an exercise price at least equal to the fair market value of the Company's stock on the date of grant. Options include non-qualified stock options and incentive stock options. Incentive stock options are intended to qualify for special tax treatment. Options vest according to a schedule. An award under the plan may consist of one or nonstatutorymore of these grant types, except that non-employee directors will only be eligible to receive non-qualified stock options. The Plan shall be governed by, and construed in accordance with,[side bar] GENERAL DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN 48 51 APPENDIX B--DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN No payment is required on the lawsgrant of any award, except for payment of the State$.01 per share par value of Delaware. ARTICLE 2. ADMINISTRATION. 2.1 The Committee. The Plan shallthe stock awarded. Upon exercise of an option, the option holder must pay the option exercise price to the Company. On March 18, 1999, the closing price of the Company's common stock was $89.69 per share. As of December 31, 1998, a total of 13,577,385 shares could 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 Awardsissued under the Plan, determineplan as restricted shares, or under performance share awards and options. This number adjusts automatically for any stock split, declaration of a stock dividend or other similar event. Under the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operationterms of the Plan. The Committee may adopt such rulesplan, if: - - the recipient forfeits any restricted shares, performance share awards 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). Ifoptions, - - any Restricted Shares, Performance Share Awards or Options are forfeited, or if any Performance Share Awardsperformance share awards terminate for any other reason without the associated Common Sharescommon stock being issued, or if any Options- - options terminate for any other reason before being exercised,exercise, then such Restricted Shares, Performance Share Awards or Options shallthe underlying shares again become available for Awards under the Plan.awards. Administration, Amendment and Termination The limitation of this Article 3 shall be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the1992 Stock Incentive Plan may be authorized but unissued shares or treasury shares. 39 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 Participantsis administered by the Board Compensation Committee. 4.2 Non-Employee Directors. In additionThe committee, on 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 plan, and - - makes all other decisions regarding the operation of the plan. The grant of non-qualified stock options to any awards pursuant to Section 4.1, Non-Employee Directors shall be entitled to receivenon-employee directors is made annually, and 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 Yearcommittee has no discretion with respect to which he or she serves as athose awards. Grants of Options to Non-Employee Director onDirectors Under the 1992 Stock Incentive Plan, each non-employee director receives an annual, automatic grant date described in subsection (b) below; provided that the Non-Officer Stock Option shall coverof options to purchase 1,500 shares of common stock (2,500 shares if the Exercise Price determined as of theoption exercise price is less than $35). This grant date, is $35 or more; (b) The NSO for a particular Award Year shall be granted to each Non-Employee Director as ofmade on May 15 of each Award Year, andyear, but if May 15 is not a business day, then the grant shall beis 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 onday. If the date thatstockholders approve 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 equalproposed amendment to the Fair Market Value on the dateplan, each non-employee director will receive an annual, automatic grant of grant and shall be payable in anyoptions to purchase an additional 1,000 shares of the forms described in Article 6. 4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10 percent ofcommon stock, bringing the total combined voting powerto 2,500 shares (3,500 if the option exercise price is less than $35). [side bar] GENERAL DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN 49 52 APPENDIX B -- DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN In addition, a non-employee director who elects to defer directors' fees under the Directors' Deferred Compensation Plan can elect to receive, instead of all classes of outstanding stock of the Company or any of its Subsidiaries shall not be eligible for thefees, a grant of an ISO unless (a) the Exercise price under such ISO is at least 110 percent of the Fair Market Value ofoptions: - - with 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. 40 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. 41 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 ofunder 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 respectappropriate options valuation method) equal to the Company. 5.8 Restrictions on Transfer of Common Shares. Any Common Shares issued upondeferred fees, and - - with an option 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 respectprice equal to the Underlying Options shall so state, and the terms and conditionsfair market value 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 ShareCompany common stock 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 aredeferred fees would have been paid. 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 respectRecipients of restricted shares cannot transfer them before they vest (except that the recipient can transfer them by gift to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement betweencertain trusts and partnerships formed for the Award recipientbenefit of family members). Recipients of performance share awards cannot transfer them, and the Company. The amountrecipients have no voting or dividend rights until the associated shares of each Award of Restricted Shares or Performance Share Awards shall be determined bycommon stock are issued. At that time 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 Awardsrecipients 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) DuringGenerally, vesting of restricted shares and performance share awards is accelerated if the periodrecipient dies, becomes disabled, or retires, and may be accelerated if a "change in control" occurs. (We explain that term later in this Appendix B under "Change in Control.") When granting an award, the Board Compensation Committee determines the number of restriction, Named Executive Officers holding Restricted Shares granted hereunder shallperformance share awards or restricted shares to be credited with all regular cash dividends paid with respect to all Restricted Shares while they are so held. If a dividend is paidincluded in the form of cash, such cash dividend shall be credited to Named Executive Officers subject to the same restrictions on transferability and forfeitabilityaward as well as the Restricted Shares with respect to which they were paid. If any dividendsvesting or distributions are paid in shares of Common Stock,issuance conditions. The vesting or issuance conditions may be based on: - - the shares of Common Stock shall be subject toemployee's individual performance, - - the same restrictions on transferability and forfeitabilityCompany's performance, or - - other appropriate criteria. When the committee uses the Company's performance 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 inissuance condition, it establishes performance goals based on one or more of (a) the numberfollowing business criteria: - - pretax income, - - operating income, - - cash flow, - - stockholder return, - - revenue, - - revenue growth, - - return on net assets, - - net income, - - earnings per share, - - return on equity, or - - return on investment. [side bar] GENERAL DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN 50 53 APPENDIX B -- DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN Terms of Stock 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 paymentThe exercise price 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 Awardoption granted under the Plan shallplan must be deemedequal to give any individual a right to remain employed byor greater than the Company or any Subsidiary. The Company and its Subsidiaries reservefair market value of 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 aCompany's common stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior toon the date when such certificate is issued, exceptof grant. The 1992 Stock Incentive Plan defines "fair market value" 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 creditorthe closing price 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 approvalsCompany's stock as reported 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 Composite Transactions Index for the date of grant. The term of an incentive stock option cannot exceed 10 years. The Board Compensation Committee establishes vesting conditions when it grants an option. Generally vesting is accelerated if the recipient dies, becomes disabled, 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,retires, and may be accelerated if a "change in control" occurs. (We explain that term in the event that the independent auditors most recently selected by the Board (the "Auditors"following section of this Appendix B.) determine that any payment orRecipients may transfer in the nature of compensationoptions (other than incentive stock options, which must be nontransferable to orqualify as incentive stock options) to certain trusts and partnerships formed for the benefit of a Participant, whether paidfamily members. Change in Control Under the 1992 Stock Incentive Plan the term "change in control" means: - - the Company undergoes any change in control which would have to be disclosed in the Company's next proxy statement under SEC rules, - - any person becomes the beneficial owner, directly or payable (or transferred or transferable) pursuant to the termsindirectly, of this Plan or otherwise (a "Payment"), would be nondeductible for federal income tax purposes becauseat least 20% of the provisions concerning "excess parachute payments" in section 280Gcombined voting power 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 asCompany's outstanding securities, except from a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductiblerepurchase 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 hisits own securities, 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 of Directors changes, and as a result of which fewer than two-thirds of the incumbent directors are directors who either (i)directors: - had been directors of the Company 24 months prior to such changeearlier, or (ii) were- had been elected or nominated for election, to the Board with the affirmative votesapproval of at least a majority of the directors who had been directors of the Company 24 months prior to such changeearlier and who were still in officedirectors at the time of the incumbent directors' election or nomination; 50 (c) Any "person" (as such termnomination. FEDERAL TAX CONSEQUENCES The following is used in sections 13(d) and 14(d)a summary of the Exchange Act)federal income tax consequences of awards under the 1992 Stock Incentive Plan. Options When the options are granted, there are no federal income tax consequences to the Company or the option holder. On the exercise of a non-qualified stock option, the option holder generally will have ordinary income. The amount of the income will be equal to: - - the fair market value of the shares on the exercise date, minus - - the option exercise price. [side bar] FEDERAL TAX CONSEQUENCES 51 54 APPENDIX B -- DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN The income will be subject to tax withholding. Generally, in the same year that the option holder has income from the option exercise the Company will be able to take a deduction in the amount of that income. On 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 incentive stock options will not normally result in any taxable income to the option holder at that time; nor will the Company be entitled to any tax deduction. However, the exercise will result in an amount that is taken into account in computing the option holder's alternative minimum taxable income. This amount will be equal to: - - the fair market value of the shares on the exercise date, minus - - the option exercise price. If the option holder exercises the options, holds the shares for the period required by law, and then sells the shares, the difference between the sale price and the exercise price generally will be taxed as capital gain or loss. If the option holder does not hold the shares for the period required by law, he or she generally will have ordinary income at the time of the early disposition. The amount of the income will be equal to: - - the fair market value of the shares on the exercise date (or, if less, the sale price), minus - - the option exercise price. The Company generally will be entitled to a tax deduction in that same amount. Any additional gain upon the disposition generally will be taxed as capital gain. Restricted Shares Unless the recipient of restricted shares elects to be taxed when the shares are granted, there will be no federal income tax consequences to the recipient or to the Company while the shares have vesting restrictions. Upon vesting, the recipient will have ordinary income. The amount of the income will be equal to: - - the fair market value of the shares on the vesting date, minus - - the amount paid for the shares. The income will be subject to tax withholding. The Company generally will be entitled to a tax deduction in the amount of the recipient's income. Upon any subsequent disposition of the shares, any additional gain or loss recognized by the holder generally will be capital gain or loss. [side bar] FEDERAL TAX CONSEQUENCES 52 55 APPENDIX B -- DESCRIPTION OF THE 1992 STOCK INCENTIVE PLAN 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 a recipient becomes entitled to receive any common stock under the beneficial owner, directlyterms of the performance share award, the recipient generally will have ordinary income. The amount of the income will be equal to: - - the fair market value of the shares on that date, minus - - any amount paid for the shares. The income will be subject to tax withholding. The Company generally will be entitled to a tax deduction in the amount the recipient's income. Upon any subsequent disposition of the shares, any additional gain or indirectly,loss recognized by the holder generally will be capital gain or loss. To date, no performance share awards have been granted under the 1992 Stock Incentive Plan. Options and Restricted Shares Granted Under the 1992 Stock Incentive Plan As of securitiesDecember 31, 1998, current executive officers have received options and restricted shares representing a total of 17,080,367 shares 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" meansas follows: CHARLES R. SCHWAB 4,453,125 DAVID S. POTTRUCK 6,459,001 JOHN COGHLAN 1,432,503 LINNET F. DEILY 345,001 LUIS E. VALENCIA 933,753 STEVEN L. SCHEID 397,501 OTHER SIX EXECUTIVE OFFICERS AS A GROUP 3,059,483
Of shares granted under options or as restricted shares: - - 309,125 shares have been granted to non-employee directors, and - - 40,174,485 shares have been granted to employees other than executive officers. [side bar] FEDERAL TAX CONSEQUENCES 53 56 THE CHARLES SCHWAB CORPORATION ANNUAL MEETING OF STOCKHOLDERS MONDAY, MAY 17, 1999 2:00 P.M. YERBA BUENA CENTER FOR THE ARTS THEATER 700 HOWARD STREET SAN FRANCISCO, CALIFORNIA [LOGO] The Charles Schwab Corporation a Delaware corporation. 16.9 "ERISA" means the Employee Retirement Income Security ActPROXY 101 Montgomery Street San Francisco, CA 94104 THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING ON MAY 17, 1999. The shares of 1974,stock you hold in your account, as amended. 16.10 "Exchange Act" means the Securities Exchange Act of 1934,well 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 promulgatedshares you hold 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 OptionDividend Reinvestment and Stock Purchase Plan and/or The SchwabPlan Retirement Savings and Investment Plan, will be voted as you specify below. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2 AND 3. By signing the proxy, you revoke all prior proxies and appoint Charles R. Schwab and David S. Pottruck, and each of them, with full power of substitution, to satisfy tax withholding requirements incidentvote your shares on the matters shown on the reverse side and any other matters which may come before the Annual Meeting and all adjournments. 57 Company # Control # THERE ARE THREE WAYS TO VOTE YOUR PROXY YOUR TELEPHONE OR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD. VOTE BY PHONE -- TOLL FREE - 1-800-240-6326 - QUICK *** EASY *** IMMEDIATE - - Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. - - You will be prompted to enter your 3-digit Company Number and your 7-digit Control Number which are located above. - - Follow the simple instructions the voice provides you. VOTE BY INTERNET - http://www.eproxy.com/sch/ - QUICK *** EASY *** IMMEDIATE - - Use the Internet to vote your shares 24 hours a day, 7 days a week. - - You will be prompted to enter your 3-digit Company Number and your 7-digit Control Number which are located above to obtain your records and create an electronic ballot. - - You will have the option to receive all future materials via the Internet. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we've provided or return it to The Charles Schwab Corporation, c/o Shareowner Services (SM), P.O. Box 64873, St. Paul, MN 55164-0873. IF YOU VOTE BY PHONE OR INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD. - Please detach here - THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3. 1. Election of directors: 01 Frank C. Herringer 02 Stephen T. McLin 03 Charles R. Schwab 04 Roger O. Walther
/ / Vote FOR all nominees / / Vote WITHHELD from all nominees (INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE / / BOX PROVIDED TO THE RIGHT.) 2. Approval of amendment to the exerciseCertificate of an Option. 16.24 "Restricted Share" means a Common Share awardedIncorporation to a Participant underincrease the Plan. 52 16.25 "Stock Award Agreement" means the agreement between the Company and the recipientnumber 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 percentauthorized shares of the total combined voting powercommon stock. / / For / / Against / / Abstain 3. Approval 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 pursuantamendment to the Plan, irrespective of any definition to the contrary contained1992 Stock Incentive Plan. / / For / / Against / / Abstain WHEN THIS PROXY IS PROPERLY EXECUTED YOUR SHARES WILL BE VOTED AS DIRECTED, OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL. Address Change? Mark Box / / Date ______________________ Indicate changes below: 58 / / Signature(s) in any such Stock Option Agreement. 53 ADDENDUM A The provisions of the Plan,Box Please sign exactly 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 endingyour name(s) appear on the following April 5. 4. Common Shares issued pursuant toproxy card. If held in joint tenancy, all persons must sign. Trustees, administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing 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. 55 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.proxy.