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As filed with the U.S. Securities and Exchange Commission on April 21, 2011
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 6211 | 94-3025021 | ||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
211 Main Street
San Francisco, California 94105
(415) 667-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Joseph R. Martinetto
Executive Vice President and Chief Financial Officer
The Charles Schwab Corporation
211 Main Street
San Francisco, California 94105
(415) 667-7000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
| With copies to: | ||||
| Lee Meyerson, Esq. Elizabeth Cooper, Esq. Simpson Thacher & Bartlett LLP |
Adam J. DeWitt Chief Financial Officer |
Sanford E. Perl, P.C. Gerald T. Nowak, P.C. Kirkland & Ellis LLP 300 North LaSalle Street Chicago, Illinois 60654 (312) 862-2200 |
Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective and upon completion of the merger described in the enclosed proxy statement/prospectus.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | x | Accelerated filer | ¨ | |||||
| Non–accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
CALCULATION OF REGISTRATION FEE
| Title of each class of securities to be registered |
Amount to be registered |
Proposed maximum offering price per share |
Proposed maximum aggregate offering price |
Amount of registration fee | ||||
| Common Stock, par value $0.01 per share |
61,312,255(1) | N/A | $1,088,893,628.21(2) | $126,420.55(3) | ||||
| (1) | Represents the maximum number of shares of the registrant’s common stock estimated to be issuable upon the completion of the merger described herein, based on an estimate of (A) the maximum number of shares of common stock, par value $0.0001 per share, of optionsXpress Holdings, Inc. (“optionsXpress”) presently outstanding or issuable or expected to be issued in connection with the merger, multiplied by (B) the exchange ratio of 1.02 shares of common stock, par value $0.01 per share, of the registrant for each share of optionsXpress common stock. |
| (2) | Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act and computed pursuant to Rule 457(f)(1) and 457(c) of the Securities Act. The proposed maximum aggregate offering price of the registrant’s common stock was calculated based upon the market value of shares of optionsXpress common stock (the securities to be canceled and exchanged in the merger) in accordance with Rule 457(c) under the Securities Act as follows: the product of (A) $18.115, the average of the high and low prices per share of optionsXpress common stock on the NASDAQ Global Select Market on April 19, 2011 and (B) 60,110,054, the maximum possible number of shares of optionsXpress common stock which may be canceled and exchanged pursuant to the merger described herein, calculated as the sum of (i) 58,021,501 shares of optionsXpress common stock outstanding as of April 15, 2011 (including 552,231 unvested deferred shares), (ii) 1,866,553 shares issuable upon the exercise of options granted under optionsXpress’ stock incentive plans as of April 15, 2011 and (iii) 222,000 additional shares (including deferred shares) that may be issued or granted, or issuable upon exercise of options that may be granted, prior to completion of the merger. |
| (3) | Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $116.10 per $1,000,000 of the proposed maximum aggregate offering price. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.
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The information in this proxy statement/prospectus is not complete and may be changed. We may not sell the securities offered by this proxy statement/prospectus until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction where an offer or solicitation is not permitted.
PRELIMINARY—SUBJECT TO COMPLETION—DATED APRIL 21, 2011
MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT
[—], 2011
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of optionsXpress Holdings, Inc., or optionsXpress, to be held at [—], on [—], 2011 beginning at [—], local time. At the special meeting, you will be asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, or merger agreement, dated as of March 18, 2011, by and among optionsXpress, The Charles Schwab Corporation, or Schwab, and Neon Acquisition Corp., a newly formed, wholly-owned subsidiary of Schwab, pursuant to which, upon completion of the merger, Neon Acquisition Corp. will be merged with and into optionsXpress, with optionsXpress surviving the merger. After the merger, optionsXpress will be a wholly-owned subsidiary of Schwab and no longer be a publicly held corporation.
If the merger is completed, optionsXpress stockholders will have the right to receive 1.02 shares of Schwab common stock for each share of optionsXpress common stock (other than shares owned directly or indirectly by optionsXpress or Schwab), with cash paid in lieu of fractional shares. This exchange ratio is fixed and will not be adjusted to reflect stock price changes prior to closing of the merger.
Shares of Schwab common stock are listed on the New York Stock Exchange under the symbol “SCHW.” Shares of optionsXpress common stock are listed on the NASDAQ Global Select Market under the symbol “OXPS.” Based on the closing price of Schwab common stock on the New York Stock Exchange on March 18, 2011, the last trading day prior to the public announcement of the proposed merger, the 1.02 exchange ratio represented approximately $17.91 in value for each share of optionsXpress common stock. Based on the closing price of Schwab common stock on [—], 2011, the most recent practicable trading day before the date of the accompanying proxy statement/prospectus, the 1.02 exchange ratio represented approximately $[—] in value for each share of optionsXpress common stock.
The board of directors of optionsXpress unanimously (i) determined that it was advisable, in the best interests of and fair to optionsXpress and its stockholders to enter into the merger agreement and (ii) approved and adopted the merger agreement, the merger, and the other transactions contemplated by the merger agreement. Therefore, the optionsXpress board of directors unanimously recommends that you vote “FOR” the approval and adoption of the merger agreement and the merger contemplated by the merger agreement, and “FOR” the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies in favor of the adoption of the merger agreement and the merger contemplated by the merger agreement.
The proxy statement/prospectus attached to this letter, which serves as the proxy statement for the special meeting of the stockholders of optionsXpress and the prospectus for the shares of Schwab common stock to be issued in the merger, provides you with information about the merger, the merger agreement and the special meeting. A copy of the merger agreement is attached as Annex A to the proxy statement/prospectus. We encourage you to read the entire proxy statement/prospectus and its annexes carefully, including the discussion of the risks related to the merger and owning Schwab common stock after the merger in the section titled “Risk Factors” beginning on page 19. You may also obtain more information about us from documents we have filed with the Securities and Exchange Commission.
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Your vote is very important, regardless of the number of shares of optionsXpress common stock you own. Under Delaware law, the merger cannot be completed unless the holders of a majority of the outstanding shares of optionsXpress common stock entitled to vote at the special meeting vote for the approval and adoption of the merger agreement. If you do not vote, it will have the same effect as a vote against the approval and adoption of the merger agreement.
Whether or not you plan to attend the special meeting in person, please complete, sign, date and return promptly the enclosed proxy card by mail, or submit a proxy through the Internet or by telephone following the instructions on the enclosed proxy card as soon as possible to make sure your shares are represented at the special meeting. If you hold shares through a broker or other nominee, you should follow the procedures provided by your broker or nominee. These actions will not limit your right to vote in person if you wish to attend the special meeting and vote in person.
Thank you in advance for your cooperation and continued support.
Sincerely,
Adam DeWitt
Chief Financial Officer and Secretary
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN THE MERGER OR DETERMINED IF THE ATTACHED PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS IS DATED [—], 2011, AND IS FIRST BEING MAILED TO OPTIONSXPRESS STOCKHOLDERS ON OR ABOUT [—], 2011.
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311 W. Monroe St., Suite 1000
Chicago, Illinois 60606
(312) 630-3300
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [—], 2011
TO THE STOCKHOLDERS OF OPTIONSXPRESS HOLDINGS, INC.:
A special meeting of stockholders of optionsXpress Holdings, Inc., a Delaware corporation, will be held at [—], on [—], 2011, beginning at [—], local time, for the following purposes:
1. Approval and Adoption of the Merger Agreement. To consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of March 18, 2011, by and among optionsXpress, Schwab and Neon Acquisition Corp., and the merger contemplated by the merger agreement, as it may be amended from time to time.
2. Adjournment of the Special Meeting. To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes properly cast at the time of the meeting to approve and adopt the merger agreement.
Only stockholders of record of optionsXpress common stock as of the close of business on [—], 2011, will be entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. All stockholders of record are cordially invited to attend the special meeting in person.
Your vote is very important, regardless of the number of shares of optionsXpress common stock you own. Under Delaware law, the merger cannot be completed unless the holders of a majority of the outstanding shares of optionsXpress common stock entitled to vote at the special meeting vote for the approval and adoption of the merger agreement. Even if you plan to attend the meeting in person, we request that you complete, sign, date and return the enclosed proxy card in the envelope provided or submit a proxy through the Internet or by telephone following the instructions on the enclosed proxy card, and thereby ensure that your shares will be represented at the meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote “FOR” the approval and adoption of the merger agreement and “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.
If you fail to vote by proxy or in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and, if a quorum is present, will have the same effect as a vote against the approval and adoption of the merger agreement. If you are a stockholder of record and wish to vote in person at the special meeting, you may withdraw your proxy and vote in person.
The merger agreement and the merger are described in the accompanying proxy statement/prospectus and a copy of the merger agreement is included as Annex A to the proxy statement/prospectus.
By Order Of The Board Of Directors,
Adam DeWitt
Chief Financial Officer and Secretary
[—], 2011
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ADDITIONAL INFORMATION
The accompanying proxy statement/prospectus incorporates by reference important business and financial information about Schwab and optionsXpress from documents that are not included in or delivered with the proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in the proxy statement/prospectus by requesting them in writing or by telephone or email from the appropriate company at the following addresses, telephone numbers and email addresses:
| The Charles Schwab Corporation 211 Main Street San Francisco, California 94105 Attention: Corporate Secretary (415) 667-1959 Email: investor.relations@schwab.com |
optionsXpress Holdings, Inc. 311 W. Monroe St., Suite 1000 Chicago, Illinois 60606 Attention: Corporate Secretary 1-877-280-9010 Email: investorrelations@optionsxpress.com |
If you would like to request documents, please do so by [—], 2011, in order to receive them before the special meeting of optionsXpress stockholders.
For a more detailed description of the information incorporated by reference in the accompanying proxy statement/prospectus and how you may obtain it, see “Where You Can Find More Information” beginning on page 84 of the accompanying proxy statement/prospectus.
The accompanying proxy statement/prospectus provides a detailed description of the merger and the merger agreement. We urge you to read the accompanying proxy statement/prospectus, including any documents incorporated by reference into the accompanying proxy statement/prospectus, and its annexes carefully and in their entirety. If you have any questions concerning the merger, the other meeting matters or the accompanying proxy statement/prospectus or need assistance voting your shares, please contact optionsXpress’ proxy solicitor at the address or telephone number listed below:
[—]
| Banks and brokers should call: | Stockholders should call: | |
| [—] | [—] |
Please do not send your stock certificates at this time. You will be sent separate instructions regarding the surrender of your stock certificates.
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| Conversion of Shares; Exchange of Certificates; Dividends; Withholding |
56 | |||
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| Delisting and Deregistration of optionsXpress Common Stock after the Merger |
58 | |||
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| Stock Options, Other Stock-Based Awards and Employee Stock Purchase Plan |
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This summary highlights selected information from this proxy statement/prospectus. It does not contain all of the information that may be important to you. We urge you to read carefully the entire document and the other documents to which this proxy statement/prospectus refers in order to fully understand the merger and the related transactions. See “Where You Can Find More Information” beginning on page 84. Each item in this summary refers to the page of this proxy statement/prospectus on which that subject is discussed in more detail.
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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
The following questions and answers are intended to address briefly some commonly asked questions regarding the merger and the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder. To better understand these matters, and for a description of the legal terms governing the merger, you should carefully read this entire proxy statement/prospectus, including the annexes, as well as the documents that have been incorporated by reference in this proxy statement/prospectus.
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SELECTED HISTORICAL FINANCIAL DATA OF SCHWAB
Schwab is providing the following information to aid you in your analysis of the financial aspects of the merger. Schwab derived the financial information as of and for the fiscal years ended December 31, 2006 through December 31, 2010 from its historical audited financial statements for these fiscal years. This information is only a summary, and you should read it in conjunction with Schwab’s consolidated financial statements and the related notes contained in Schwab’s periodic reports filed with the Securities and Exchange Commission, or the SEC, that have been incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 84.
| As of and for the Fiscal Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in millions, except per share data, ratios or as noted) | ||||||||||||||||||||
| Results of Operations |
||||||||||||||||||||
| Net revenues |
$ | 4,248 | $ | 4,193 | $ | 5,150 | $ | 4,994 | $ | 4,309 | ||||||||||
| Expenses excluding interest |
$ | 3,469 | $ | 2,917 | $ | 3,122 | $ | 3,141 | $ | 2,833 | ||||||||||
| Income from continuing operations |
$ | 454 | $ | 787 | $ | 1,230 | $ | 1,120 | $ | 891 | ||||||||||
| Net income(1) |
$ | 454 | $ | 787 | $ | 1,212 | $ | 2,407 | $ | 1,227 | ||||||||||
| Income from continuing operations per share— basic |
$ | .38 | $ | .68 | $ | 1.07 | $ | .93 | $ | .70 | ||||||||||
| Income from continuing operations per share—diluted |
$ | .38 | $ | .68 | $ | 1.06 | $ | .92 | $ | .69 | ||||||||||
| Basic earnings per share(1)(2) |
$ | .38 | $ | .68 | $ | 1.06 | $ | 1.98 | $ | .96 | ||||||||||
| Diluted earnings per share(1)(2) |
$ | .38 | $ | .68 | $ | 1.05 | $ | 1.96 | $ | .95 | ||||||||||
| Dividends declared per common share |
$ | .240 | $ | .240 | $ | .220 | $ | .200 | $ | .135 | ||||||||||
| Special dividend declared per common share |
$ | — | $ | — | $ | — | $ | 1.00 | $ | — | ||||||||||
| Weighted-average common shares outstanding—diluted |
1,194 | 1,160 | 1,157 | 1,222 | 1,286 | |||||||||||||||
| Asset management and administration fees as a percentage of net revenues |
43 | % | 45 | % | 46 | % | 47 | % | 45 | % | ||||||||||
| Net interest revenue as a percentage of net revenues |
36 | % | 30 | % | 33 | % | 33 | % | 33 | % | ||||||||||
| Trading revenue as a percentage of net revenues(3) |
20 | % | 24 | % | 21 | % | 17 | % | 18 | % | ||||||||||
| Effective income tax rate on income from continuing operations |
41.7 | % | 38.3 | % | 39.3 | % | 39.6 | % | 39.6 | % | ||||||||||
| Capital expenditures—purchases of equipment, office facilities, and property, net(4) |
$ | 127 | $ | 139 | $ | 194 | $ | 168 | $ | 59 | ||||||||||
| Capital expenditures, net, as a percentage of net revenues |
3 | % | 3 | % | 4 | % | 3 | % | 1 | % | ||||||||||
| Performance Measures |
||||||||||||||||||||
| Net revenue growth (decline) |
1 | % | (19 | %) | 3 | % | 16 | % | 19 | % | ||||||||||
| Pre-tax profit margin from continuing operations |
18.3 | % | 30.4 | % | 39.4 | % | 37.1 | % | 34.3 | % | ||||||||||
| Return on stockholders’ equity |
8 | % | 17 | % | 31 | % | 55 | % | 26 | % | ||||||||||
| Financial Condition (at year end) |
||||||||||||||||||||
| Total assets |
$ | 92,568 | $ | 75,431 | $ | 51,675 | $ | 42,286 | $ | 48,992 | ||||||||||
| Long-term debt |
$ | 2,006 | $ | 1,512 | $ | 883 | $ | 899 | $ | 388 | ||||||||||
| Stockholders’ equity |
$ | 6,226 | $ | 5,073 | $ | 4,061 | $ | 3,732 | $ | 5,008 | ||||||||||
| Assets to stockholders’ equity ratio |
15 | 15 | 13 | 11 | 10 | |||||||||||||||
| Long-term debt to total financial capital (long-term debt plus stockholders’ equity) |
24 | % | 23 | % | 18 | % | 19 | % | 7 | % | ||||||||||
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| As of and for the Fiscal Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Employee Information |
||||||||||||||||||||
| Full-time equivalent employees (at year end, in thousands) |
12.8 | 12.4 | 13.4 | 13.3 | 12.4 | |||||||||||||||
| Net revenues per average full-time equivalent employee (in thousands) |
$ | 337 | $ | 338 | $ | 383 | $ | 387 | $ | 362 | ||||||||||
Note: All information is presented on a continuing operations basis unless otherwise noted.
| (1) | Net income in 2007 includes a gain of $1.2 billion, after tax, on the sale of U.S. Trust Corporation. |
| (2) | Both basic and diluted earnings per share in 2008, 2007 and 2006 include discontinued operations. |
| (3) | Trading revenue includes commission and principal transaction revenues. |
| (4) | Capital expenditures in 2006 are presented net of proceeds of $63 million primarily from the sale of a data center. |
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SELECTED HISTORICAL FINANCIAL DATA OF OPTIONSXPRESS
The following table provides summary historical consolidated financial data as of the end of and for each of the fiscal years in the five-year period ended December 31, 2010. This historical consolidated financial data have been derived from optionsXpress’ audited financial statements and related notes incorporated by reference into this document. This information is only a summary, and you should read it in conjunction with optionsXpress’ consolidated financial statements and the related notes contained in optionsXpress’ periodic reports filed with the Securities and Exchange Commission that have been incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 84.
| As of and for the Fiscal Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands, except per share data, statistical data or ratios) | ||||||||||||||||||||
| Results of Operations |
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| Revenues |
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| Commissions |
$ | 159,448 | $ | 159,536 | $ | 167,562 | $ | 153,913 | $ | 123,305 | ||||||||||
| Other brokerage related revenue |
17,936 | 26,765 | 30,832 | 35,389 | 33,816 | |||||||||||||||
| Interest revenue and fees |
18,409 | 17,787 | 46,956 | 62,493 | 30,781 | |||||||||||||||
| Interest expense |
(200 | ) | (245 | ) | (1,794 | ) | (7,015 | ) | (1,440 | ) | ||||||||||
| Net interest revenue and fees |
18,209 | 17,542 | 45,162 | 55,478 | 29,341 | |||||||||||||||
| Education revenue |
27,302 | 24,398 | — | — | — | |||||||||||||||
| Other income |
8,549 | 5,177 | 3,002 | 2,250 | 470 | |||||||||||||||
| Net revenues |
$ | 231,444 | $ | 233,418 | $ | 246,558 | $ | 247,030 | $ | 186,932 | ||||||||||
| Expenses |
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| Compensation and benefits |
$ | 46,299 | $ | 42,452 | $ | 28,571 | $ | 26,499 | $ | 21,510 | ||||||||||
| Brokerage, cleaning, and other related expenses |
37,203 | 31,931 | 27,675 | 19,910 | 21,583 | |||||||||||||||
| Brokerage advertising |
17,863 | 17,608 | 20,716 | 14,816 | 7,454 | |||||||||||||||
| Education marketing and fulfillment |
17,208 | 15,763 | — | — | — | |||||||||||||||
| Depreciation and amortization |
8,890 | 8,879 | 7,423 | 5,710 | 3,394 | |||||||||||||||
| Other general and administrative |
23,858 | 22,509 | 20,592 | 20,335 | 16,073 | |||||||||||||||
| Total expenses |
151,321 | 139,142 | 104,977 | 87,270 | 70,014 | |||||||||||||||
| Income before income taxes of consolidated companies |
80,123 | 94,276 | 141,581 | 159,760 | 116,918 | |||||||||||||||
| Income taxes |
28,154 | 33,439 | 51,008 | 61,830 | 45,158 | |||||||||||||||
| Net income of consolidated companies |
51,969 | 60,837 | 90,573 | 97,930 | 71,760 | |||||||||||||||
| Net income attributable to non-controlling interests |
65 | 70 | 258 | 211 | 31 | |||||||||||||||
| Net income |
$ | 51,904 | $ | 60,767 | $ | 90,315 | $ | 97,719 | $ | 71,729 | ||||||||||
| Net income per share—basic |
$ | 0.90 | $ | 1.05 | $ | 1.49 | $ | 1.55 | $ | 1.15 | ||||||||||
| Net income per share—diluted |
$ | 0.90 | $ | 1.05 | $ | 1.49 | $ | 1.55 | $ | 1.15 | ||||||||||
| Weighted average shares—basic |
57,443 | 57,925 | 60,566 | 62,923 | 62,319 | |||||||||||||||
| Weighted average shares—diluted |
57,785 | 58,081 | 60,720 | 63,131 | 62,612 | |||||||||||||||
| Statistical Data |
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| Number of customer accounts (at period end)(1) |
379,400 | 351,200 | 318,600 | 262,400 | 204,600 | |||||||||||||||
| Daily average revenue trades (“DARTs”)(2) |
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| Retail DARTs |
29,900 | 31,500 | 36,500 | 35,500 | 27,200 | |||||||||||||||
| Institutional DARTs(3) |
14,000 | 12,600 | 7,100 | — | — | |||||||||||||||
| Total DARTs |
43,900 | 44,100 | 43,600 | 35,500 | 27,200 | |||||||||||||||
| Customer trades per account(4) |
30 | 33 | 38 | 38 | 37 | |||||||||||||||
| Average commission per trade |
$ | 14.42 | $ | 14.41 | $ | 15.27 | $ | 17.38 | $ | 18.13 | ||||||||||
| Option trades as a % of total trades |
42 | % | 42 | % | 53 | % | 67 | % | 74 | % | ||||||||||
| Brokerage advertising expense per net new customer account(5) |
$ | 633 | $ | 540 | $ | 388 | $ | 304 | $ | 138 | ||||||||||
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| As of and for the Fiscal Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
| Balance Sheet (at period end) |
||||||||||||||||||||
| Cash and investments in securities |
$ | 112,317 | $ | 249,839 | $ | 204,387 | $ | 228,667 | $ | 194,665 | ||||||||||
| Total assets |
1,472,918 | 1,546,321 | 972,333 | 1,155,511 | 687,524 | |||||||||||||||
| Total liabilities |
1,367,833 | 1,235,446 | 704,038 | 877,561 | 506,665 | |||||||||||||||
| Total stockholders’ equity |
105,085 | 310,875 | 268,295 | 277,950 | 180,859 | |||||||||||||||
| Dividends |
||||||||||||||||||||
| Dividends declared per share (during the period) |
$ | 4.50 | $ | 0.08 | $ | 0.32 | $ | 0.25 | $ | 0.20 | ||||||||||
| (1) | Customer accounts are open, numbered accounts. |
| (2) | DARTs are total revenue-generating trades for a period divided by the number of trading days in that period. |
| (3) | Includes all Open E Cry, LLC and other institutional revenue-generating trades beginning in July 2008. |
| (4) | Customer trades per account are total trades divided by the average number of total customer accounts during the period. |
| (5) | Calculated based on total net new customer accounts opened during the period. Excludes accounts acquired in the XpressTrade, LLC and Open E Cry, LLC acquisitions. |
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UNAUDITED COMPARATIVE PER SHARE DATA
The table below presents per share data for (1) Schwab and optionsXpress on a historical basis, (2) Schwab on a preliminary pro forma combined basis giving effect to the merger and (3) optionsXpress on a preliminary pro forma equivalent basis based on the exchange ratio of 1.02 shares of Schwab common stock per share of optionsXpress common stock. The preliminary pro forma and pro forma equivalent information was prepared as if the merger had become effective on December 31, 2010, in the case of the book value data presented, and on January 1, 2010, in the case of the earnings and dividends declared data presented. The data presented in the table assume that the merger is accounted for using the acquisition method of accounting. The preliminary pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of Schwab had the merger actually been completed as of or at the beginning of the period presented nor does it indicate future results for any interim or full-year period.
The information in the following table is derived from and should be read in conjunction with the historical consolidated financial statements and related notes of Schwab and optionsXpress, which are incorporated into this document by reference. See “Selected Historical Financial Data of Schwab” beginning on page 12 and “Selected Historical Financial Data of optionsXpress” beginning on page 14.
| At or for the Year Ended December 31, 2010 |
||||
| Schwab |
||||
| Basic earnings per common share |
||||
| Historical |
$ | 0.38 | ||
| Pro forma(1) |
$ | 0.39 | ||
| Diluted earnings per common share |
||||
| Historical |
$ | 0.38 | ||
| Pro forma(1) |
$ | 0.38 | ||
| Dividends declared per common share |
||||
| Historical |
$ | 0.240 | ||
| Pro forma |
$ | 0.240 | ||
| Book value per common share outstanding at period end |
||||
| Historical |
$ | 5.18 | ||
| Pro forma |
$ | 5.01 | ||
| optionsXpress |
||||
| Basic earnings per common share |
||||
| Historical |
$ | 0.90 | ||
| Pro forma equivalent(2) |
$ | 0.40 | ||
| Diluted earnings per common share |
||||
| Historical |
$ | 0.90 | ||
| Pro forma equivalent(2) |
$ | 0.39 | ||
| Dividends declared per common share |
||||
| Historical |
$ | 4.50 | ||
| Pro forma equivalent(2) |
$ | 0.24 | ||
| Book value per common share outstanding at period end |
||||
| Historical |
$ | 1.83 | ||
| Pro forma equivalent(2) |
$ | 5.11 | ||
| (1) | The preliminary pro forma earnings per share information was prepared based on the combined historical consolidated earnings of Schwab and optionsXpress, adjusted to give effect to pro forma events that are (a) directly attributable to the merger, (b) factually supportable and (c) expected to have a continuing impact on combined results. |
| (2) | The preliminary pro forma equivalent per share information was obtained by multiplying the pro forma per share amounts shown for Schwab by the exchange ratio of 1.02. |
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COMPARATIVE MARKET PRICE DATA AND DIVIDEND INFORMATION
Schwab common stock is listed and traded on the New York Stock Exchange under the symbol “SCHW.” optionsXpress common stock is listed and traded on the NASDAQ Global Select Market under the symbol “OXPS.” The following table sets forth, for the calendar quarters indicated, (1) the high and low sales prices per share of Schwab common stock as reported on the NASDAQ Stock Market until March 5, 2010, at which time it began trading on the New York Stock Exchange, and thereafter on the New York Stock Exchange, and (2) the high and low sales prices of optionsXpress common stock as reported on the NASDAQ Global Select Market. In addition, the table also sets forth the quarterly cash dividends per share declared by Schwab and optionsXpress with respect to their common stock. On [—], 2011, the last practicable trading day prior to the date of this proxy statement/prospectus, there were [—] shares of Schwab common stock outstanding and [—] shares of optionsXpress common stock outstanding.
| Schwab | optionsXpress | |||||||||||||||||||||||
| High | Low | Dividends Declared |
High | Low | Dividends Declared |
|||||||||||||||||||
| For the calendar quarterly period ended: | ||||||||||||||||||||||||
| 2008 |
||||||||||||||||||||||||
| March 31, 2008 |
$ | 24.78 | $ | 18.04 | $ | 0.05 | $ | 33.39 | $ | 19.56 | $ | 0.08 | ||||||||||||
| June 30, 2008 |
$ | 22.78 | $ | 18.31 | $ | 0.05 | $ | 24.67 | $ | 19.77 | $ | 0.08 | ||||||||||||
| September 30, 2008 |
$ | 26.00 | $ | 18.78 | $ | 0.06 | $ | 26.52 | $ | 19.42 | $ | 0.08 | ||||||||||||
| December 31, 2008 |
$ | 24.37 | $ | 14.59 | $ | 0.06 | $ | 19.01 | $ | 11.29 | $ | 0.08 | ||||||||||||
| 2009 |
||||||||||||||||||||||||
| March 31, 2009 |
$ | 16.63 | $ | 11.34 | $ | 0.06 | $ | 13.86 | $ | 8.66 | $ | 0.08 | ||||||||||||
| June 30, 2009 |
$ | 18.92 | $ | 15.31 | $ | 0.06 | $ | 19.31 | $ | 11.56 | — | |||||||||||||
| September 30, 2009 |
$ | 19.45 | $ | 16.47 | $ | 0.06 | $ | 18.55 | $ | 14.09 | — | |||||||||||||
| December 31, 2009 |
$ | 19.49 | $ | 16.94 | $ | 0.06 | $ | 18.48 | $ | 13.99 | — | |||||||||||||
| 2010 |
||||||||||||||||||||||||
| March 31, 2010 |
$ | 19.78 | $ | 17.50 | $ | 0.06 | $ | 17.47 | $ | 14.32 | — | |||||||||||||
| June 30, 2010 |
$ | 19.88 | $ | 14.18 | $ | 0.06 | $ | 18.09 | $ | 15.25 | — | |||||||||||||
| September 30, 2010 |
$ | 15.43 | $ | 12.76 | $ | 0.06 | $ | 17.18 | $ | 14.23 | — | |||||||||||||
| December 31, 2010 |
$ | 17.42 | $ | 13.98 | $ | 0.06 | $ | 21.00 | $ | 15.14 | $ | 4.50 | ||||||||||||
| 2011 |
||||||||||||||||||||||||
| March 31, 2011 |
$ | 19.45 | $ | 17.16 | $ | 0.06 | $ | 18.49 | $ | 14.11 | — | |||||||||||||
| June 30, 2011 (through April 20, 2011) |
$ | 18.72 | $ | 17.88 | N/A | $ | 18.87 | $ | 18.00 | — | ||||||||||||||
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The following table presents:
| • | the last reported sale price of a share of optionsXpress common stock, as reported on the NASDAQ Global Select Market; and |
| • | the last reported sale price of a share of Schwab common stock, as reported on the New York Stock Exchange, |
in each case, on March 18, 2011, the last trading day prior to the public announcement of the proposed merger, and on [—], 2011, the last practicable trading day prior to the date of this proxy statement/prospectus. The following table also presents the equivalent per share value of the Schwab common stock that optionsXpress stockholders would receive for each share of their optionsXpress common stock if the merger was completed on those dates:
| optionsXpress Common Stock |
Schwab Common Stock |
Equivalent Value Per Share of optionsXpress Common Stock(1) |
||||||||||
| March 18, 2011 |
$ | 15.33 | $ | 17.56 | $ | 17.91 | ||||||
| [—], 2011 |
$ | [—] | $ | [—] | $ | [—] | ||||||
| (1) | Calculated by multiplying the closing price of Schwab common stock as of the specified date by the exchange ratio of 1.02. |
The market value of the Schwab common stock to be issued in exchange for shares of optionsXpress common stock upon the completion of the merger will not be known at the time of the optionsXpress special meeting. The above tables show only historical comparisons. Because the market prices of Schwab common stock and optionsXpress common stock will likely fluctuate prior to the merger, these comparisons may not provide meaningful information to optionsXpress stockholders in determining whether to adopt the merger agreement. Stockholders are encouraged to obtain current market quotations for Schwab common stock and optionsXpress common stock and to review carefully the other information contained in this proxy statement/prospectus or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 84.
The holders of Schwab common stock receive dividends as and when declared by Schwab’s board of directors out of statutory surplus or from net profits. Following the completion of the merger, subject to approval and declaration by Schwab’s board of directors, Schwab expects to continue paying quarterly cash dividends on a basis consistent with past practice. The current annualized rate of dividends on a share of Schwab common stock is $0.240 per share.
optionsXpress has not paid dividends since the first quarter of 2009, other than a special cash dividend of $4.50 per common share paid on December 27, 2010. Under the terms of the merger agreement, optionsXpress is prohibited from declaring or paying any dividends prior to completion of the merger.
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In addition to the other information contained in or incorporated by reference into this proxy statement/prospectus, including the matters addressed under the caption “Information Regarding Forward-Looking Statements” on page 23, you should carefully consider the following risk factors in deciding whether to vote for adoption of the merger agreement.
Because the exchange ratio is fixed and the market price of Schwab common stock will fluctuate, optionsXpress stockholders will not know until the effective time of the merger the value of the consideration they will receive in the merger.
Upon completion of the merger, each share of optionsXpress common stock, other than excluded shares, will be converted into the right to receive 1.02 shares of Schwab common stock. Because the exchange ratio is fixed and will not be adjusted in the event of any increase or decrease in the price of either Schwab common stock or optionsXpress common stock, the value of the Schwab common stock to be issued in the merger will depend upon the market price of Schwab common stock. This market price may vary from the closing price of Schwab common stock on the date the merger was announced, on the date that this proxy statement/prospectus was mailed to optionsXpress stockholders and on the date of the optionsXpress special meeting. Accordingly, at the time of the optionsXpress special meeting, optionsXpress stockholders will not necessarily know or be able to calculate the value of the consideration they would be entitled to receive upon completion of the merger. You should obtain current market quotations for shares of Schwab common stock and for shares of optionsXpress common stock.
The market price of Schwab common stock after the merger may be affected by factors different from those affecting the shares of Schwab or optionsXpress currently.
The businesses of Schwab and optionsXpress differ and, accordingly, the results of operations of Schwab and the market price of Schwab common stock following the merger may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of Schwab and optionsXpress. For a discussion of the businesses of Schwab and optionsXpress and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this proxy statement/prospectus and referred to under “Where You Can Find More Information” beginning on page 84.
The failure to successfully integrate optionsXpress’ business and operations and/or fully realize synergies from the merger in the expected time frame may adversely affect Schwab’s future results.
The success of the merger will depend, in part, on Schwab’s ability to successfully integrate optionsXpress’ business and operations and fully realize the anticipated benefits and synergies from combining the businesses of Schwab and optionsXpress. However, to realize these anticipated benefits and synergies, the businesses of Schwab and optionsXpress must be successfully combined. If Schwab is not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected.
Schwab and optionsXpress have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, as well as the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any or all of which could adversely affect Schwab’s ability to maintain relationships with clients, customers and employees after the merger or to achieve the anticipated benefits and synergies of the merger. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Schwab and optionsXpress.
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The merger agreement limits optionsXpress’ ability to pursue alternatives to the merger.
The merger agreement contains provisions that make it more difficult for optionsXpress to sell its business to a party other than Schwab. These provisions include a general prohibition on optionsXpress’ solicitation of any acquisition proposal or offer for a competing transaction, the requirement that optionsXpress pay a termination fee of $41,900,000 if the merger agreement is terminated in specified circumstances and the requirement that optionsXpress submit the adoption of the merger agreement to a vote of optionsXpress’ stockholders unless the merger agreement is terminated in accordance with its terms. See “Proposal No. 1: The Merger Agreement—No Solicitation of Alternative Transactions” and “Proposal No. 1: The Merger Agreement—Termination of the Merger Agreement—Termination Fee” beginning on pages 66 and 71, respectively.
These provisions might discourage a third party that might have an interest in acquiring all or a significant part of optionsXpress from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per share value than the current proposed merger consideration. Furthermore, a potential competing acquiror may propose to pay a lower per share price to optionsXpress stockholders than it might otherwise have proposed to pay because of optionsXpress’ obligation, in connection with termination of the merger agreement under certain circumstances, to pay Schwab a $41,900,000 termination fee.
The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: adoption of the merger agreement by optionsXpress stockholders, regulatory and antitrust approvals, absence of orders prohibiting the completion of the merger, effectiveness of the registration statement of which this proxy statement/prospectus is a part, the receipt of authorization for listing of the shares of Schwab common stock on the New York Stock Exchange, continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements, and the receipt by both parties of legal opinions from their respective tax counsels.
In addition, both Schwab and optionsXpress have rights to terminate the merger agreement under certain circumstances specified in the merger agreement. See “Proposal No. 1: The Merger Agreement—Termination of the Merger Agreement” beginning on page 69 for a discussion of the circumstances under which the merger agreement could be terminated.
Lawsuits challenging the merger have been filed against optionsXpress, the optionsXpress board of directors, Schwab and Neon Acquisition Corp., and an adverse judgment in such lawsuits or any future similar lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
optionsXpress, the optionsXpress board of directors, Schwab and Neon Acquisition Corp. are named as defendants in several purported class action lawsuits filed in the Circuit Court of Cook County, Illinois and the Court of Chancery in the State of Delaware, challenging the proposed merger and seeking, among other things, to enjoin the defendants from completing the merger on the agreed-upon terms and rescission of the merger to the extent it has been completed. See “The Merger—Litigation Relating to the Merger” on page 58.
One of the conditions to the closing of the merger is that no order, injunction or decree or other legal restraint or prohibition that prevents the completion of the merger be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the optionsXpress or Schwab defendants from completing the merger on the agreed-upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
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optionsXpress stockholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management of Schwab following the merger.
optionsXpress’ stockholders currently have the right to vote in the election of the board of directors of optionsXpress and on other matters affecting optionsXpress. Upon the completion of the merger, each optionsXpress stockholder will become a stockholder of Schwab with a percentage ownership that is much smaller than any such stockholder’s percentage ownership of optionsXpress. It is expected that the former stockholders of optionsXpress as a group will receive shares in the merger constituting approximately [—]% of the outstanding shares of Schwab common stock immediately after the merger. Because of this, optionsXpress’ stockholders will have significantly less influence on the management and policies of Schwab than they now have on the management and policies of optionsXpress.
optionsXpress’ directors and executive officers have financial interests in the merger that may be different from, or in addition to, the interests of optionsXpress stockholders.
In considering the information contained in this proxy statement/prospectus, you should be aware that optionsXpress’ executive officers and directors have financial interests in the merger that are different from, or in addition to, the interests of optionsXpress stockholders generally. These interests include the rights to continued indemnification and insurance coverage by Schwab after the merger for acts or omissions occurring before the merger. In addition, Schwab has entered into retention agreements with certain executive officers of optionsXpress, which provide for continued employment as well as other rights and benefits. Schwab may negotiate and enter into additional agreements with other executive officers of optionsXpress prior to the effective time of the merger. See “The Merger—Interests of optionsXpress’ Directors and Executive Officers in the Merger” beginning on page 46 for a discussion of these financial interests.
The fairness opinion obtained by optionsXpress from its financial advisor will not reflect changes in circumstances subsequent to the date of the fairness opinion.
Evercore Group L.L.C., optionsXpress’ financial advisor in connection with the proposed merger, has delivered to the board of directors of optionsXpress its opinion dated as of March 18, 2011. The opinion of Evercore stated that as of such date, and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth in the opinion, the exchange ratio was fair, from a financial point of view, to the holders of the shares of optionsXpress common stock entitled to receive shares of Schwab common stock in the merger. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Schwab or optionsXpress, changes in general market and economic conditions or regulatory or other factors. Any such changes, or changes in other factors on which the opinion is based, may materially alter or affect the relative values of Schwab and optionsXpress.
The merger is subject to the receipt of consents and approvals from governmental and regulatory entities that may delay the date of completion of the merger or impose conditions that could have an adverse effect on Schwab.
Before the merger may be completed, various approvals or consents must be obtained from the Department of Justice, Federal Trade Commission, Financial Industry Regulatory Authority, Chicago Board Options Exchange, NASDAQ Stock Market LLC, Investment Industry Regulatory Organization of Canada and applicable Canadian provincial securities commissions, Netherlands Authority for the Financial Markets, Dutch Central Bank, Monetary Authority of Singapore and other governmental and regulatory authorities. Satisfying the requirements of these governmental and regulatory entities may delay the date of completion of the merger. In addition, these governmental and regulatory entities may include conditions on the completion of the merger or require changes to the terms of the merger.
While Schwab and optionsXpress do not currently expect that any such conditions or changes would result in a material adverse effect on Schwab, there can be no assurance that they will not, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting
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the revenues of Schwab following the merger, any of which might have a material adverse effect on Schwab following the merger. Schwab is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that would reasonably be expected to have a material adverse effect on Schwab, but Schwab could choose to waive this condition.
Failure to complete the merger could negatively impact the stock price and future business and financial results of optionsXpress.
If the merger is not completed, the ongoing business of optionsXpress may be adversely affected and optionsXpress will be subject to several risks, including the following:
| • | optionsXpress may be required, under certain circumstances, to pay Schwab a termination fee of $41,900,000 under the merger agreement; |
| • | optionsXpress will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees; |
| • | under the merger agreement, optionsXpress is subject to certain restrictions on the conduct of its business prior to completing the merger which may adversely affect its ability to execute certain of its business strategies; and |
| • | matters relating to the merger may require substantial commitments of time and resources by optionsXpress management, which could otherwise have been devoted to other opportunities that may have been beneficial to optionsXpress as an independent company. |
In addition, if the merger is not completed, optionsXpress may experience negative reactions from the financial markets and from its customers and employees. optionsXpress also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against it to perform its obligations under the merger agreement. If the merger is not completed, optionsXpress cannot assure its stockholders that the risks described above will not materialize and will not materially affect its business, financial results and stock price.
The shares of Schwab common stock to be received by optionsXpress stockholders as a result of the merger will have different rights from shares of optionsXpress common stock.
Following completion of the merger, optionsXpress stockholders will no longer be stockholders of optionsXpress. optionsXpress stockholders will instead be stockholders of Schwab. There will be important differences between your current rights as an optionsXpress stockholder and the rights to which you will be entitled as a Schwab stockholder. See “Comparison of Stockholder Rights” beginning on page 77 for a discussion of the different rights associated with Schwab common stock and optionsXpress common stock.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including the documents incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements that refer to expectations, projections, or other characterizations of future events or circumstances and are identified by words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “will,” “may,” “aim,” “target,” “could,” “should,” “continue,” “build,” “improve,” “growth,” “increase” and other similar expressions. These forward-looking statements include, but are not limited to, statements about the benefits of the merger between Schwab and optionsXpress, including future financial and operating results and performance; statements about Schwab’s and optionsXpress’ plans, objectives, expectations and intentions with respect to future operations, products and services; financial projections; and Schwab’s payment of dividends.
These forward-looking statements, which reflect Schwab’s and optionsXpress’ management’s beliefs, objectives and expectations as of the date of this proxy statement/prospectus, or in the case of any documents incorporated by reference, as of the date of those documents, are necessarily estimates. Achievement of the expressed beliefs, objectives and expectations is subject to risks and uncertainties that could cause actual results to differ materially.
Factors that may cause actual results to differ include, but are not limited to:
| • | the failure of the parties to satisfy the closing conditions in the merger agreement in a timely manner or at all, including regulatory and government approvals; |
| • | the failure of the stockholders of optionsXpress to adopt the merger agreement; |
| • | disruptions to the parties’ businesses as a result of the announcement and pendency of the merger; |
| • | the parties’ ability to successfully implement their integration strategies; |
| • | the risk that the future business operations of optionsXpress will not be successful; |
| • | the risk that expected revenue, expense and other synergies from the merger may not be fully realized or may take longer than expected to realize; |
| • | changes in general economic and financial market conditions; |
| • | the level of interest rates, equity valuations and trading activity; |
| • | the parties’ ability to attract and retain clients and grow client assets/relationships; |
| • | competitive pressures on rates and fees; |
| • | the level of client assets, including cash balances; |
| • | the impact of changes in market conditions on money market fund fee waivers, revenues, expenses and pre-tax margins; |
| • | capital needs; |
| • | the parties’ ability to develop and launch new products, services and capabilities in a timely and successful manner; |
| • | the effect of adverse developments in litigation or regulatory matters; and |
| • | any adverse impact of financial reform legislation and related regulations. |
Additional factors that could cause Schwab’s and optionsXpress’ results to differ materially from those described in the forward-looking statements can be found in Schwab’s and optionsXpress’ filings with the Securities and Exchange Commission, including Schwab’s and optionsXpress’ Annual Reports on Form 10-K for the fiscal year ended December 31, 2010.
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You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this proxy statement/prospectus or the date of any document incorporated by reference in this proxy statement/prospectus. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement/prospectus and attributable to Schwab or optionsXpress or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, Schwab and optionsXpress undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.
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INFORMATION ABOUT THE COMPANIES
The Charles Schwab Corporation
Schwab, a savings and loan holding company headquartered in San Francisco, California, was incorporated in 1986 and engages, through its subsidiaries, in securities brokerage, banking, asset management, and related financial services. At March 31, 2011, Schwab had $1.65 trillion in client assets, 8.1 million active brokerage accounts, 1.44 million corporate retirement plan participants, and 719,000 banking accounts.
Significant business subsidiaries of Schwab include:
| • | Charles Schwab & Co., Inc., which was incorporated in 1971, is a securities broker-dealer with over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K., and serves clients in Hong Kong through one of Schwab’s subsidiaries; |
| • | Charles Schwab Bank, which commenced operations in 2003, is a federal savings bank located in Reno, Nevada; and |
| • | Charles Schwab Investment Management, Inc., which is the investment advisor for Schwab’s proprietary mutual funds. |
Schwab provides financial services to individuals and institutional clients through two segments—Investor Services and Institutional Services. The Investor Services segment includes Schwab’s retail brokerage and banking operations. The Institutional Services segment provides custodial, trading, and support services to independent investment advisors, as well as retirement plan, equity compensation plan, and other financial services to corporations and their employees. As of March 31, 2011, Schwab had full-time, part-time and temporary employees, and persons employed on a contract basis that represented the equivalent of about 13,100 full-time employees.
The address of Schwab’s principal executive offices is 211 Main Street, San Francisco, California 94105, and its telephone number is (415) 667-7000. For additional information about Schwab, see “Where You Can Find More Information” beginning on page 84.
Neon Acquisition Corp.
Neon Acquisition Corp. is a Delaware corporation and a direct wholly-owned subsidiary of Schwab. Neon Acquisition Corp. was organized on January 13, 2011, solely for the purpose of effecting the merger with optionsXpress. It has not carried on any activities other than in connection with the merger. The address of Neon Acquisition Corp.’s principal executive offices is 211 Main Street, San Francisco, California 94105, and its telephone number is (415) 667-7000.
optionsXpress Holdings, Inc.
optionsXpress, a Delaware company and pioneer in equity options and futures trading, offers an innovative suite of online brokerage services for investor education, strategy evaluation and trade execution. optionsXpress subsidiaries include optionsXpress, Inc., a retail online brokerage specializing in options and futures, brokersXpress, LLC, an online trading and reporting platform for independent investment professionals, Open E Cry, LLC, an innovative futures broker offering direct access futures trading for high volume commodities and futures traders through its proprietary software platform, and Optionetics, Inc., a leading provider of investment education services, including live seminars, proprietary software analytics, online and offline educational products and individual coaching.
The address of optionsXpress’ principal executive offices is 311 W. Monroe St., Suite 1000, Chicago, Illinois 60606, and its telephone number is (312) 630-3300. For additional information about optionsXpress, see “Where You Can Find More Information” beginning on page 84.
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THE SPECIAL MEETING OF OPTIONSXPRESS STOCKHOLDERS
Date, Time, Place and Purpose of the Special Meeting
This proxy statement/prospectus is being furnished to holders of optionsXpress common stock as part of the solicitation of proxies by the board of directors of optionsXpress for use at the special meeting of optionsXpress stockholders to be held on [—], 2011, beginning at [—], local time, at [—], or at any postponement or adjournment thereof.
The special meeting of optionsXpress stockholders is being held for the following purposes:
1. Approval and Adoption of the Merger Agreement. To consider and vote on a proposal to approve and adopt the merger agreement and the merger contemplated by the merger agreement, as it may be amended from time to time.
2. Adjournment of the Special Meeting. To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes properly cast at the time of the meeting to approve and adopt the merger agreement.
The holders of record of optionsXpress common stock as of the close of business on [—], 2011, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were [—] shares of optionsXpress common stock outstanding. Each share of optionsXpress common stock is entitled to one vote on each matter to be voted on at the special meeting. This proxy statement/prospectus and the enclosed form of proxy are first being mailed to optionsXpress stockholders on or about [—], 2011.
The holders of a majority of the outstanding shares of optionsXpress common stock at the close of business on the record date represented in person or by proxy will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Once a share is represented at the special meeting, it will be counted for the purpose of determining whether a quorum is present at the special meeting and any postponement or adjournment of the special meeting. However, if a new record date is set for the adjourned or postponed special meeting, then a new quorum must be established.
Under Delaware law, the merger cannot be completed unless the holders of a majority of the outstanding shares of optionsXpress common stock entitled to vote at the close of business on the record date for the special meeting vote for the approval and adoption of the merger agreement. Each outstanding share of optionsXpress common stock is entitled to one vote.
Approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of holders representing a majority of the shares present in person or by proxy at the special meeting.
Two of optionsXpress stockholders, G-Bar Limited Partnership and JG 2002 Delta Trust, which collectively held approximately 22.9% of the outstanding voting stock of optionsXpress as of March 18, 2011 and [—]% as of the record date, have each entered into a voting agreement obligating them to vote all of their shares of optionsXpress common stock “FOR” the approval and adoption of the merger agreement and “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.
Giving a proxy means that an optionsXpress stockholder authorizes the persons named in the enclosed proxy card to vote its shares at the special meeting in the manner it directs. An optionsXpress stockholder may
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vote by proxy or in person at the special meeting. If you hold your shares of optionsXpress common stock in your name as a stockholder of record, to submit a proxy, you as an optionsXpress stockholder may use one of the following methods:
| • | Submit a proxy by mail, by completing and returning the proxy card in the enclosed envelope. The envelope requires no additional postage if mailed in the United States; |
| • | Submit a proxy by Internet, by accessing the website specified on the proxy card and following the instructions on the proxy card; or |
| • | Submit a proxy by telephone, by dialing the toll-free number specified on the proxy card and following the instructions on the proxy card. |
If you are a stockholder of record and submit a proxy by any method set forth above, your shares will be voted at the special meeting as you indicate. If no instructions are indicated on your proxy card, your shares of optionsXpress common stock will be voted “FOR” the approval and adoption of the merger agreement and “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.
The persons named as proxies may propose and vote for one or more adjournments of the special meeting to solicit additional proxies.
If your shares are held in “street name” by your broker, you should instruct your broker how to vote your shares using the instructions provided by your broker. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker and they can give you directions on how to vote your shares. Under the applicable rules, brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to the approval of non-routine matters such as the approval and adoption of the merger agreement. Therefore, absent specific instructions from the beneficial owner of the shares, brokers are not empowered to vote the shares with respect to the approval and adoption of the merger agreement (i.e., “broker non-votes”). Shares of optionsXpress common stock held by persons attending the special meeting but not voting, or shares for which we have received proxies with respect to which holders have abstained from voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists but will have the same effect as a vote “Against” the approval and adoption of the merger agreement. Abstentions also will have the same effect as a vote “Against” any adjournment of the special meeting, but broker non-votes will have no effect with respect to the adjournment proposal.
You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must (i) advise the Corporate Secretary of optionsXpress of the revocation in writing, (ii) submit by mail a new proxy card dated after the date of the proxy you wish to revoke, or (iii) attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy. All written notices of revocation and other communications with respect to revocation of proxies should be addressed to optionsXpress as follows: Corporate Secretary, 311 West Monroe Street, Suite 1000, Chicago, Illinois 60606.
Please note that if you hold your shares in “street name” and you have instructed your broker to vote your shares, the options for revoking your proxy described in the paragraph above do not apply and instead you must follow the directions provided by your broker to change your vote.
Adjournments and Postponements
Although it is not expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than 30 days or, if there are multiple adjournments, 120 total days from the date fixed for the original meeting), other
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than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Whether or not a quorum exists, the holders of a majority of the shares of optionsXpress common stock present in person or represented by proxy at the special meeting and entitled to vote at the meeting may adjourn the special meeting. If no instructions are indicated on your proxy card, your shares of optionsXpress common stock will be voted “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow optionsXpress stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.
optionsXpress will pay the expenses of soliciting proxies to be voted at the special meeting, except that optionsXpress and Schwab have each agreed to share equally the costs of preparing, printing, filing and mailing this document, other than attorneys’ and accountants’ fees which will be paid by the party incurring the expense. In addition to soliciting proxies by mail, directors, officers and employees of optionsXpress may solicit proxies personally and by telephone, facsimile or other electronic means of communication. These persons will not receive additional or special compensation for such solicitation services. optionsXpress has engaged the firm of [—] to assist optionsXpress in the distribution and solicitation of proxies from optionsXpress stockholders and optionsXpress will pay [—] an estimated fee of $[—], as well as out-of-pocket expenses for its services.
optionsXpress will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions.
To reduce the expenses of delivering duplicate proxy materials to optionsXpress stockholders, optionsXpress is relying upon Securities and Exchange Commission rules that permit it to deliver only one proxy statement/prospectus to multiple stockholders who share an address unless optionsXpress received contrary instructions from any stockholder at that address. If you share an address with another stockholder and have received only one proxy statement/prospectus, you may write or call optionsXpress at the following address to request a separate copy of this document and optionsXpress will promptly send it to you at no cost to you: Investor Relations, optionsXpress Holdings, Inc., 311 W. Monroe St., Suite 1000, Chicago, Illinois 60606, or by telephoning optionsXpress at 1-877-280-9010. If your shares are held in the name of a bank, broker, or other nominee and you wish to receive separate copies of the proxy materials, please contact the bank, broker or other nominee.
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The following discussion contains material information about the merger. The discussion is subject, and qualified in its entirety by reference, to the merger agreement and financial advisor opinion attached as annexes to this proxy statement/prospectus. We urge you to read carefully this entire proxy statement/prospectus, including the merger agreement and financial advisor opinion attached as annexes to this proxy statement/prospectus, for a more complete understanding of the merger.
On March 18, 2011, Schwab and optionsXpress entered into the merger agreement, which provides for the acquisition by Schwab of optionsXpress through a merger of Neon Acquisition Corp. with and into optionsXpress. After the merger, optionsXpress will be the surviving corporation and will be a wholly-owned subsidiary of Schwab.
Upon completion of the merger, each outstanding share of optionsXpress common stock (other than excluded shares) will be converted into the right to receive 1.02 shares of Schwab common stock.
See “Proposal No. 1: The Merger Agreement,” beginning on page 59, for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the merger and the provisions for terminating or amending the merger agreement.
optionsXpress’ board of directors has, over the past several years, in discharge of its normal responsibilities, periodically reviewed with management and outside financial advisors and legal advisors the potential strategic direction for optionsXpress in light of its financial performance and market, economic, competitive, regulatory and other conditions and developments. These discussions have included the possibility of, among other things, business combinations involving optionsXpress and other brokerage companies, particularly in view of the increasing competition in the industry.
optionsXpress, at both the management and board of directors levels, has analyzed potential opportunities for strategic partnerships with companies operating in the same industry, as well as financial partnerships with potential investors, and acquisitions. In 2008, optionsXpress pursued a potential acquisition of another online options trading company. Ultimately, that company was instead acquired by a major online brokerage firm. In addition, at various times beginning in 2008 and continuing through 2010, optionsXpress has had discussions about possible business combinations with three potential strategic industry partners, not including Schwab. optionsXpress entered into confidentiality agreements with each of these parties. The parties did differing levels of diligence and engaged in differing levels of discussions regarding the terms of a potential deal. None of these discussions developed into a mutually agreeable merger proposal that would be beneficial to optionsXpress stockholders.
In connection with its discussions with one of these potential industry partners, optionsXpress formally engaged Evercore Group L.L.C. on July 28, 2010. Thereafter, Evercore analyzed several strategic alternatives for the optionsXpress board of directors and senior management. On October 6, 2010, Evercore made a presentation to the optionsXpress board of directors in which it gave an overview of the industry and analyzed the potential for increased competition in the near term from larger-scale competitors and potential partnerships, including each national market participant and select smaller participants. Evercore identified three “Tier 1” industry participants that it believed were most attractive as potential strategic partners because they offered the most synergy potential. optionsXpress had already explored a potential strategic partnership with two of the three industry participants identified by Evercore and, after significant discussions, had been unable to reach an agreement that would be beneficial to optionsXpress stockholders. Evercore identified Schwab as the third attractive Tier 1 potential partner. Evercore noted that, although Schwab had not been an active acquirer in the brokerage market, Schwab was a strong strategic fit, possessed significant long-term value potential and presented a high degree of synergy potential.
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Evercore’s presentation also noted that earnings in the online brokerage industry were at a cyclical low due to low interest rates and low trading activity, and that, as a result, a stock-for-stock merger would be relatively more advantageous for optionsXpress stockholders because they would still benefit if interest rates and/or trading activity recovered. The potential for a private equity backed take-private transaction was also discussed. However, based on the capital requirements, the lack of synergies, and the inability of optionsXpress stockholders to participate in a turnaround in interest rates and/or trading activity, Evercore did not believe that optionsXpress would be attractive to a private equity sponsor at a price that would benefit stockholders. Given the lack of upside going forward and potential synergies with private equity investors, the prior discussions with three strategic acquirers and Schwab’s perceived lack of acquisition appetite, Evercore concluded that an acquisition in the short term was unlikely. Evercore also presented an analysis on maintaining the status quo and not pursuing any strategic or financial transactions.
On November 11, 2010, Walter Bettinger, Chief Executive Officer of Schwab, met informally with James A. Gray, Chairman of optionsXpress and David Fisher, Chief Executive Officer of optionsXpress. The parties expressed interest in pursuing a possible business combination, and the parties agreed that the potential synergies made such a transaction worth exploring.
On November 15, 2010, optionsXpress entered into a mutual confidentiality agreement with Schwab and the parties began to exchange information for each party’s respective due diligence reviews.
On November 18, 2010, during a scheduled quarterly meeting, the optionsXpress board of directors discussed the preliminary conversations with Schwab regarding the potential transaction and received advice from representatives of Evercore and Kirkland & Ellis LLP, or Kirkland, optionsXpress’ outside legal counsel. At this time, the optionsXpress board of directors noted that, based upon its prior interactions with other strategic industry partners and the advice it had received from Evercore regarding the likelihood of a transaction with another strategic industry partner or with private equity investors and the strategic advantages of a transaction with Schwab, pursuing a potential transaction with Schwab was in the best interests of stockholders. Over the following several weeks, optionsXpress’ senior management met with senior management of Schwab to discuss potential business synergies and revenue enhancement opportunities as well as preliminary terms of a potential business combination.
On November 24, 2010, unrelated to the potential transaction with Schwab, the optionsXpress board of directors declared a dividend on optionsXpress common shares of $4.50 per share. There was specific discussion about the implications of this dividend on the trading price of the common shares and whether it would have any impact on the desirability of optionsXpress as an acquisition candidate. Based in part on Schwab’s reaction to the proposed dividend when management discussed the concept with Schwab, the optionsXpress board of directors concluded that the dividend would be neutral to positive to a potential acquirer’s evaluation of optionsXpress as an acquisition candidate because it would make optionsXpress’ capital structure more similar to likely acquirers and eliminate the question of how to value the significant amount of company cash that optionsXpress held prior to the dividend.
Over the following weeks, optionsXpress continued discussions with Schwab regarding a potential business combination. On December 9, 2010, Mr. Gray had a general discussion with Mr. Bettinger about price, without either side making a specific proposal. On December 17, 2010, Schwab proposed an ex-dividend price of approximately $17.00 per share. On January 5, 2011, Schwab for the first time proposed an exchange ratio of 1.0 share of Schwab common stock for each share of optionsXpress outstanding common stock. The optionsXpress board of directors held a special meeting on January 6, 2011, at which representatives from Kirkland highlighted the board of directors’ fiduciary obligations with regard to a business combination transaction and Evercore discussed the strategic fit of the transaction as well as pricing, timing and negotiation strategy. The board of directors asked numerous questions of each advisor. The board of directors and senior management viewed Schwab’s proposed pricing favorably and concluded that Schwab’s common stock was desirable consideration for purposes of the potential transaction because (i) optionsXpress stockholders would benefit more from future interest rate increases as Schwab stockholders, (ii) a Schwab combination presented opportunities for
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optionsXpress to expand its customer base, (iii) the Schwab transaction presented attractive synergies, and (iv) a Schwab acquisition would address the potential for increased competition in the near term from large scale competitors. The optionsXpress board of directors directed management to continue discussions with Schwab and endeavor to negotiate an improved offer.
Over the next several days, the parties negotiated the exchange ratio. On January 7, 2011, Messrs. Gray and Fisher countered Schwab’s 1.0 to one proposal with a fixed ratio of 1.075 to one. Schwab responded to this proposal with an offer of a fixed exchange ratio of 1.01 to one. Messrs. Gray and Fisher had a follow up conversation with Schwab on January 10, 2011, proposing a fixed exchange ratio of 1.02 to one, subject to approval by the optionsXpress board of directors. Schwab provisionally accepted the proposal. The provisionally agreed upon price represented a premium for optionsXpress stockholders of 22.9 percent based upon the respective closing price of each company’s stock on that day.
On January 11, 2011, in conjunction with the parties’ provisional agreement relating to the exchange ratio the previous day, Simpson Thacher & Bartlett LLP, or Simpson, outside legal counsel to Schwab, delivered a preliminary draft of the merger agreement. Notably, this initial draft did not contain a “fiduciary out” allowing the optionsXpress board of directors to terminate the agreement to accept a superior proposal. In addition, Simpson delivered an initial draft of a voting agreement, pursuant to which G-Bar Limited Partnership and JG 2002 Delta Trust, stockholders of optionsXpress controlled by Mr. Gray that collectively hold approximately 23 percent of optionsXpress’ outstanding common stock, would each agree to, among other things, vote its shares in favor of the adoption of the merger agreement and against any takeover bid by a third party.
On January 13, 2011, the board of directors of optionsXpress held a special meeting to discuss the potential transaction and the proposed merger agreement. During that meeting, Messrs. Gray and Fisher updated the board on the progress optionsXpress had made towards the potential transaction, specifically noting that the parties had negotiated an exchange ratio of 1.02 shares of Schwab common stock for each share of optionsXpress common stock. Messrs. Gray and Fisher also discussed with the board the potential synergies and revenue enhancements that the parties had identified, as well as potential operational benefits of a business combination with Schwab. Messrs. Gray and Fisher also noted that the parties had not completed their respective due diligence investigations and that there were open issues regarding certain terms of the merger agreement which the two parties were continuing to negotiate, including the “fiduciary out” to allow optionsXpress to terminate the transaction with Schwab if another suitor approached optionsXpress with a superior transaction offer. Representatives of Kirkland led a discussion relating to the fiduciary obligations of the board of directors with regard to the transaction. Members of the board of directors asked questions of Kirkland’s representatives regarding open terms of the merger agreement. Thereafter, representatives of Evercore presented an analysis of the transaction at the current pricing terms. The analysis indicated that the current pricing being discussed was within the range of fairness and that Schwab’s stock was attractive as an acquisition currency. The board of directors then asked a number of questions and discussed pricing, timing and strategy for continuing to negotiate the terms of the transaction. The board of directors directed management to continue work on the transaction and to report on progress to the board at a subsequent meeting.
Over the following days, the parties and their legal and financial advisors held periodic meetings regarding the proposed transaction and outstanding issues in diligence and the merger agreement. On January 15, 2011, optionsXpress concluded that it was unlikely that the parties would be able to reach agreement on a transaction in the near term, due to unresolved issues.
On January 17, 2011, the board of directors of optionsXpress held another special meeting to discuss developments in the potential transaction. Messrs. Gray and Fisher reported on the foregoing.
On or about March 7, 2011, negotiations among business principals resumed. Simpson circulated a revised draft of the merger agreement to Kirkland that included, for the first time, a “fiduciary out” provision. The parties and their legal and financial advisors held several discussions over the following days regarding the proposed transaction and outstanding issues in the merger agreement and the other transaction documents.
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On March 11, 2011, the board of directors of optionsXpress held a special meeting with Evercore and Kirkland to discuss the status of the merger agreement and related transaction documents and open issues remaining with respect to the proposed transaction. The board of directors directed management to continue working towards resolution of all outstanding items.
On March 17, 2011, the board of directors of optionsXpress held a special meeting to consider and approve the merger and the merger agreement. At the meeting, representatives of Kirkland reviewed the terms of the substantially final draft of the merger agreement and the voting agreement, and facilitated a discussion by the board of directors. The board of directors noted that the relative trading prices of optionsXpress’ and Schwab’s common stock had not changed materially since the initial agreement on an exchange ratio in January and accordingly the financial benefits of the transaction to optionsXpress’ stockholders remained favorable. Representatives of Evercore presented their financial analysis and recommendation and orally delivered the opinion of Evercore that, based on and subject to the various assumptions made, matters considered and limitations described in the opinion, as of March 17, 2011, the exchange ratio was fair, from a financial point of view, to the holders of optionsXpress’ common stock. Evercore’s opinion was subsequently confirmed in writing on March 18, 2011. Following discussions, the optionsXpress board of directors unanimously approved the merger agreement, the voting agreement and the transactions contemplated by those and other documents, and resolved to recommend that optionsXpress stockholders vote to adopt the merger agreement and approve the merger and related transactions.
On the evening of March 18, 2011, optionsXpress, Schwab and Neon Acquisition Corp. executed the merger agreement. In addition, optionsXpress and Schwab entered into the voting agreement with G-Bar Limited Partnership and JG 2002 Delta Trust on the same day.
On March 21, 2011, the parties issued a press release prior to the opening of the U.S. financial markets announcing the execution of the merger agreement and the voting agreement and the terms of the proposed acquisition of optionsXpress by Schwab.
Recommendation of the optionsXpress Board of Directors; Reasons for the Merger
Recommendation of the Board of Directors. On March 17, 2011, after careful consideration, the board of directors of optionsXpress unanimously (i) determined that the merger agreement, the terms thereof, the merger and the other transactions contemplated thereby are fair to and in the best interests of optionsXpress and the holders of optionsXpress common stock and (ii) approved and declared the advisability of the merger agreement. Accordingly, the optionsXpress board of directors recommends that stockholders vote “FOR” the proposal to adopt the merger agreement and “FOR” any adjournment proposal by the board.
Reasons for the Merger. The material factors and potential benefits of the merger considered by the members of the optionsXpress board of directors, each of which support the determination and recommendation set forth above, include the following:
| • | the recent and historical market prices of optionsXpress common stock, including the market price of optionsXpress common stock relative to those of other industry participants and general market indices, and the fact that the 1.02 exchange ratio of shares of Schwab common stock to each share of optionsXpress common stock represents a premium of approximately 20 percent to the average closing price of optionsXpress common stock during the 30 trading days ending on March 18, 2011, the last trading day before the announcement of the merger agreement, and a premium of approximately 21 percent based on the 90-day average price of optionsXpress common stock as of such date; |
| • | the potentially unique benefits of a business combination with Schwab, including revenue and cost synergies, business opportunities and, accordingly, the potential for increases in the value of Schwab stock going forward; |
| • | the overall attractiveness of Schwab stock as an acquisition currency; |
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| • | the potential for increased competition in the near future from larger-scale competitors; |
| • | optionsXpress’ right to compel Schwab to specifically perform its obligations under the merger agreement and thus to consummate the transaction upon satisfaction of the closing conditions; |
| • | the fact that the merger is not subject to a financing condition; |
| • | the likelihood that Schwab would close the transaction on the terms set forth in the merger agreement; |
| • | the overall terms of the proposed transaction; |
| • | the regular evaluation of strategic alternatives by the optionsXpress board of directors and its familiarity with optionsXpress’ business, operations, financial condition, competitive position, business strategy, and prospects, and general industry, economic, and market conditions, including the risks and uncertainties in optionsXpress’ business, in each case on a historical, current, and prospective basis; |
| • | the process conducted by optionsXpress over a period of years of exploring its strategic alternatives and the possible alternatives to the merger (including the possibility of continuing to operate optionsXpress as an independent company), the range of possible benefits to optionsXpress’ stockholders of such alternatives relative to optionsXpress’ prospects as an independent company, and the timing and likelihood of accomplishing the goals of any such alternatives; |
| • | subject to compliance with the terms and conditions of the merger agreement, the optionsXpress board of directors’ right to change its recommendation to vote in favor of the proposal to adopt the merger agreement and, prior to the adoption of the merger agreement by stockholders, to terminate the merger agreement in order to enter into a definitive agreement with a competing bidder with respect to a superior proposal, upon the payment to Schwab of a $41,900,000 termination fee (inclusive of expense reimbursement); and |
| • | The belief of the optionsXpress board of directors that the merger was more favorable to optionsXpress’ stockholders than the potential value that might result from other alternatives available, including continuing to operate in the ordinary course of business and the alternatives of pursuing other strategic initiatives. |
The board of directors of optionsXpress also considered potential risks and negative factors relating to the merger, including the following:
| • | the fact that after the merger optionsXpress’ current stockholders will be subject to the risks associated with being a Schwab stockholder; |
| • | the risks and costs to optionsXpress if the merger does not close, including the diversion of management and employee attention, potential employee attrition, the potential effect on business and customer relationships, and the transaction costs that will be incurred even if the merger is not consummated; |
| • | the restrictions in the merger agreement on the conduct of optionsXpress’ business prior to the consummation of the merger, requiring optionsXpress to conduct its business in the ordinary course of business consistent with past practices, subject to certain specific exceptions, which may delay or prevent optionsXpress from undertaking business opportunities that may arise pending consummation of the merger; |
| • | the provision in the merger agreement requiring optionsXpress to pay a termination fee of $41.9 million if the merger agreement is terminated under certain circumstances; |
| • | the fact that the merger agreement prevents optionsXpress from soliciting other acquisition proposals; and |
| • | the fact that certain officers and directors of optionsXpress have certain interests in the merger that are in addition to their interests as stockholders, which has the potential to influence their views and actions in connection with the merger proposal. |
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The foregoing discussion addresses the material factors considered by the optionsXpress board of directors in their consideration of the merger agreement and the merger, but is not exhaustive and does not present all of the factors considered by the board. In light of the number and variety of factors and the amount of information considered, the optionsXpress board of directors did not find it practicable to quantify, rank, or otherwise assign relative weights to the specific factors considered in reaching their determination. Individual members of the board may have given different weights to different factors. The determination to approve the merger agreement was made after consideration of all of the relevant factors as a whole, and the optionsXpress board of directors based their ultimate decisions to approve the merger agreement and the merger on their business judgment that the potential benefits of the merger to optionsXpress’ stockholders were not outweighed by the risks and other negative aspects of the merger.
Opinion of Evercore Group L.L.C., Financial Advisor to optionsXpress
On March 17, 2011, at a meeting of the optionsXpress board of directors, Evercore delivered to the optionsXpress board of directors an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion dated March 18, 2011, to the effect that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth in the opinion, the exchange ratio was fair, from a financial point of view, to the holders of the shares of optionsXpress common stock entitled to receive shares of Schwab common stock in the merger.
The full text of Evercore’s written opinion, dated March 18, 2011, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated by reference in its entirety into this proxy statement/prospectus. You are urged to read Evercore’s opinion carefully and in its entirety. Evercore’s opinion was directed to the optionsXpress board of directors and addresses only the fairness, from a financial point of view, of the exchange ratio to the holders of the shares of optionsXpress common stock entitled to receive shares of Schwab common stock in the merger. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to any holder of optionsXpress common stock as to how such stockholder should vote or act with respect to any matters relating to the merger. Evercore’s opinion does not address the relative merits of the merger as compared to other business or financial strategies that might be available to optionsXpress, nor does it address the underlying business decision of optionsXpress to engage in the merger.
In connection with rendering its opinion, Evercore, among other things:
| • | reviewed certain publicly available business and financial information relating to optionsXpress and Schwab that Evercore deemed to be relevant, including publicly available research analysts’ estimates; |
| • | reviewed certain non-public historical and projected financial statements and operating data relating to optionsXpress and Schwab prepared and furnished to Evercore by management of optionsXpress and Schwab, respectively; |
| • | discussed the past and current operations, financial projections and current financial condition of optionsXpress with management of optionsXpress (including management’s views on the risks and uncertainties of achieving such projections); |
| • | discussed the past and current operations, financial projections and current financial condition of Schwab with management of Schwab (including management’s views on the risks and uncertainties of achieving such projections); |
| • | reviewed the reported prices and the historical trading activity of optionsXpress common stock and Schwab common stock; |
| • | compared the financial performance of optionsXpress and Schwab and their respective stock market trading multiples with those of certain other publicly traded companies that Evercore deemed relevant; |
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| • | compared the financial performance of optionsXpress and the valuation multiples and premiums relating to the merger with those of certain other transactions that Evercore deemed relevant; |
| • | reviewed certain cost savings and operating synergies projected by the management of Schwab to result from the merger; |
| • | discussed the impact of changes to the operating environment on the projected financial performance of optionsXpress and Schwab with management of optionsXpress and Schwab, respectively; |
| • | reviewed a draft of the merger agreement dated March 16, 2011 and a draft of the voting agreement dated March 11, 2011, which Evercore assumed were in substantially final form and from which Evercore assumed the final form would not vary in any respect material to its analysis; and |
| • | performed such other analyses and examinations and considered such other factors that Evercore deemed appropriate. |
For purposes of its analysis and opinion, Evercore assumed and relied upon, without undertaking any independent verification of, the accuracy and completeness of all of the information publicly available, and all of the information supplied or otherwise made available to, discussed with, or reviewed by Evercore, and Evercore assumed no liability therefor. With respect to the projected financial data relating to optionsXpress and Schwab referred to above, Evercore assumed that such projected financial data had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of optionsXpress and Schwab, respectively, as to the future financial performance of optionsXpress and Schwab. Evercore expressed no view as to any projected financial data relating to optionsXpress or Schwab or the assumptions on which such projected financial data was based. With respect to periods not covered by the projected financial data received from Schwab, Evercore used, with the consent of the optionsXpress board of directors, publicly available research analysts’ estimates. Evercore relied, at the direction of the optionsXpress board of directors, without independent verification, upon the assessments of projected cost savings and operating synergies provided to Evercore by management of Schwab.
For purposes of rendering its opinion, Evercore assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct, that each party would perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the completion of the merger would be satisfied without material waiver or modification thereof. Evercore further assumed that all governmental, regulatory or other consents, approvals or releases necessary for the completion of the merger would be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on optionsXpress or the completion of the merger or materially reduce the benefits to the holders of optionsXpress common stock of the merger.
Evercore did not make or assume any responsibility for making any independent valuation or appraisal of the assets or liabilities of optionsXpress, nor was Evercore furnished with any such appraisals. Evercore did not evaluate the solvency or fair value of optionsXpress under any state or federal laws relating to bankruptcy, insolvency or similar matters. Evercore’s opinion was necessarily based upon information made available to it as of the date of its opinion and financial, economic, market and other conditions as they existed and as could be evaluated on the date of its opinion. It should be understood that subsequent developments may affect Evercore’s opinion and that Evercore has no obligation to update, revise or reaffirm its opinion.
Evercore was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness, from a financial point of view, of the exchange ratio to the holders of the shares of optionsXpress common stock entitled to receive shares of Schwab common stock in the merger. Evercore did not express any view on, and its opinion did not address, the fairness of the proposed transaction to, or any consideration received in connection therewith by, the holders of any other securities, creditors or other constituencies of optionsXpress, nor the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of optionsXpress, or any class of such persons, whether relative to the exchange ratio or otherwise. Evercore assumed that any modification to the structure of the transaction would not vary such
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structure in any respect material to its analysis. Evercore’s opinion did not address the relative merits of the merger as compared to other business or financial strategies that might be available to optionsXpress, nor did Evercore’s opinion address the underlying business decision of optionsXpress to engage in the merger. In arriving at its opinion, Evercore was not authorized to solicit, and did not solicit, interest from any third party with respect to the acquisition of any or all of the optionsXpress common stock or any business combination or other extraordinary transaction involving optionsXpress. Evercore expressed no opinion as to the price at which shares of optionsXpress or Schwab will trade at any time. Evercore’s opinion noted that Evercore is not a legal, regulatory, accounting or tax expert and that Evercore had assumed the accuracy and completeness of assessments by optionsXpress and its advisors with respect to legal, regulatory, accounting and tax matters.
Except as described above, the optionsXpress board of directors imposed no other instructions or limitations on Evercore with respect to the investigations made or the procedures followed by Evercore in rendering its opinion. Evercore’s opinion was only one of many factors considered by the optionsXpress board of directors in its evaluation of the merger and should not be viewed as determinative of the views of the optionsXpress board of directors or optionsXpress management with respect to the merger or the exchange ratio.
Set forth below is a summary of the material financial analyses reviewed by Evercore with the optionsXpress board of directors on March 17, 2011 in connection with rendering its opinion. The following summary, however, does not purport to be a complete description of the analyses performed by Evercore. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by Evercore. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before March 15, 2011 (the second to last trading day prior to March 17, 2011, the date on which the optionsXpress board of directors adopted a resolution to approve the merger), and is not necessarily indicative of current market conditions.
The following summary of financial analyses includes information presented in tabular format. These tables must be read together with the text of each summary in order to understand fully the financial analyses. The tables alone do not constitute a complete description of the financial analyses. Considering the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Evercore’s financial analyses.
Relative Valuation Summary
Based on various stand-alone valuations of optionsXpress and Schwab, discussed below, Evercore calculated an implied valuation range of common shares of Schwab for each common share of optionsXpress and compared these valuation ranges to the exchange ratio of 1.020. Except as indicated below, Evercore calculated each of these valuation ranges by dividing the end points of the appropriate reference range of equity values calculated for optionsXpress by the mid-point of the corresponding reference range of equity values for Schwab. For the Implied Exchange Ratio Valuation Range, Evercore adjusted the historical prices of optionsXpress common shares prior to December 28, 2010 to reflect the $4.50 special dividend.
Summary Relative Valuation
| Valuation Approach |
Implied Valuation Range | |
| Implied Exchange Ratio: LTM Low—High(1) |
0.624x – 1.002x | |
| Analyst Target Price |
0.658x – 1.062x | |
| Peer Group Trading (2011E P/E based valuation) |
0.884x – 1.002x | |
| Peer Group Trading (2011E TEV/EBITDA based valuation) |
0.843x – 1.054x | |
| PV of Estimated Equity Value at 12/31/12 and 12/31/13 |
0.646x – 0.732x | |
| Precedent Transactions(2) |
0.724x – 0.919x | |
| Discounted Dividend Analysis of optionsXpress / PV of Estimated Equity Value of Schwab(3) |
0.786x – 0.881x | |
| Premiums Paid(4) |
1.052x – 1.136x |
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| (1) | Represents the high and low values calculated by dividing the closing share price of optionsXpress by the closing share price of Schwab for each trading day in the twelve month period ending on March 15, 2011. |
| (2) | Calculated using the average of the reference range of equity values for optionsXpress calculated in the Precedent Transaction Analysis, using transaction multiples based on latest twelve months financial data for (a) Revenue, (b) EBITDA + synergies, and (c) relating to the 2009 acquisition of thinkorswim Group Inc. by TD Ameritrade Holding Corporation, as adjusted, all divided by the average of the reference range of equity values for Schwab calculated in the Peer Group Trading Analysis. |
| (3) | Calculated using the end points of the reference range of equity values for optionsXpress calculated in the Discounted Dividend Analysis divided by the mid-point of the reference range of equity values for Schwab calculated using the Present Value of Future Stock Price Analysis at December 31, 2013. |
| (4) | Calculated by applying a range of premiums from 25% to 35% to the ratio of optionsXpress’ closing share price to Schwab’s closing share price, as calculated on March 15, 2011. |
Historical Exchange Ratio Analysis. Evercore calculated the average implied exchange ratio by dividing the historical per share price of optionsXpress common stock by the historical per share price of Schwab common stock over the period from optionsXpress’ January 27, 2005 IPO to March 15, 2011 and over the five-year, three-year, two-year, one-year, six-month and one-month periods prior to and including March 15, 2011.
| Average Exchange Ratio(1) | Implied Premium Represented by 1.02 Exchange Ratio |
|||||||
| Current |
0.841x | 21.2 | % | |||||
| 1-Month |
0.847x | 20.4 | % | |||||
| 6-Month |
0.829x | 23.0 | % | |||||
| 1-Year |
0.776x | 31.5 | % | |||||
| 2-Year |
0.703x | 45.1 | % | |||||
| 3-Year |
0.696x | 46.5 | % | |||||
| 5-Year |
0.880x | 16.0 | % | |||||
| Since 1/27/05 |
0.928x | 9.9 | % | |||||
| (1) | optionsXpress prices prior to December 28, 2010 adjusted to reflect $4.50 special dividend. |
optionsXpress Stand-alone Valuation
Historical Share Price Performance Analysis. Evercore considered the historical share price performance of optionsXpress common stock over the period from optionsXpress’ January 27, 2005 IPO to March 15, 2011 and over the five-year, three-year, one-year, six-month, three-month, one-month and one-week periods prior to and including March 15, 2011.
optionsXpress Historical Share Price Performance
| Period |
Share Price Performance(1) | |||
| 1-Week |
(7.1 | %) | ||
| 1-Month |
(6.2 | %) | ||
| 3-Month |
(0.9 | %) | ||
| 6-Month |
33.7 | % | ||
| 1-Year |
18.4 | % | ||
| 3-Year |
(0.3 | %) | ||
| 5-Year |
(37.4 | %) | ||
| Since IPO Pricing |
25.2 | % | ||
| (1) | optionsXpress prices prior to December 28, 2010 adjusted to reflect $4.50 special dividend. |
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Research Analyst Stock Price Targets and Recommendations. Evercore reviewed publicly available equity research on optionsXpress published by ten Wall Street investment banks other than Evercore, and analyzed the price targets for optionsXpress common stock included in those reports. These targets reflect each analyst’s estimate of the future public market trading price of optionsXpress common stock and are not discounted to reflect present values. Evercore noted that undiscounted equity analyst price targets of optionsXpress common stock as of March 15, 2011 ranged from $13.00 to $21.00 per share, with a mean of $15.93 per share and a median of $16.00 per share. Evercore discounted these price targets to present value as of March 15, 2011 using a discount rate of 10.5%, taking into consideration, among other things, a cost of equity calculation. This analysis indicated a reference range of equity values for optionsXpress common stock of $11.76 to $19.00 per share. The price targets published by equity research analysts do not necessarily reflect current market trading prices for optionsXpress common stock and these price targets are subject to numerous uncertainties, including the future financial performance of optionsXpress and future market conditions. Evercore also provided a summary of the recommendations of the equity research analysts with regard to optionsXpress common stock, which included one “buy” recommendation, three “sell” recommendations and six “hold” recommendations.
Peer Group Trading Analysis. In order to assess how the public market values shares of similar publicly traded companies, Evercore reviewed and compared specific financial and operating data relating to optionsXpress to that of a group of selected peer companies that Evercore deemed to have certain characteristics that are similar to those of optionsXpress. As part of its peer group trading analysis, Evercore calculated and analyzed the multiple of current stock price to estimated 2011 and 2012 earnings per share (commonly referred to as a P/E multiple) for optionsXpress and each member of its peer group. Evercore also calculated and analyzed the multiple of enterprise value to estimated 2011 and 2012 earnings before interest, taxes, depreciation and amortization, or EBITDA (commonly referred to as an EBITDA multiple), for optionsXpress and each member of its peer group. The companies that Evercore deemed to have certain characteristics similar to those of optionsXpress were Schwab, TD Ameritrade Holding Corporation, Interactive Brokers Group, Inc., E*TRADE Financial Corporation and TradeStation Group, Inc. For the purpose of calculating enterprise value, Evercore added each company’s debt net of excess cash, based on its most recent publicly available balance sheet, to its market equity value. For each company, the amount of excess cash was adjusted to reflect estimated regulatory requirements.
The analysis of current stock price to estimated earnings per share indicated that, for the selected peer group, the 2011E P/E multiples ranged from 16.7x to 27.1x and the 2012E P/E multiples ranged from 13.7x to 15.5x, in each case based on Institutional Brokers’ Estimate System, or IBES, mean consensus estimates. This compared to a 2011E P/E multiple of 15.9x for optionsXpress and a 2012E P/E multiple of 13.1x for optionsXpress, in each case based on optionsXpress current share price and IBES mean consensus estimates. Evercore noted that the P/E multiple implied by the exchange ratio for optionsXpress estimated 2011 and 2012 earnings per share, in each case based on estimates provided by optionsXpress management, was 19.6x and 14.7x, respectively.
Based on the above analysis, Evercore then applied a range of P/E multiples from 15x to 17x to the 2011 EPS estimate provided by optionsXpress management. This analysis implied a reference range of equity values for optionsXpress common stock of $13.92 to $15.77 per share.
The analysis of financial multiples indicated that, for the selected peer group, 2011E EBITDA multiples ranged from 8.6x to 12.8x and 2012E EBITDA multiples ranged from 5.4x to 10.1x, in each case based on IBES mean consensus estimates. This compared to a 2011E EBITDA multiple of 8.8x and a 2012E EBITDA multiple of 7.3x for optionsXpress, in each case based on IBES mean consensus estimates. Evercore noted that, with respect to the merger, the implied enterprise value as a multiple of optionsXpress estimated 2011 and 2012 EBITDA, in each case based on estimates provided by optionsXpress management, was 10.6x and 8.1x, respectively.
Based on the above analysis, Evercore then applied a range of EBITDA multiples from 8x to 10x to the 2011 EBITDA estimate provided by optionsXpress management. This analysis implied a reference range of equity values for optionsXpress common stock of $13.74 to $17.18 per share.
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Evercore selected the peer companies identified above because their respective businesses and operating profiles are reasonably similar to that of optionsXpress. However, because of the inherent differences between the businesses, operations and prospects of optionsXpress, on the one hand, and the businesses, operations and prospects of the selected peer companies on the other, no company is exactly the same as optionsXpress.
Historical Next Twelve Months Price-to-Earnings Analysis. Evercore compared the P/E multiples for optionsXpress and Schwab based on IBES mean consensus estimated next twelve months earnings per share over the five-year, three-year, one-year, six-month, three-month, one-month, and one-week periods prior to and including March 15, 2011. For the same time periods, Evercore calculated the premium of Schwab’s P/E multiples to the P/E multiples of optionsXpress, TD Ameritrade and the average of optionsXpress and TD Ameritrade.
| Average P/E | Schwab Premium to: | |||||||||||||||||||||||
| optionsXpress(1) | Schwab | TD Ameritrade |
optionsXpress | TD Ameritrade |
Average | |||||||||||||||||||
| Current |
15.9x | 21.8x | 17.2x | 37 | % | 27 | % | 32 | % | |||||||||||||||
| 1-Week |
17.0x | 22.7x | 18.3x | 33 | % | 24 | % | 29 | % | |||||||||||||||
| 1-Month |
17.4x | 23.1x | 18.6x | 33 | % | 24 | % | 28 | % | |||||||||||||||
| 3-Month |
17.2x | 22.3x | 18.3x | 30 | % | 22 | % | 26 | % | |||||||||||||||
| 6-Month |
16.1x | 21.5x | 17.0x | 34 | % | 27 | % | 31 | % | |||||||||||||||
| 1-Year |
13.8x | 22.1x | 15.8x | 66 | % | 41 | % | 53 | % | |||||||||||||||
| 3-Year |
10.7x | 21.3x | 14.9x | 122 | % | 44 | % | 83 | % | |||||||||||||||
| 5-Year |
13.3x | 20.9x | 15.1x | 83 | % | 40 | % | 61 | % | |||||||||||||||
| (1) | optionsXpress prices prior to December 28, 2010 adjusted to reflect $4.50 special dividend. |
Present Value of Future Stock Price Analysis. Evercore performed a present value of illustrative future stock price analysis of optionsXpress based on the optionsXpress management projections provided to Evercore by optionsXpress management. In this analysis, Evercore calculated the share price of optionsXpress at year-end 2012 and year-end 2013 by applying a range of P/E multiples from 15x to 17x to optionsXpress’ projected earnings per share for 2013 and 2014, respectively. These illustrative future stock prices were discounted to present value as of March 15, 2011 using a range of discount rates from 9.5% to 11.5%, taking into consideration, among other things, a cost of equity calculation. This analysis implied a reference range of equity values for optionsXpress common stock of $17.78 to $20.15 per share based on the share price calculated at year-end 2012 and $19.22 to $21.78 per share based on the share price calculated at year-end 2013, in each case using a discount rate of 10.5%. Evercore derived these ranges of P/E multiples and discount rates based on, among other things, its professional judgment and experience, including its understandings of the size, product diversity, relative profitability and expected growth of optionsXpress and the selected peer companies to which Evercore compared optionsXpress in the optionsXpress Peer Group Trading Analysis and the multiples and discount rates of those peer companies.
Discounted Dividend Analysis. Evercore performed a discounted dividend analysis for optionsXpress based on the projections provided by optionsXpress management and IBES mean consensus estimates. This analysis was based on the sum of the present value of projected dividendable cash flow for optionsXpress on a stand-alone basis from March 15, 2011 through year-end 2014 and the present value of the terminal value as a multiple of optionsXpress’ estimated 2015 net income. Evercore calculated a range of terminal values of optionsXpress using a range of discount rates from 9.5% to 11.5%, taking into consideration, among other things, a cost of equity calculation, and a range of terminal value net income multiples from 15x to 17x. This analysis implied a reference range of equity values for optionsXpress common stock of $23.25 to $26.06 per share, using a discount rate of 10.5%. Evercore derived these ranges of terminal value net income multiples and discount rates based on, among other things, its professional judgment and experience, including its understandings of the size, product diversity, relative profitability and expected growth of optionsXpress and the selected peer companies to which Evercore compared optionsXpress in the optionsXpress Peer Group Trading Analysis and the multiples and discount rates of those peer companies.
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Selected Precedent M&A Transactions Analysis. Evercore calculated valuation multiples based on publicly-available information for ten transactions involving target companies that Evercore deemed to have certain characteristics that are similar to those of optionsXpress and compared them to the multiples implied in the merger. However, none of the selected transactions or the selected companies that participated in the selected transactions are directly comparable to the proposed merger.
| Date Announced |
Acquiror |
Target | ||
| 1/8/2009 |
TD Ameritrade | thinkorswim Group | ||
| 11/6/2007 |
ING Direct | ShareBuilder | ||
| 9/19/2006 |
INVESTools | thinkorswim Group | ||
| 9/29/2005 |
E*TRADE | BrownCo, LLC | ||
| 8/8/2005 |
E*TRADE | Harrisdirect LLC | ||
| 6/22/2005 |
Ameritrade | TD Waterhouse | ||
| 4/8/2002 |
Ameritrade Holding Corp. | Datek Online Holding Corporation | ||
| 11/28/2001 |
Bank of Montreal | CSFBdirect, Inc. | ||
| 7/31/2001 |
Ameritrade Holding Corp. | National Discount Brokers Corporation | ||
| 10/12/2000 |
Deutsche Bank AG | National Discount Brokers Corporation |
| Mean | Median | High | Low | optionsXpress –At Proposed Exchange Ratio |
||||||||||||||||
| Transaction Value/LTM Revenue |
4.3x | 3.7x | 8.0x | 2.2x | 4.7x | |||||||||||||||
| Transaction Value/LTM EBITDA |
16.7x | 18.6x | 58.3x | 5.7x | 12.6x | |||||||||||||||
| Transaction Value/(LTM EBITDA + Total Synergies) |
4.4x | 3.7x | 6.9x | 3.2x | 6.4x | |||||||||||||||
Based on the above analysis, Evercore applied a range of transaction multiples from 3.5x to 4.5x latest twelve months, or LTM, revenue to optionsXpress 2010 revenue. This analysis implied a reference range of equity values for optionsXpress common stock of $13.67 to $17.58 per share.
Based on the above analysis, Evercore also applied a range of transaction multiples from 16.5x to 18.5x LTM EBITDA to optionsXpress 2010 EBITDA. This analysis implied a reference range of equity values for optionsXpress common stock of $23.88 to $26.77 per share. However, Evercore advised the optionsXpress board of directors that this valuation range fails to take into account synergies and is thus the least relevant of the valuation ranges based on analysis of precedent transactions.
Lastly, based on the above analysis, Evercore applied a range of transaction multiples from 3.5x to 4.5x LTM EBITDA-plus-synergies to optionsXpress 2010 EBITDA-plus-synergies. The synergy estimate used was provided to Evercore by the management of Schwab. This analysis implied a reference range of equity values for optionsXpress common stock of $9.90 to $12.73 per share.
For each of the above analyses, Evercore adjusted the 2010 results for optionsXpress to exclude certain non-recurring gains related to a prior acquisition and the initial public offering of CBOE Holdings, Inc.
Evercore performed more detailed analysis based on TD Ameritrade’s 2009 acquisition of thinkorswim Group Inc., or the TOS Transaction, computing the implied value per optionsXpress share based on the multiples paid for the brokerage portion of thinkorswim. The analysis excluded thinkorswim’s education business to more accurately reflect the value of thinkorswim’s core brokerage business. Including the education business would have resulted in lower multiples for the TOS transaction. Because of the depressed state of the market at the time of the TOS Transaction, Evercore increased the multiples upward for the equity portion of the consideration in the TOS Transaction, based on the ratio of TD Ameritrade’s 2011E P/E multiple at March 15, 2011 to its 2009E P/E multiple at January 8, 2009, leading to higher implied values per optionXpress share.
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Analysis Based on TOS Transaction
| Adjusted TOS Brokerage Multiples |
Implied Value/optionsXpress Share |
|||||||
| Revenue |
3.7x | $ | 12.92 | |||||
| EBITDA |
7.3x | $ | 11.21 | |||||
| EBITDA + Synergies |
4.7x | $ | 13.85 | |||||
Based on the above analysis, Evercore implied a reference range of equity values for optionsXpress common stock of $11.21 to $13.85 per share.
Analysis of Historical Premiums Paid. Evercore reviewed the premiums to be paid in acquisitions of U.S. companies announced from January 1, 2006 until March 15, 2011 with transaction equity values between $500 million and $1.5 billion, excluding merger of equals transactions and transactions where less than 100% of the target was acquired. Using information from Securities Data Corp. and FactSet Research Systems Inc., premiums paid were calculated as the percentage by which the per share consideration paid in each such transaction exceeded the closing market share prices of the target companies one day, one week and four weeks prior to transaction announcements. These results are summarized as follows:
| Premium Paid (100% Stock Consideration) |
Premium Paid (All Transactions) |
|||||||||||||||||||||||||
| 1 Day Prior |
1 Week Prior |
4 Weeks Prior |
1 Day Prior |
1 Week Prior |
4 Weeks Prior |
|||||||||||||||||||||
| Number of Transactions |
7 | 7 | 7 | Number of Transactions | 94 | 94 | 94 | |||||||||||||||||||
| Mean |
32.7 | % | 34.3 | % | 32.7 | % | Mean | 33.3 | % | 35.9 | % | 41.0 | % | |||||||||||||
| Median |
23.9 | % | 38.1 | % | 36.3 | % | Median | 25.4 | % | 29.8 | % | 31.3 | % | |||||||||||||
| High |
64.5 | % | 60.0 | % | 48.2 | % | High | 148.6 | % | 220.2 | % | 301.5 | % | |||||||||||||
| Low |
17.7 | % | 14.7 | % | 13.5 | % | Low | 1.6 | % | 1.7 | % | 1.1 | % | |||||||||||||
| optionsXpress – At Proposed Exchange Ratio |
21.2 | % | 12.6 | % | 13.7 | % | optionsXpress – At Proposed Exchange Ratio |
21.2 | % | 12.6 | % | 13.7 | % | |||||||||||||
Based on the above analysis, Evercore applied a range of premiums from 25% to 35% to the closing share price of optionsXpress common stock on March 15, 2011. This analysis implied a reference range of equity values for optionsXpress common stock of $18.78 to $20.28 per share.
Schwab Stand-alone Valuation
Historical Share Price Performance Analysis. Evercore considered historical data with regard to the share price performance of Schwab common stock over the five-year, three-year, one-year, six-month, three-month, one-month and one-week periods prior to and including March 15, 2011.
Schwab Historical Share Price Performance
| Period |
Share Price Performance | |||
| 1-Week |
(6.6 | %) | ||
| 1-Month |
(7.9 | %) | ||
| 3-Month |
6.3 | % | ||
| 6-Month |
28.2 | % | ||
| 1-Year |
(2.1 | %) | ||
| 3-Year |
(4.9 | %) | ||
| 5-Year |
5.4 | % | ||
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Research Analyst Stock Price Targets and Recommendations. Evercore reviewed publicly available equity research on Schwab published by 22 Wall Street investment banks other than Evercore, and analyzed the price targets for Schwab common stock included in those reports. These targets reflect each analyst’s estimate of the future public market trading price of Schwab common stock and are not discounted to reflect present values. Evercore noted that undiscounted equity analyst price targets of Schwab common stock as of March 15, 2011 ranged from $16.00 to $23.00 per share, with a mean of $20.27 per share and a median of $20.00 per share. Evercore discounted these price targets to present value as of March 15, 2011 using a discount rate of 9%, taking into consideration, among other things, a cost of equity calculation. This analysis indicated a reference range of equity values for Schwab common stock of $14.68 to $21.10 per share. The price targets published by equity research analysts do not necessarily reflect current market trading prices for Schwab common stock and these price targets are subject to numerous uncertainties, including the future financial performance of Schwab and future market conditions. Evercore also provided a summary of the recommendations of the equity research analysts with regard to Schwab common stock, which included eleven “buy” recommendations, one “sell” recommendation and ten “hold” recommendations.
Peer Group Trading Analysis. In order to assess how the public market values shares of similar publicly traded companies, Evercore reviewed and compared specific financial and operating data relating to Schwab to that of a group of selected peer companies that Evercore deemed to have certain characteristics that are similar to those of Schwab. As part of its peer group trading analysis, Evercore calculated and analyzed 2011E P/E multiples for Schwab and each member of its peer group. Evercore also calculated and analyzed 2011E EBITDA multiples for Schwab and each member of its peer group using the same methodology discussed in the optionsXpress “Peer Group Trading Analysis” section above. The companies that Evercore deemed to have certain characteristics similar to those of Schwab were optionsXpress, TD Ameritrade, Interactive Brokers, E*TRADE and TradeStation. The analysis of P/E multiples indicated that, for the selected peer group, the 2011E P/E multiples ranged from 15.9x to 27.1x, in each case based on IBES mean consensus estimates. This compared to a 2011E P/E multiple of 21.8x for Schwab, based on Schwab’s current share price and IBES mean consensus estimates.
Based on the above analysis, Evercore then applied a range of P/E multiples from 20x to 23x to the 2011 EPS estimate for Schwab. This analysis implied a reference range of equity values for Schwab common stock of $14.64 to $16.84 per share.
The analysis of financial multiples indicated that, for the selected peer group, 2011E EBITDA multiples ranged from 8.6x to 12.8x based on IBES mean consensus estimates. This compared to a 2011E EBITDA multiple of 12.6x for Schwab, based on IBES mean consensus estimates.
Based on the above analysis, Evercore then applied a range of EBITDA multiples from 12x to 14x to the 2011 EBITDA estimate for Schwab. This analysis implied a reference range of equity values for Schwab common stock of $14.99 to $17.60 per share.
The 2011 estimates for Schwab used by Evercore were based on information provided by Schwab management, which included the Schwab 2011 Financial Plan presented to the Schwab board of directors on January 27, 2011, updated to reflect the Schwab Q1 2011 Net Income Forecast as of March 2011. Schwab provided no estimates for any subsequent period.
Evercore selected the peer companies identified above because their respective businesses and operating profiles are reasonably similar to that of Schwab. However, because of the inherent differences between the businesses, operations and prospects of Schwab, on the one hand, and the businesses, operations and prospects of the selected peer companies on the other, no company is exactly the same as Schwab.
Present Value of Future Stock Price Analysis. Evercore performed a present value of illustrative future stock price analysis of Schwab using the IBES mean consensus estimate for 2013 and a 2014 estimate calculated
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by growing the 2013 IBES mean consensus estimate at the IBES mean consensus long-term growth rate. In this analysis, Evercore calculated the share price of Schwab at year-end 2012 and year-end 2013 by applying a range of P/E multiples from 20x to 23x to Schwab’s projected earnings per share for 2013 and 2014, respectively. These illustrative future stock prices were discounted to present value as of March 15, 2011 using a range of discount rates from 8% to 10% , taking into consideration, among other things, a cost of equity calculation, and were increased to reflect the present value of the future dividends per share projected by IBES to be paid by Schwab over the relevant projection period. This analysis implied a reference range of equity values for Schwab common stock of $25.81 to $29.62 per share based on the stock price calculated at year-end 2012 and $27.56 to $31.58 per share based on the stock price calculated at year-end 2013, in each case using a discount rate of 9%. Evercore derived these ranges of P/E multiples and discount rates based on, among other things, its professional judgment and experience, including its understandings of the size, product diversity, relative profitability and expected growth of Schwab and the selected peer companies to which Evercore compared Schwab in the Schwab Peer Group Trading Analysis and the multiples and discount rates of those peer companies.
Sensitivity to Environment. Evercore estimated the prospective effect of a variety of potential external occurrences on the respective 2011E earnings per share of optionsXpress and Schwab.
| % Change in 2011E Earnings per Share | ||||||||
| optionsXpress 2011E | Schwab 2011E | |||||||
| Fed Funds Increase by 1.0% |
28 | % | 68 | % | ||||
| Incremental 10% Market Appreciation (Immediate) |
0 | % | 15 | % | ||||
| 10% Increase in Account Trading Activity |
17 | % | 5 | % | ||||
| 10% Decline in Pricing |
(19 | %) | (6 | %) | ||||
General
In connection with the review of the merger by the optionsXpress board of directors, Evercore performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary described above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Evercore’s opinion. In arriving at its fairness determination, Evercore considered the results of all the analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Evercore made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all the analyses. In addition, Evercore may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described above should therefore not be taken to be Evercore’s view of the value of optionsXpress or Schwab or their respective common stocks. No company used in the above analyses as a comparison is directly comparable to optionsXpress or Schwab, and no transaction used is directly comparable to the transactions contemplated by the merger agreement. Further, in evaluating comparable transactions, Evercore made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of optionsXpress, Schwab and Evercore, such as the impact of competition on optionsXpress and Schwab and their respective industries generally, industry growth and the absence of any material adverse change in the financial condition of optionsXpress and Schwab or in the markets generally.
Evercore prepared these analyses for the purpose of providing an opinion to the optionsXpress board of directors as to the fairness, from a financial point of view, of the exchange ratio to the holders of the shares of optionsXpress common stock entitled to receive shares of Schwab common stock in the merger. These analyses do not purport to be appraisals or to necessarily reflect the prices at which the business or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are
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inherently subject to uncertainty and are based upon numerous factors, assumptions with respect to industry performance, general business and economic conditions and other matters or events beyond the control of optionsXpress, Schwab and Evercore, none of optionsXpress, Schwab or Evercore assumes responsibility if future results are materially different from those forecast. The exchange ratio of shares of Schwab common stock to be received by the holders of the shares of optionsXpress common stock pursuant to the merger agreement was determined through arm’s-length negotiations between optionsXpress and Schwab and was approved by the optionsXpress board of directors. Evercore did not recommend any specific exchange ratio to the optionsXpress board of directors or the Schwab board of directors or that any given exchange ratio constituted the only appropriate exchange ratio.
Pursuant to its engagement letter, Evercore received a fee of $3 million for delivery of its fairness opinion, which was to be paid for delivery of a fairness opinion regardless of the conclusion reached in the opinion. An additional fee of $12 million becomes payable to Evercore promptly upon completion of the transaction. Furthermore, optionsXpress has agreed to reimburse Evercore for its reasonable expenses up to $30,000 (with additional amounts subject to approval by optionsXpress) incurred in connection with the engagement and to indemnify Evercore for certain liabilities arising out of its engagement. The optionsXpress board of directors engaged Evercore as its financial advisor because it is an internationally recognized investment banking and advisory firm that has substantial experience in transactions similar to the merger. Evercore, as part of its investment banking business, is continuously engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, competitive biddings and valuations for corporate, estate and other purposes. During the two year period prior to the date of Evercore’s opinion, Evercore and its affiliates provided financial advisory services to optionsXpress, but have not received any fees for the rendering of those services or any reimbursement of expenses. During the two year period prior to the date of Evercore’s opinion, no material relationship existed between Evercore and its affiliates and Schwab pursuant to which compensation was received by Evercore or its affiliates as a result of such a relationship. Evercore may provide financial or other services to optionsXpress or Schwab in the future and in connection with any such services Evercore may receive compensation. In the ordinary course of its business, Evercore and its affiliates may, from time to time, trade in the securities or the indebtedness of optionsXpress, Schwab and their affiliates or any currencies or commodities (or derivative thereof) for its own account, the accounts of investment funds and other clients under the management of Evercore and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities, indebtedness, currencies or commodities (or derivative thereof) for any such account.
optionsXpress does not as a matter of course make public projections as to future revenues, earnings or other results. However, optionsXpress has included the prospective financial information set forth below to provide its stockholders access to certain non-public financial projections provided to the optionsXpress board of directors, Schwab and optionsXpress’ financial advisor for purposes of considering and evaluating the merger. The board of directors of optionsXpress, its financial advisor and Schwab were provided with all of the financial projections set forth below. The accompanying prospective financial information was not prepared with a view toward public disclosure or a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but in the view of optionsXpress, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents to the best of optionsXpress’ knowledge and belief the expected course of action of optionsXpress. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this proxy statement/prospectus are cautioned not to place undue reliance on the prospective information. The inclusion of this information should not be regarded as an indication that optionsXpress’ board of directors, Schwab or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results.
Neither optionsXpress’ or Schwab’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information
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contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the prospective financial information.
The following table presents selected projected financial data for the fiscal years ended December 31 of the year indicated. The projections were prepared by optionsXpress’ management in November 2010. The projections do not take into account any circumstances, events or accounting pronouncements occurring after the date they were prepared, nor does optionsXpress intend to update or otherwise revise the projected financial information to reflect circumstances arising since its preparation or to reflect the occurrence of unanticipated events.
| Management Forecast | 2010-2014E | |||||||||||||||||||
| 2011E | 2012E | 2013E | 2014E | CAGR | ||||||||||||||||
| (in millions, except DARTs, customer assets and EPS) | ||||||||||||||||||||
| DARTs |
50,589 | 55,501 | 60,629 | 66,532 | 11.0 | % | ||||||||||||||
| % Growth |
15.2 | % | 9.7 | % | 9.2 | % | 9.7 | % | ||||||||||||
| Customer Assets (in billions) |
$ | 8.9 | $ | 10.2 | $ | 11.9 | $ | 13.9 | 15.3 | % | ||||||||||
| % Growth |
13.1 | % | 15.5 | % | 16.2 | % | 16.6 | % | ||||||||||||
| Revenue |
$ | 244.2 | $ | 291.9 | $ | 327.1 | $ | 371.0 | 13.2 | % | ||||||||||
| % Growth |
7.9 | % | 19.6 | % | 12.0 | % | 13.4 | % | ||||||||||||
| Pre-tax Income |
$ | 86.4 | $ | 115.8 | $ | 133.9 | $ | 161.1 | 21.1 | % | ||||||||||
| % Growth |
15.3 | % | 34.0 | % | 15.6 | % | 20.3 | % | ||||||||||||
| % Margin |
35.4 | % | 39.7 | % | 40.9 | % | 43.4 | % | ||||||||||||
| EBITDA |
$ | 99.5 | $ | 129.8 | $ | 148.6 | $ | 175.4 | 20.3 | % | ||||||||||
| % Growth |
18.7 | % | 30.5 | % | 14.5 | % | 18.0 | % | ||||||||||||
| % Margin |
40.7 | % | 44.5 | % | 45.4 | % | 47.3 | % | ||||||||||||
| Net Income |
$ | 54.0 | $ | 72.4 | $ | 83.7 | $ | 100.7 | 20.7 | % | ||||||||||
| % Growth |
13.7 | % | 34.0 | % | 15.6 | % | 20.3 | % | ||||||||||||
| % Margin |
22.1 | % | 24.8 | % | 25.6 | % | 27.1 | % | ||||||||||||
| EPS |
$ | 0.93 | $ | 1.23 | $ | 1.42 | $ | 1.69 | 19.8 | % | ||||||||||
| % Growth |
12.8 | % | 33.1 | % | 14.9 | % | 19.5 | % | ||||||||||||
While the summary financial projections set forth above were prepared in good faith by members of optionsXpress’ management, no assurance can be given regarding future events. Therefore, these financial projections may not be necessarily predictive of actual future operating results, and this information should not be relied on as such. The estimates and assumptions underlying these financial projections involve judgments with respect to, among other things, future economic, competitive and financial market conditions and future business decisions as well as additional matters specific to the optionsXpress’ business, many of which are beyond optionsXpress’ control. The projections cover multiple years and such information by its nature becomes more speculative with each successive year. Additionally, the financial projections in this section were not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information or published guidelines of the Securities and Exchange Commission regarding financial projections. The financial projections are not historical fact. In light of the foregoing, optionsXpress stockholders are cautioned not to unduly rely on these summary financial projections.
The inclusion of these financial projections should not be interpreted as an indication that optionsXpress considers this information necessarily predictive of actual future results, and this information should not be relied on for that purpose. These projections are not included in this document in order to induce any stockholder of optionsXpress to vote to approve the merger agreement, or to impact any investment decision with respect to its common stock. See “Information Regarding Forward-Looking Statements” beginning on page 23.
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OPTIONSXPRESS DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THESE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING SINCE THEIR PREPARATION OR TO REFLECT THE OCCURRENCE OF SUBSEQUENT EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF THE UNDERLYING ASSUMPTIONS ARE NO LONGER APPROPRIATE.
Interests of optionsXpress’ Directors and Executive Officers in the Merger
In considering the recommendations of the optionsXpress board of directors, you should be aware that certain of optionsXpress’ directors and executive officers have interests in the transaction that are different from, or in addition to, the interests of optionsXpress stockholders generally. These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below. The board of directors of optionsXpress was aware of these potential conflicts of interest and considered them, among other matters, in reaching its decisions to approve the merger agreement and the merger and the recommendation that optionsXpress stockholders vote in favor of approving the merger. For purposes of all of the optionsXpress agreements and plans described below, the completion of the transactions contemplated by the merger agreement will constitute a change in control.
The following table identifies the number of shares of Schwab common stock that will be received by each director and executive officer of optionsXpress in exchange for optionsXpress common stock (excluding deferred shares) held by each such director and executive officer, in each case based on his direct and indirect holdings as of April 15, 2011:
| Name |
Number of Shares of optionsXpress Common Stock |
Number of Shares of Schwab Common Stock to be Received in Exchange for optionsXpress Common Stock Upon Closing |
||||||
| James A. Gray |
13,186,721 | 13,450,455 | ||||||
| Ned Bennett |
1,487,595 | 1,517,346 | ||||||
| David A. Fisher |
108,082 | 110,243 | ||||||
| Thomas E. Stern |
72,395 | 73,842 | ||||||
| Michael J. Soenen |
23,445 | 23,913 | ||||||
| Scott Wald |
20,902 | 21,320 | ||||||
| Adam J. DeWitt |
14,634 | 14,926 | ||||||
| Peter Bottini |
14,580 | 14,871 | ||||||
| Howard C. Draft |
8,399 | 8,566 | ||||||
| Bruce R. Evans |
8,399 | 8,566 | ||||||
| Steven Fradkin |
8,399 | 8,566 | ||||||
| Kirk Chartier |
— | — | ||||||
Interests of Mr. James Gray (Chairman of the Board of Directors)
Mr. James Gray, the chairman of the board of directors of optionsXpress, beneficially owned [—] shares, or approximately [—]%, of outstanding common stock of optionsXpress, as well as vested options to acquire [—] shares of optionsXpress common stock, in each case as of the record date, personally and through his interest in G-Bar Limited Partnership and JG 2002 Delta Trust. Pursuant to the voting agreement entered into among G-Bar, JG Trust, Schwab and optionsXpress in connection with the execution of the merger agreement, G-Bar and JG Trust has each agreed to, among other things, (1) vote its shares in favor of the adoption of the agreement and plan of merger and against any takeover bid by a third party, (2) comply with certain restrictions on the disposition of such shares, subject to the terms and conditions contained in the voting agreement and (3) grant an irrevocable proxy in favor of designated officers of Schwab to vote its shares of optionsXpress common stock as required by the terms of the proposed voting agreement. Upon completion of the merger, and pursuant to the terms of the merger agreement, Mr. Gray, through G-Bar and JG Trust, would exchange all of his equity interest in optionsXpress for approximately [—] shares of Schwab common stock and vested options to acquire [—] shares of Schwab common stock.
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Pursuant to the terms of his amended and restated retention letter agreement with optionsXpress, dated January 3, 2007, in the event that Mr. Gray ceases to be chairman of the board of directors of optionsXpress, without his prior consent, Mr. Gray is entitled to 12 months of separation pay at the rate of his then-current base remuneration of $300,000 per year payable in 12 equal monthly installments. Mr. Gray’s retention letter agreement also provides for a post-separation 12-month noncompetition period as well as a simultaneous 12-month non-solicitation/non-hire restriction. optionsXpress has the option to pay Mr. Gray his then-current base retainer in monthly installments for up to 24 additional months in order to extend his noncompetition period after the initial 12-month period has lapsed.
Interests of Mr. Ned Bennett (Vice Chairman of the Board of Directors)
Pursuant to the terms of his employment letter agreement dated January 15, 2004, if the employment of Mr. Bennett is terminated by optionsXpress without cause or by Mr. Bennett for good reason, then Mr. Bennett is entitled to 12 months of base salary payable in 12 monthly installments. Mr. Bennett’s current base salary is $385,000.
Mr. Bennett is subject to a 12-month noncompetition period as well as a simultaneous 12-month non-solicitation period following his termination of employment. In the event of Mr. Bennett’s termination of employment for any reason, optionsXpress has the option to pay Mr. Bennett his then-current base salary in monthly installments for up to 24 additional months in order to extend his noncompetition period after the initial 12-month period has lapsed.
Equity Compensation Awards
The merger agreement provides that, upon completion of the merger, each optionsXpress stock option and deferred share will be converted, based on the 1.02 exchange ratio, into an option or deferred share of Schwab common stock, and will otherwise be subject to the same terms as the original optionsXpress stock option or deferred share, as applicable, was subject. optionsXpress’ directors and executive officers own optionsXpress common stock, options and deferred shares of optionsXpress common stock and, like other optionsXpress stockholders, will be entitled to receive equity securities of Schwab for their optionsXpress shares, options and stock-based awards.
In addition, pursuant to retention agreements between Schwab and Messrs. David Fisher, Adam DeWitt and Peter Bottini entered into in connection with the execution of the merger agreement (as described in greater detail below), upon a change in control of optionsXpress, each executive’s unvested optionsXpress options will become fully vested and exercisable and their deferred shares will vest in full. Pursuant to Mr. Bennett’s equity arrangements with optionsXpress, upon a change in control of optionsXpress, his unvested optionsXpress options will become fully vested and exercisable and his deferred shares will vest in full. The unvested optionsXpress options and deferred shares of optionsXpress common stock held by other directors and officers of optionsXpress will continue to vest according to the terms of the instrument by which such options or deferred shares were granted.
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The following table identifies, for each of the executive officers of optionsXpress, (1) the aggregate number of shares of Schwab common stock that would be held by each executive upon completion of the merger that correspond to their optionsXpress deferred shares that become vested upon completion of the merger, (2) the aggregate number of vested options to acquire shares of Schwab common stock that would be held by each executive upon completion of the merger that correspond to the optionsXpress stock options that are currently unvested stock options, and (3) the average exercise price of vested options to acquire shares of Schwab common stock that would be held by each executive upon completion of the merger that correspond to the optionsXpress stock options that are currently unvested stock options, in each such case based on optionsXpress equity compensation holdings as of April 15, 2011:
| Name |
Number of Outstanding Shares of Schwab Stock Received Upon Vesting of Deferred Shares at Closing |
Number of Schwab Shares Subject to Stock Options Which Vest at Closing |
Average Exercise Price of Stock Options on Schwab Shares Which Vest at Closing |
|||||||||
| David A. Fisher |
141,250 | 117,849 | $ | 13.74 | ||||||||
| Adam J. DeWitt |
34,925 | 28,750 | $ | 13.78 | ||||||||
| Peter Bottini |
29,090 | 98,248 | $ | 12.29 | ||||||||
| Ned W. Bennett |
2,040 | 3,141 | $ | 17.82 | ||||||||
| Kirk Chartier |
— | — | — | |||||||||
| Thomas E. Stern |
— | — | — | |||||||||
The following table identifies for each member of the board of directors of optionsXpress (other than Messrs. Fisher and Bennett), (1) the aggregate number of shares of Schwab common stock that would be held by each such director upon completion of the merger, (2) the aggregate number of options to acquire shares of Schwab common stock that would be held by each director upon completion of the merger, and (3) the average exercise price of options to acquire shares of Schwab common stock that would be held by each executive upon completion of the merger, in each case based on optionsXpress equity compensation holdings as of April 15, 2011:
| Name |
Number of Outstanding Shares of Schwab Stock Received at Closing* |
Number of Schwab Shares Subject to Stock Options at Closing* |
Average Exercise Price of Stock Options on Schwab Shares at Closing |
|||||||||
| James A. Gray |
13,462,371 | 60,360 | $ | 16.06 | ||||||||
| Michael J. Soenen |
28,680 | 14,821 | $ | 14.63 | ||||||||
| Scott Wald |
26,087 | 42,463 | $ | 16.38 | ||||||||
| Howard C. Draft |
13,333 | 24,143 | $ | 16.06 | ||||||||
| Bruce R. Evans |
13,333 | 24,143 | $ | 16.06 | ||||||||
| Steven Fradkin |
13,333 | 33,303 | $ | 17.56 | ||||||||
| * | Each deferred share and unvested stock option held by the directors listed on the table above as of April 15, 2011 will vest pursuant to the terms of its respective granting instrument on May 28, 2011. |
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Special Dividend Deferred Share Bonus Program
optionsXpress declared and paid a $4.50 per share special dividend in December 2010. At the time, the board of directors of optionsXpress approved the payment of a special bonus, which we refer to as the special dividend bonus, in the amount of $4.50 per share in cash for each unvested deferred share that was granted before December 28, 2010 and became vested after the payment of the dividend. Since December 31, 2010, optionsXpress has paid the special dividend bonus for deferred shares that have vested according to their original vesting schedules. The following table identifies, for each executive officer of optionsXpress, (1) the aggregate number of deferred shares of optionsXpress common stock that would become vested as a result of the merger for which a special dividend bonus payment would be made as a result and (2) the aggregate amount of the special dividend bonus that would become vested and payable upon completion of the merger:
| Name |
Deferred Shares Vested |
Special Dividend Bonus | ||||||
| David A. Fisher |
95,580 | $ | 430,110 | |||||
| Adam J. DeWitt |
22,840 | $ | 102,780 | |||||
| Peter Bottini |
14,020 | $ | 63,090 | |||||
| Ned Bennett |
2,000 | $ | 9,000 | |||||
| Kirk Chartier |
— | — | ||||||
| Thomas E. Stern |
— | — | ||||||
Interests of Kirk Chartier (Chief Marketing Officer)
Pursuant to the terms of his offer letter with optionsXpress dated January 4, 2010, Mr. Chartier is entitled to an amount equal to his current base salary of $300,000 if his employment with optionsXpress is terminated without cause. In addition, if his termination without cause is within 12 months following a change in control, Mr. Chartier’s unvested options and restricted stock will immediately vest upon such termination.
Other Executives
Except as described above, no other optionsXpress executive officers have employment agreements with optionsXpress or any other arrangements with optionsXpress which would provide them with any severance benefits or accelerated vesting of any optionsXpress equity incentive awards that they may hold, upon the completion of the merger.
Retention Agreements with Schwab
In connection with the merger, Schwab has entered into retention agreements with Messrs. Fisher, DeWitt and Bottini, which we collectively refer to as the retention agreements, each of which supersedes each such executive’s previous employment agreement with optionsXpress, and is conditioned and becomes effective upon completion of the merger. It is possible that other members of optionsXpress’ current management team will enter into arrangements with Schwab or its affiliates in connection with the completion of the merger after the date of this proxy statement/prospectus.
Title/Compensation
Pursuant to their retention agreements, Messrs. Fisher, DeWitt and Bottini will hold the following positions and be entitled to an annual base salary as set forth in the table below.
| Name |
Title |
Annual Base Salary | ||||
| David A. Fisher |
Senior Vice President and President of optionsXpress | $ | 425,000 | |||
| Adam J. DeWitt |
Vice President, optionsXpress | $ | 260,000 | |||
| Peter Bottini |
Vice President, optionsXpress | $ | 275,000 | |||
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Bonuses
Pursuant to their retention agreements, Messrs. Fisher, DeWitt and Bottini are entitled to certain annual, deal and retention bonuses. For the first two calendar years ending after the date on which the merger is completed, the executives will be eligible to earn annual target bonus opportunities equal to $425,000 in the case of Mr. Fisher, $120,000 in the case of Mr. DeWitt and $200,000 in the case of Mr. Bottini. For the first calendar year ending after the closing date, the annual target bonus opportunity will be pro-rated based on the number of days worked for Schwab during that year.
The executives are also entitled to receive a lump sum amount that is at least equal to a pro-rata portion (based on the number of days in the period of optionsXpress’ fiscal year that precedes the date of the closing of the merger, relative to 365 days) of $342,500 for Mr. Fisher, $165,000 for Mr. DeWitt and $190,000 for Mr. Bottini. This bonus amount may be increased in the discretion of the Chief Operating Officer of Schwab’s Investor Services business based upon the actual performance of optionsXpress during the period of optionsXpress’ fiscal year that precedes the closing date.
So long as each respective executive is employed through the closing date of the merger, such executive is entitled to deal bonuses as follows (i) following the closing, $800,000 to Mr. Fisher, $355,000 to Mr. DeWitt and $500,000 to Mr. Bottini and (ii) following the second anniversary of the closing date of the merger, $592,500 to Mr. Fisher, $225,000 to Mr. DeWitt and $250,000 to Mr. Bottini, which will be paid whether or not the executive is employed with optionsXpress on such second anniversary date.
Finally, if each respective executive is employed through the following anniversary dates, such executive is entitled to a retention bonus as follows: (i) upon the first anniversary of the closing date, $607,500 to Mr. Fisher, $262,500 to Mr. DeWitt and $187,500 to Mr. Bottini and (ii) upon the second anniversary of the closing date, $1,170,000 to Mr. Fisher, $412,500 to Mr. DeWitt and $562,500 to Mr. Bottini. If any of the respective executives’ employment is terminated by Schwab without cause or by the executives for good reason (as defined in the retention agreements), the executive will still be entitled to any unpaid amounts of these retention bonuses on the dates they would otherwise be due. A summary of the foregoing bonuses is set forth in the table below.
| Name |
Annual Target Bonus |
Pre-Closing Annual Bonus |
Deal Bonus | Retention Bonus | ||||||||||||
| David A. Fisher |
$ | 425,000 | (1) | $ | 342,500 | (2) | $ | 800,000 | (3) | $ | 607,500 | (5) | ||||
| $ | 592,500 | (4) | $ | 1,170,000 | (6) | |||||||||||
| Adam J. DeWitt |
$ | 120,000 | (1) | $ | 165,000 | (2) | $ | 355,000 | (3) | $ | 262,500 | (5) | ||||
| $ | 225,000 | (4) | $ | 412,500 | (6) | |||||||||||
| Peter Bottini |
$ | 200,000 | (1) | $ | 190,000 | (2) | $ | 500,000 | (3) | $ | 187,500 | (5) | ||||
| $ | 250,000 | (4) | $ | 562,500 | (6) | |||||||||||
| (1) | Pro rata payment for the first calendar year after the closing date to be made based upon the number of days worked for Schwab in such period relative to 365 days. |
| (2) | Pro rata payment to be made based upon the number of days worked for optionsXpress in such period relative to 365 days. |
| (3) | Payable in the normal payroll processing cycle of Schwab following the closing date of the merger. |
| (4) | Payable in the normal payroll processing cycle of Schwab following the second anniversary of the closing date of the merger. |
| (5) | Payable in the normal payroll processing cycle of Schwab following the first anniversary of the closing date of the merger if executive remains employed by Schwab through such date. |
| (6) | Payable in the normal payroll processing cycle of Schwab following the second anniversary of the closing date of the merger if executive remains employed by Schwab through such date. |
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Equity Compensation
As discussed above, pursuant to the retention agreements, in the event that the merger is completed, each of Messrs. Fisher’s, DeWitt’s and Bottini’s unvested optionsXpress options will become fully vested and exercisable and their unvested shares of optionsXpress deferred shares will vest in full upon the completion of the merger.
In addition, pursuant to the retention agreements, Messrs. Fisher, DeWitt and Bottini are eligible to receive from Schwab certain equity incentive awards. As soon as practicable after the closing date of the merger, Schwab will recommend to its board of directors or the compensation committee that the executives receive equity awards with a value (based on the closing price of Schwab common stock on the date of grant of such awards) equal to $1,500,000 in the case of Mr. Fisher, $350,000 in the case of Mr. DeWitt and $600,000 in the case of Mr. Bottini. Of these awards, 70% will be options to purchase shares of Schwab common stock, and the remaining 30% will be time-vested restricted stock units of Schwab common stock. These equity grants vest, subject to each respective executive’s continued employment with Schwab through each vesting date, as follows: 25% on each of the second and third anniversaries of the grant date; and the remaining 50% of the fourth anniversary of the grant date. These equity grants will otherwise be subject to terms specified in the applicable Schwab award agreement to be provided to the executives at the time of grant.
The executives will also be eligible for additional equity grants under Schwab’s Key Contributor Program, while employed with Schwab, during each of the first two annual grant cycles of Schwab that begin following the closing date (generally expected to occur on or about October 2011 and 2012) having a target value (based on the closing price of Schwab common stock on the date of grant of such awards) equal to $400,000 for Mr. Fisher, $150,000 for Mr. DeWitt and $125,000 for Mr. Bottini. Following these grants cycles, each executive will be eligible to receive equity grants at a target value equal to the level applicable to other Schwab employees of similar rank.
Other Terms
Except as described above, none of Messrs. Fisher, DeWitt, or Bottini will be eligible for any payments or benefits upon any termination of their employment with Schwab. However, upon any termination, each executive is subject to a covenant not to compete which precludes such executive from managing, controlling, participating in (whether as an officer, director, employee, partner, agent, representative or otherwise), consulting with or rendering services with respect to any entity that engages or proposes to engage in the on-line securities industry for the retail, consumer customer base (including, for the avoidance of doubt and without limitation, the service of retail brokerage accounts through independent representatives) or any other business conducted by optionsXpress, Schwab or any of its subsidiaries and in which such executive materially participated during his employment term for the duration of a “restricted period.” For Mr. Fisher, the restricted period will last for (i) 24 months upon any termination of employment that occurs during the period beginning with the closing date and ending on the first anniversary of the closing date, (ii) 18 months if the termination of employment occurs after the first anniversary but on or before the second anniversary of the closing date, and (iii) 12 months if the termination of employment occurs at any time after the second anniversary of the closing date. For Messrs. DeWitt and Bottini, the restrictive period will last for (i) 18 months following any termination of employment that occurs during the period beginning with the closing date and ending on the second anniversary of the closing date, and (ii) 12 months if the termination of employment occurs at any time after the second anniversary of the closing date.
Indemnification
Schwab has agreed to indemnify and hold harmless all past and present officers and directors of optionsXpress and its subsidiaries in their capacities as such against all losses, claims, damages, liabilities, costs, expenses, judgments, fines and amounts paid in settlement to the fullest extent such persons would be entitled to such indemnification under the certificate of incorporation and bylaws of optionsXpress as in effect on the date of the merger agreement and permitted by applicable law.
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The merger agreement provides that Schwab will use its reasonable best efforts to cause the persons serving as officers and directors of optionsXpress immediately prior to the effective time to be covered for a period of six years after completion of the merger by Schwab’s current directors’ and officers’ liability insurance policies, or policies of at least the same coverage and amount and containing terms and conditions that are not in the aggregate less advantageous than the current policy, subject to specified cost limitations. Alternatively, Schwab or optionsXpress may obtain “tail” insurance policies with a claims period of at least six years of the completion of the merger, subject to specified cost limitations.
Schwab’s Reasons for the Merger
Schwab’s reasons for entering into the merger agreement include to:
| • | acquire a more flexible and extendable technology platform that positions Schwab to better meet active investor client needs today and in the future; |
| • | improve Schwab’s scale, operational efficiency, long-term growth and ability to attract and retain clients; |
| • | unite Schwab’s and optionsXpress’ complementary strengths across equities, options and futures; |
| • | use optionsXpress’ derivative trading tools, analytics and education, as well as foreign exchange capabilities, for Schwab’s existing client base; |
| • | offer Schwab’s breadth of products and services to optionsXpress clients; |
| • | provide Schwab the opportunity to capitalize on the growth of the derivatives trading market; |
| • | provide Schwab’s clients with expanded access to investor education on derivatives trading; and |
| • | increase Schwab’s stockholder value through enhanced growth and operating leverage. |
The board of directors of Schwab approved the merger agreement after Schwab’s senior management discussed with the board of directors a number of factors, including those described above and the business, results of operations, financial performance and condition, strategic direction and prospects of optionsXpress. The Schwab board of directors did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The Schwab board of directors viewed its position as being based on all the information and the factors presented to and considered by it. In addition, individual directors may have given different weights to different information and factors.
Schwab’s Board of Directors after the Merger
Upon completion of the merger, the current directors of Schwab are expected to continue in their current positions. Information about the current Schwab directors can be found in the documents listed under the heading “Schwab Securities and Exchange Commission Filings” in the section entitled “Where You Can Find More Information” beginning on page 84.
Material U.S. Federal Income Tax Consequences of the Merger
The following summary describes the anticipated material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) of optionsXpress common stock. The following summary is based upon the Code, its legislative history, existing and proposed regulations thereunder and published rulings and decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to income tax, or federal laws applicable to alternative minimum taxes, are not addressed in this proxy statement/prospectus.
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For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner which is:
| • | an individual citizen or resident of the United States; |
| • | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any of its political subdivisions; |
| • | a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or |
| • | an estate that is subject to U.S. federal income taxation on its income regardless of its source. |
This discussion addresses only those holders of optionsXpress common stock that hold their optionsXpress common stock as a capital asset within the meaning of Section 1221 of the Code and does not address all the U.S. federal income tax consequences that may be relevant to particular holders of optionsXpress common stock in light of their individual circumstances or to holders of optionsXpress common stock that are subject to special rules, such as:
| • | financial institutions; |
| • | investors in pass-through entities; |
| • | insurance companies; |
| • | tax-exempt organizations; |
| • | dealers in securities or currencies; |
| • | traders in securities that elect to use a mark to market method of accounting; |
| • | persons that hold optionsXpress common stock as part of a straddle, hedge, constructive sale or conversion transaction; |
| • | regulated investment companies; |
| • | real estate investment trusts; |
| • | persons whose “functional currency” is not the U.S. dollar; |
| • | persons who are not citizens or residents of the United States; and |
| • | holders who acquired their shares of optionsXpress common stock through the exercise of an employee stock option or otherwise as compensation. |
If a partnership or other entity taxed as a partnership holds optionsXpress common stock, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Partnerships and partners in such a partnership should consult their tax advisors about the tax consequences of the merger to them.
The actual tax consequences of the merger to you may be complex and will depend on your specific situation and on factors that are not within our control. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.
Tax Consequences of the Merger Generally
The merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, the material U.S. federal income tax consequences will be as follows:
| • | no gain or loss will be recognized by Schwab or optionsXpress as a result of the merger; |
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| • | except as discussed below with respect to cash received instead of a fractional share of Schwab common stock, under “—Cash Received Instead of a Fractional Share of Schwab Common Stock,” no gain or loss will be recognized by U.S. holders who exchange all of their optionsXpress common stock for Schwab common stock pursuant to the merger; |
| • | the aggregate basis of the Schwab common stock received by a U.S. holder of optionsXpress common stock in the merger (including fractional shares of Schwab common stock deemed received and redeemed as described below) will be the same as the aggregate basis of the optionsXpress common stock for which it is exchanged; and |
| • | the holding period of Schwab common stock received in exchange for shares of optionsXpress common stock (including fractional shares of Schwab common stock deemed received and redeemed as described below) will include the holding period of the optionsXpress common stock for which it is exchanged. |
If a U.S. holder acquired different blocks of optionsXpress shares at different times or different prices, such U.S. holder must determine its tax basis and holding period separately with respect to each block of optionsXpress shares.
Completion of the merger is conditioned on, among other things, the receipt by optionsXpress and Schwab of legal opinions from Kirkland & Ellis LLP and Simpson Thacher & Bartlett LLP, respectively, each dated as of the closing date of the merger, that for U.S. federal income tax purposes the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. These opinions will be based on certain assumptions and on representation letters provided by optionsXpress and Schwab to be delivered at the time of closing. Although the merger agreement allows each of Schwab and optionsXpress to waive this condition to closing, neither Schwab nor optionsXpress currently anticipates doing so. Neither of the tax opinions will be binding on the Internal Revenue Service. Neither Schwab nor optionsXpress intends to request any ruling from the Internal Revenue Service as to the U.S. federal income tax consequences of the merger and there is no guarantee that the Internal Revenue Service will treat the merger as a “reorganization” within the meaning of Section 368(a) of the Code.
Cash Received Instead of a Fractional Share of Schwab Common Stock
A U.S. holder of optionsXpress common stock who receives cash instead of a fractional share of Schwab common stock will be treated as having received the fractional share pursuant to the merger and then as having exchanged the fractional share for cash in a redemption by Schwab. As a result, such U.S. holder of optionsXpress common stock will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in his or her fractional share interest as set forth above. Any such gain or loss recognized by the U.S. holders will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the U.S. holder’s holding period for the relevant shares is greater than one year. The deductibility of capital losses is subject to limitations.
You are urged to consult with your own tax advisors about the particular tax consequences of the merger to you, including the effects of U.S. federal, state or local, or foreign and other tax laws.
Backup Withholding and Information Reporting
Payments of cash in lieu of a fractional share of Schwab common stock to a U.S. holder pursuant to the merger may, under certain circumstances, be subject to information reporting and backup withholding unless the holder provides proof of an applicable exemption or, in the case of backup withholding, furnishes its taxpayer identification number and otherwise complies with all applicable requirements of the backup withholding rules. Any amounts withheld from payments to a U.S. holder under the backup withholding rules are not additional tax and generally will be allowed as a refund or credit against the U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the Internal Revenue Service.
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U.S. holders will be required to retain records pertaining to the merger. Each U.S. holder of optionsXpress common stock who is required to file a U.S. federal income tax return and who is a “significant holder” that receives Schwab common stock in the merger will be required to file a statement with such U.S. federal income tax return setting forth such holder’s basis in the optionsXpress common stock surrendered and the fair market value of the Schwab common stock and cash received in the merger. A “significant holder” is a holder of optionsXpress common stock, who, immediately before the merger, owned at least 5% of the outstanding stock of optionsXpress.
This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. Moreover, it does not address any non-income tax or any foreign, state or local tax consequences of the merger. Tax matters are very complicated, and the tax consequences of the merger to you will depend upon the facts of your particular situation. Accordingly, we strongly urge you to consult with a tax advisor to determine the particular federal, state, local or foreign income or other tax consequences to you of the merger.
Accounting Treatment of the Merger
The merger will be accounted for using the acquisition method of accounting with Schwab treated as the acquiror. Under this method of accounting, optionsXpress’ assets and liabilities will be recorded by Schwab at their respective fair values as of the closing date of the merger and added to those of Schwab. The amount of the purchase price in excess of the aggregate fair value of the net assets of optionsXpress will be recorded as goodwill. However, in the event that the aggregate fair value of the net assets of optionsXpress exceeds the purchase price, such excess will be recognized in earnings by Schwab on the closing date of the merger. The purchase price will be measured by multiplying the number of Schwab common shares issued in connection with the merger by the closing share price of Schwab’s common stock on the effective date of the merger. Financial statements of Schwab issued after the merger will not be restated retroactively to reflect the historical financial position or results of operations of optionsXpress prior to the merger. The results of operations of optionsXpress will be included in the results of operations of Schwab beginning on the effective date of the merger.
Regulatory Approvals Required for the Merger
Schwab and optionsXpress have agreed to use reasonable best efforts to obtain the regulatory approvals required or advisable to complete the merger.
Antitrust Approvals
The merger is subject to review by the Antitrust Division of the U.S. Department of Justice, which is referred to as the Antitrust Division, and the U.S. Federal Trade Commission, which is referred to as the FTC (collectively referred to as the antitrust agencies), under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules that have been promulgated under the Act, collectively referred to herein as the HSR Act. Under the HSR Act, Schwab and optionsXpress are required to make premerger notification filings and to await the expiration or early termination of the statutory waiting period (and any extension of the waiting period) prior to completing the merger. On April 7, 2011, Schwab and optionsXpress each filed a Premerger Notification and Report Form with the antitrust agencies. The expiration of the statutory waiting period for such filing is 11:59 p.m. Eastern Time on May 9, 2011, unless the waiting period is terminated earlier by a grant of early termination by the antitrust agencies. If the Antitrust Division or the FTC issues a request for additional information and documentary material prior to the expiration of the waiting period, the parties must observe a second thirty calendar-day waiting period, which would begin to run only after both parties have substantially complied with the request for information, unless the waiting period is terminated earlier or extended with the consent of the parties.
There can be no assurance that the merger will not be challenged on antitrust or competition grounds or, if a challenge is made, what the outcome would be. The Antitrust Division, the FTC, any U.S. state and other applicable U.S. or non-U.S. regulatory bodies may challenge the merger on antitrust or competition grounds at
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any time, including after the expiration or termination of the waiting period under the HSR Act or other applicable process, as they may deem necessary or desirable or in the public interest. Accordingly, at any time before or after the completion of the merger, any such party could take action under the antitrust laws, including, without limitation, by seeking to enjoin the effective time of the merger or permitting completion subject to regulatory concessions or conditions. Private parties may also seek to take legal action under antitrust or competition laws under certain circumstances.
Other Regulatory Procedures
The merger is subject to certain regulatory requirements of other municipal, state and federal, domestic or foreign, governmental agencies and authorities, including those relating to the offer and sale of securities. Schwab and optionsXpress have agreed to use reasonable best efforts to obtain as promptly as practicable all regulatory approvals that are required to complete the transactions contemplated by the merger agreement. The foreign, federal and state securities authorities, regulatory authorities and organizations, and self-regulatory organizations, from which approvals must be sought or to which notifications must be provided include, among others: (1) the Financial Industry Regulatory Authority, Chicago Board Options Exchange and NASDAQ Stock Market LLC; (2) the Investment Industry Regulatory Organization of Canada and applicable Canadian provincial securities commissions; (3) the Netherlands Authority for the Financial Markets and Dutch Central Bank; and (4) the Monetary Authority of Singapore.
Schwab and optionsXpress are currently working to evaluate and comply in all material respects with these requirements, as appropriate, and do not currently anticipate that they will materially hinder, delay or restrict completion of the merger. Although neither optionsXpress nor Schwab knows of any reason why these regulatory approvals would not be obtained in a timely manner, neither Schwab nor optionsXpress can be certain when or if the approvals will be obtained.
Conversion of Shares; Exchange of Certificates; Dividends; Withholding
Conversion and Exchange of Shares. The conversion of shares of optionsXpress common stock (other than excluded shares) into the right to receive the merger consideration will occur automatically at the effective time of the merger. As soon as reasonably practicable after completion of the merger, the exchange agent will exchange certificates and book-entry shares representing shares of optionsXpress common stock for the merger consideration to be received in the merger pursuant to the terms of the merger agreement. Wells Fargo Bank, N.A. will be the exchange agent in the merger and will exchange certificates and book-entry shares for the merger consideration and perform other duties as explained in the merger agreement.
If any Schwab shares are to be issued in a name other than that in which the optionsXpress stock certificates or book-entry shares surrendered in exchange for the merger consideration are registered, the person requesting the exchange must pay any transfer or other taxes required by reason of the issuance of the new Schwab shares in a name other than that of the registered holder of the optionsXpress stock certificate or book-entry shares surrendered, or must establish to the satisfaction of the exchange agent that any such taxes have been paid or are not applicable.
optionsXpress stock certificates may be exchanged for the merger consideration with the exchange agent for up to nine months after the completion of the merger. At the end of that period, any shares of Schwab common stock may at Schwab’s option be returned to Schwab or transferred as directed by Schwab, and in such case, any holders of optionsXpress stock certificates that have not exchanged their stock certificates would then be entitled to look only to Schwab for payment of the merger consideration.
Letter of Transmittal. As soon as reasonably practicable after the effective time of the merger, the exchange agent will send a letter of transmittal to those persons who were record holders of shares of optionsXpress common stock immediately prior to the effective time of the merger. This mailing will contain instructions on how to surrender optionsXpress shares in exchange for the merger consideration the holder is entitled to receive
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under the merger agreement. Holders of optionsXpress common stock that hold their shares in certificated form will be required to return, along with surrendered certificates, a letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, to be entitled to receive the merger consideration pursuant to the terms of the merger agreement. However, holders of optionsXpress common stock who hold their shares in book-entry form (rather than through a certificate representing optionsXpress common stock) will not be required to deliver a certificate or an executed letter of transmittal to the exchange agent in order to receive the merger consideration that the holder is entitled to receive pursuant to the terms of the merger agreement.
If you hold your shares in certificated form, do not submit your optionsXpress stock certificates for exchange now. You will receive transmittal instructions from the exchange agent at a later date. Please be sure to read and follow the transmittal instructions when you receive them.
If a certificate for optionsXpress common stock has been lost, stolen or destroyed, the exchange agent will issue the consideration properly payable under the merger agreement upon making of an affidavit of that fact and the posting of a bond in a reasonable amount as an indemnity.
Fractional Shares. No fractional shares of Schwab common stock will be issued to any holder of optionsXpress common stock upon completion of the merger. For each fractional share that would otherwise be issued, Schwab will pay cash (without interest) in an amount equal to the fractional share interest to which such stockholder would otherwise be entitled (after taking into account all shares of optionsXpress common stock held by such stockholders) multiplied by the closing price of Schwab common stock as reported on the New York Stock Exchange on the last trading day immediately preceding the effective time of the merger.
Dividends and Distributions. Until shares of optionsXpress common stock are surrendered for exchange, any dividends or other distributions declared after the effective time of the merger with respect to shares of Schwab common stock into which optionsXpress shares may have been converted will accrue but will not be paid. Schwab will pay to former optionsXpress stockholders any unpaid dividends or other distributions, without interest, only after they have duly surrendered their shares. At and after the effective time of the merger, there will be no transfers on the stock transfer books of optionsXpress of any optionsXpress shares. If shares of optionsXpress common stock are presented for transfer after the completion of the merger, they will be cancelled and exchanged for the merger consideration into which such shares have been converted pursuant to the merger agreement.
Withholding. Schwab or the exchange agent will be entitled to deduct and withhold from the merger consideration otherwise payable to any optionsXpress stockholder the amounts it is required to deduct and withhold under any provision of any federal, state, local or foreign tax law. To the extent that Schwab or the exchange agent withholds any amounts, these amounts will be treated for all purposes of the merger as having been paid to the stockholders in respect of whom such deduction and withholding were made.
Section 262 of the Delaware General Corporation Law, or the DGCL, provides that stockholders have the right, in some circumstances, to dissent from certain corporate actions and to instead demand payment of the fair value of their shares. Stockholders do not have appraisal rights with respect to shares of any class or series of stock if such shares of stock, or depositary receipts in respect thereof, are either (1) listed on a national securities exchange or (2) held of record by more than 2,000 holders, unless the stockholders receive in exchange for their shares anything other than shares of stock of the surviving or resulting corporation (or depositary receipts in respect thereof), or of any other corporation that is publicly listed or held by more than 2,000 holders of record, cash in lieu of fractional shares or fractional depositary receipts described above or any combination of the foregoing. Therefore, because optionsXpress’ common stock is listed on the NASDAQ Global Select Market, and holders thereof will receive in the merger only shares of Schwab common stock, which will be publicly listed on the New York Stock Exchange, and cash in lieu of fractional shares, holders of optionsXpress common stock will not be entitled to appraisal rights in the merger with respect to their shares of optionsXpress common stock.
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Litigation Relating to the Merger
A number of purported class action lawsuits have been filed by optionsXpress stockholders challenging Schwab’s proposed acquisition of optionsXpress. These suits name as defendants optionsXpress, members of optionsXpress’ board of directors (whom we refer to as the individual defendants), Schwab and Neon Acquisition Corp.
Seven lawsuits have been filed in the Circuit Court of Cook County, Illinois: Kolton v. Gray, et al. (Civ. Action No. 11CH10657) was filed on March 21, 2011; Page v. optionsXpress Holdings, Inc., et al. (Case No. 11CH10845) was filed on March 22, 2011; Thomas v. optionsXpress Holdings, Inc., et al. (Case No. 11CH10898) was filed on March 22, 2011; Shotter v. optionsXpress Holdings, Inc., et al. (Case No. 11CH11957) was filed on March 29, 2011; Dworkin v. optionsXpress Holdings, Inc., et al. (Case No. 11CH12445) was filed on March 31, 2011; Raymon v. optionsXpress Holdings, Inc., et al. (Case No. 11CH12710) was filed on April 4, 2011; and Marks v. optionsXpress Holdings, Inc. et al. (Case No. 11CH12764) was filed on April 5, 2011. By orders dated April 6, 2011, the Kolton, Page and Thomas matters have been consolidated under the caption Kolton v. Gray, et al. (Civ. Action No. 11CH10657).
Three lawsuits have been filed in the Court of Chancery of the State of Delaware: Oakes v. Bennett, et al. (C.A. No. 6314-VCL) was filed March 25, 2011; Collipi v. optionsXpress Holdings, Inc., et al. (C.A. No. 6337-VCL) was filed April 1, 2011; and Kokolis v. optionsXpress Holdings, Inc., et al. (C.A. No. 6353-VCL) was filed on April 6, 2011.
The complaints generally allege that (i) the individual defendants breached fiduciary duties owed to optionsXpress’ stockholders by allegedly approving the merger agreement at an unfair price and through an unfair process and by agreeing to certain deal protection devices; and (ii) the transaction unfairly benefits certain members of optionsXpress’ board of directors, including the Chief Executive Officer, to the disadvantage of other optionsXpress stockholders. The complaints also allege that Schwab and Neon Acquisition Corp. aided and abetted the alleged fiduciary breaches by the individual defendants. The complaints seek, among other relief, to enjoin the transaction, rescission in the event the transaction is completed, an order directing defendants to account to plaintiff and other members of the putative class for all damages caused by their breaches, and an award of costs and disbursements, including reasonable attorneys’ and expert fees.
optionsXpress, the individual defendants, Schwab and Neon Acquisition Corp. deny any wrongdoing in connection with the merger and intend to defend these actions vigorously.
Restrictions on Sales of Shares by Certain Affiliates
The shares of Schwab common stock to be issued in the merger will be freely transferable under the Securities Act, except for shares issued to any stockholder who is an “affiliate” of Schwab as defined by Rule 144 under the Securities Act. Affiliates consist of individuals or entities that control, are controlled by, or are under common control with Schwab and include the executive officers and directors of Schwab and may include significant stockholders of Schwab.
Following the merger, the shares of Schwab common stock will continue to trade on the New York Stock Exchange under the symbol “SCHW.”
Delisting and Deregistration of optionsXpress Common Stock after the Merger
When the merger is completed, the optionsXpress common stock currently listed on the NASDAQ Global Select Market will be delisted from the NASDAQ Global Select Market and will be deregistered under the Exchange Act.
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PROPOSAL NO. 1: THE MERGER AGREEMENT
This section of the document describes the material terms of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of the merger agreement, which is incorporated herein by reference and attached as Annex A to this proxy statement/prospectus. This summary may not contain all of the information about the merger agreement that may be important to you. You are urged to read the full text of the merger agreement.
Subject to the terms and conditions of the merger agreement, and in accordance with Delaware law, at the completion of the merger, Neon Acquisition Corp. (a newly formed and wholly-owned subsidiary of Schwab established to facilitate the acquisition of optionsXpress) will be merged with and into optionsXpress. optionsXpress will survive the merger as a wholly-owned subsidiary of Schwab and will continue its corporate existence under the laws of the State of Delaware under the name “optionsXpress Holdings, Inc.”
Each share of Schwab common stock issued and outstanding at the effective time of the merger will remain issued and outstanding as one share of common stock of Schwab, and each share of optionsXpress common stock issued and outstanding at the effective time of the merger (other than excluded shares) will be converted into the right to receive 1.02 shares of Schwab common stock, as described below. See “—Consideration to be Received in the Merger.”
The merger agreement provides that Schwab may change the method of effecting the business combination between Schwab and optionsXpress; however, no such change will alter or change the amount or kind of merger consideration to be provided under the merger agreement, materially impede or delay completion of the merger, or adversely affect the anticipated tax consequences to optionsXpress or its stockholders in the merger.
The merger will be completed and become effective when the parties to the merger agreement file the certificate of merger with the Secretary of State of the State of Delaware. However, Schwab and optionsXpress may agree to a later time for completion of the merger and specify that time in the certificate of merger in accordance with Delaware law. The closing of the merger will take place on the second business day after the conditions to the merger have been satisfied or waived, or on such other date as Schwab and optionsXpress may agree.
Surviving Corporation, Governing Documents and Directors
At the effective time of the merger, the certificate of incorporation and bylaws of optionsXpress, as in effect immediately prior to the effective time of the merger, will be amended so as to read as that of Neon Acquisition Corp., respectively, and will be the certificate of incorporation and bylaws of optionsXpress as the surviving corporation of the merger.
At the effective time of the merger, the board of directors of Neon Acquisition Corp. immediately prior to the effective time of the merger will be the directors of optionsXpress as the surviving corporation of the merger.
Consideration to be Received in the Merger
Upon completion of the merger, each outstanding share of optionsXpress common stock (other than excluded shares) will be converted into the right to receive 1.02 shares of Schwab common stock. The value of the consideration is dependent upon the value of Schwab common stock and therefore will fluctuate with the market price of Schwab common stock.
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No fractional shares of Schwab common stock will be issued to any holder of optionsXpress common stock upon completion of the merger. For each fractional share that would otherwise be issued Schwab will pay cash in an amount equal to the fractional share interest to which such stockholder would otherwise be entitled (after taking into account all shares of optionsXpress common stock held by such stockholders) multiplied by the closing price of Schwab common stock as reported on the New York Stock Exchange on the last trading day immediately preceding the effective time of the merger.
Stock Options, Other Stock-Based Awards and Employee Stock Purchase Plan
optionsXpress Stock Options
Each outstanding option to purchase shares of optionsXpress common stock granted under optionsXpress’ stock incentive plans, whether vested or unvested, will be converted pursuant to the merger agreement into an option to purchase, on the same terms and conditions as were applicable under such optionsXpress option prior to the merger, Schwab common stock, except that Schwab may at its option decide to cancel in exchange for a cash payment any such options held by optionsXpress employees who reside outside of the United States. The number of shares of Schwab common stock underlying the new Schwab stock option will be equal to the product of:
| • | the number of shares of optionsXpress common stock otherwise purchasable pursuant to such optionsXpress option and |
| • | 1.02, |
rounded down, if necessary, to the nearest whole share of Schwab common stock.
The per share exercise price of these converted options will be obtained by dividing:
| • | the per share exercise price of such optionsXpress stock option by |
| • | 1.02, |
rounded up to the nearest cent.
In the event that Section 421 of the Code applies, the foregoing method will be adjusted in a manner that complies with Section 424(a) of the Code and results in the smallest modification in the economic values that otherwise would be achieved by the holder pursuant to the method described above.
Other Stock-Based Awards
Under the terms of the merger agreement, at the effective time of the merger, each right to receive shares of optionsXpress common stock or benefits measured by the value of a number of optionsXpress common stock, and each award consisting of shares of optionsXpress common stock (including restricted stock, restricted stock units, deferred stock units, performance shares (or units), phantom stock units and dividend equivalents), other than optionsXpress stock options, which we collectively refer to as optionsXpress stock-based awards, that was granted under optionsXpress’ stock incentive plans and is outstanding immediately prior to the effective time of the merger will be converted into a right or award with respect to a number of shares of Schwab common stock equal to the product of:
| • | the number of shares of optionsXpress common stock subject to the optionsXpress stock-based award and |
| • | 1.02, |
provided, that any fractional shares of Schwab common stock resulting from such multiplication will be rounded down to the nearest whole share and such converted stock-based award will remain subject to the terms of the applicable optionsXpress’ stock incentive plans and the award agreements under such stock incentive plans.
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Employee Stock Purchase Plan
optionsXpress will take all actions necessary to:
| • | terminate the offering period currently in effect under its employee stock purchase plan as soon as practicable after March 18, 2011; |
| • | provide that no new offering periods commence after March 18, 2011; |
| • | provide that there will be no increase in the amount of payroll deductions permitted to be made by the participants therein during the current period; and |
| • | provide that on the last day of the current offering period as shortened under the terms of the merger agreement, each participant in the applicable employee stock purchase plan will be credited with the number of share(s) of optionsXpress common stock purchased for his or her account(s) under the applicable employee stock purchase plan in respect of the applicable offering period, as shortened, in accordance with the terms of the applicable employee stock purchase plan. |
Representations and Warranties
The merger agreement contains generally customary representations and warranties of the parties thereto relating to their respective businesses. For purposes of determining the satisfaction of the closing conditions relating to each party’s representations and warranties as described under “—Conditions to Complete the Merger” below, subject to certain exceptions, each party’s representations and warranties will be deemed to be true and correct in all respects unless the failure or failures of such representations and warranties to be true and correct, individually or in the aggregate, results or would reasonably be expected to result in a “material adverse effect” on the party making the representations and warranties. For purposes of the merger agreement, “material adverse effect” means with respect to Schwab or optionsXpress, as the case may be, any fact, circumstance, event, change, effect, development or occurrence that, individually or in the aggregate with all other facts, circumstances, events, changes, effects, developments or occurrences, (1) has had or would be reasonably expected to have a material adverse effect on the business, operations, financial condition or results of operations of such party and its subsidiaries taken as a whole, or (2) prevents or materially delays or materially impairs, or that would reasonably be expected to prevent, materially delay or materially impair, such party’s ability to perform its obligations under the merger agreement or complete the merger on a timely basis. However, in determining whether a material adverse effect has occurred with respect to clause (1) above, there will be excluded any effect on the referenced party the cause of which is:
| • | any changes after March 18, 2011 in laws, rules or regulations of general applicability or published interpretations by governmental entities, in generally accepted accounting principles or in regulatory accounting requirements applicable to the industries in which such party and its subsidiaries operate; |
| • | the announcement of the merger agreement or compliance with the terms of, or any action of any party to the merger agreement or any of its subsidiaries required to be taken under the merger agreement, including the loss of customers, employees or vendors demonstrably arising as a result thereof; |
| • | any changes after March 18, 2011 in general economic conditions in the United States affecting the industries in which such party and its subsidiaries operate; |
| • | any changes after March 18, 2011 in conditions in the financial markets, credit markets or capital markets in the United States or any other jurisdiction in which such party or any of its subsidiaries has substantial business or operations, including (1) changes in interest rates or currency exchange rates and (2) any suspension of trading in securities (whether equity, debt, derivative or hybrid securities) generally on any securities exchange or over-the-counter market operating in the United States or any other jurisdiction in which such party or any of its subsidiaries has substantial business or operations; |
| • | any changes after March 18, 2011 in conditions in the industries in which such party and its subsidiaries conduct business, including changes in conditions in the brokerage industry generally; |
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| • | any changes after March 18, 2011 in global or national political conditions in the United States or any other jurisdiction in which such party or any of its subsidiaries has substantial business or operations; |
| • | acts of war, sabotage or terrorism (including any escalation or general worsening of any such acts of war, sabotage or terrorism) in the United States or any other jurisdiction in which such party or any of its subsidiaries has substantial business or operations; and |
| • | any actions taken which the other party has in writing expressly approved, consented to or requested, |
in each case, only to the extent that such changes or actions do not have a disproportionate impact on such party and its subsidiaries relative to other participants in the industries in which such party and its subsidiaries operate.
In addition, a decrease in the trading or market prices of a party’s capital stock or any failure to meet public estimates, projections or internal budgets or forecasts are not considered, by itself, to constitute a material adverse effect.
The merger agreement has been included to provide you with information regarding its terms. The merger agreement contains representations and warranties made by and to Schwab and Neon Acquisition Corp., on the one hand, and optionsXpress, on the other hand. The statements embodied in those representations and warranties were made for purposes of the contract among the parties to the merger agreement and are subject to important qualifications and limitations agreed to by such parties in connection with negotiating its terms. In addition, certain representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk between Schwab and Neon Acquisition Corp., on the one hand, and optionsXpress, on the other hand, rather than establishing matters as facts. For the foregoing reasons, you should not rely on the representations and warranties as statements of factual information.
Each of Schwab, Neon Acquisition Corp. and optionsXpress has made representations and warranties to the other regarding, among other things:
| • | corporate matters, including due organization and qualification; |
| • | capitalization; |
| • | authority relative to execution and delivery of the merger agreement and the voting agreement, as applicable, and the absence of conflicts with, or violations of, organizational documents or other obligations as a result of the merger; |
| • | governmental filings and consents necessary to complete the merger; |
| • | the timely filing of regulatory reports, the absence of investigations by regulatory agencies and internal controls; |
| • | financial statements; |
| • | the absence of undisclosed liabilities; |
| • | broker’s fees payable in connection with the merger; |
| • | the absence of events having, or reasonably expected to have, a material adverse effect; |
| • | legal proceedings; |
| • | approval by such party’s board of directors of the merger agreement and the voting agreement, as applicable, and the transactions contemplated by the merger agreement and the voting agreement; |
| • | the required vote, if any, of such party’s stockholders to complete the merger; |
| • | compliance with applicable laws and permits; and |
| • | the accuracy of information supplied for inclusion in this proxy statement/prospectus and other similar documents. |
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In addition, optionsXpress has made other representations and warranties about itself to Schwab and Neon Acquisition Corp. as to:
| • | tax matters; |
| • | employee matters and benefit plans; |
| • | matters relating to fiduciary accounts; |
| • | matters relating to certain contracts; |
| • | real and personal property; |
| • | insurance matters; |
| • | environmental liabilities; |
| • | the receipt of a fairness opinion from its financial advisor; |
| • | intellectual property; |
| • | transactions with affiliates; |
| • | labor matters; |
| • | derivative instruments and transactions; and |
| • | the inapplicability of state takeover laws. |
The representations and warranties of each party to the merger agreement will expire upon the effective time of the merger.
Conduct of Business Pending the Merger
Conduct of Business of optionsXpress Pending the Merger
optionsXpress has agreed that, between March 18, 2011 and the completion of the merger, subject to certain exceptions and unless Schwab gives its prior written consent (which consent Schwab will not unreasonably withhold or delay), optionsXpress and its subsidiaries will use their:
| • | commercially reasonable efforts to conduct its business in the usual, regular and ordinary course consistent with past practice and maintain and preserve intact its business organization and its rights, authorizations, franchises and other authorizations issued by governmental entities, preserve its advantageous business relationships with customers, vendors and others doing business with it and retain the services of its officers and key employees; and |
| • | reasonable best efforts not to take any action which would reasonably be expected to adversely affect or delay the receipt of any governmental approvals required to complete the transactions contemplated by the merger agreement and the voting agreement or the completion of the transactions contemplated by the merger agreement and the voting agreement. |
optionsXpress further has agreed that during the same period, and again subject to certain exceptions and unless Schwab gives its prior written consent (which consent Schwab will not unreasonably withhold or delay), optionsXpress and its subsidiaries will not:
| • | adjust, split, combine or reclassify any of its capital stock; |
| • | repurchase, redeem or otherwise acquire any of its capital stock; |
| • | make, declare or pay any dividends or other distributions on any shares of its capital stock, other than dividends paid by any of the subsidiaries of optionsXpress so long as such dividends are only paid to optionsXpress or any of its other wholly-owned subsidiaries; |
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| • | issue or grant shares of its capital stock except pursuant to the exercise of optionsXpress stock options or the settlement of optionsXpress stock-based awards in existence as of the date of the merger agreement; |
| • | enter into any new line of business, make any material changes to products or services or change its brokerage policies, risk policies or other operating policies or practices in any material respect, except as required by law or policies imposed by a governmental entity; |
| • | other than with certain exceptions, sell, license, lease, transfer, mortgage, encumber or otherwise dispose of any of its material rights, assets, business or properties or cancel or release any material indebtedness owed to optionsXpress or any of its subsidiaries or any claims held by optionsXpress or any of its subsidiaries; |
| • | make any acquisition or investment or make any material property transfers or material purchases of any debt securities, property or assets, other than in each case in the ordinary course of business and with certain other exceptions; |
| • | enter into, renew, extend or terminate (1) any lease, license, contract or other agreements that calls for annual payments of $500,000, (2) any material contracts or (3) any broker agreements or agreements, arrangements or other affiliate transactions; |
| • | other than with certain exceptions, change compensation or other benefits for directors, officers, employees or independent contractors; pay any bonus (other than normal year-end cash bonuses); grant or pay any change-in-control, retention bonus or severance pay; adopt, amend or terminate any compensation or benefit plan; or hire or terminate (other than for cause) any employee with an annual total compensation in excess of $200,000; |
| • | make or commit to make capital expenditures in excess of $500,000 in total, except in accordance with the expenditures budgeted in the existing capital expenditure budget; |
| • | incur any indebtedness for borrowed money, issue or sell any long-term debt securities or warrants or rights to acquire long-term debt securities, or assume, guarantee or endorse or otherwise become responsible for the long-term indebtedness of any other person, other than indebtedness under existing lines of credit; |
| • | other than with certain exceptions, pay, loan or advance any amount to, or sell, transfer or lease any properties, rights or assets (real, personal or mixed, tangible or intangible) to, or enter into any agreement or arrangement with, any of its officers or directors or any of their family members, or any affiliates or associates of any of its officers or directors; |
| • | settle any claim, action or proceeding involving monetary damages in excess of specified amounts, waive or release any material rights or claims, or agree or consent to the issuance of any injunction or order restricting or otherwise affecting its business or operations; |
| • | amend its certificate of incorporation or bylaws, or enter into a plan of consolidation, merger, share exchange, share acquisition, reorganization or complete or partial liquidation with any person; |
| • | take any action to exempt any person, other than Schwab or Neon Acquisition Corp., from Section 203 of the DGCL or any other applicable anti-takeover laws; |
| • | make any changes in its methods, practices or policies of financial or tax accounting, except as may be required under law, rule, regulation or generally accepted accounting principles; |
| • | enter into any securitizations of any loans or create any special purpose funding or variable interest entity; |
| • | except in the ordinary course of business, introduce any material new products or services, any material marketing campaigns or any material new sales compensation or incentive programs or arrangements; |
| • | except as required by law, make or change any tax election, file any amended tax returns, or settle or compromise any material tax liability; |
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| • | other than with certain exceptions, open any new offices or facilities or relocate or close any existing offices or facilities, or file any application with any governmental entity to do any of the foregoing; |
| • | grant any exclusive rights with respect to any proprietary rights of optionsXpress and its subsidiaries, divest any material proprietary rights, or materially modify the optionsXpress’ standard warranty terms for its products, technologies and services or amend or modify any product or service warranty in any manner that is likely to be materially adverse to optionsXpress or any of its subsidiaries; |
| • | except as required by applicable law or generally accepted accounting principles, revalue in any material respect any of its properties or assets; or |
| • | take any action that is intended or would reasonably be expected to result in (1) any of its representations and warranties set forth in the merger agreement being or becoming untrue in any material respect at any time prior to the effective time, (2) any of the conditions to the merger not being satisfied or a requisite regulatory approval not being obtained on a timely basis or (3) a material violation of any provision of the merger agreement. |
Conduct of Business of Schwab and Neon Acquisition Corp. Pending the Merger
Each of Schwab and Neon Acquisition Corp. has agreed that, between March 18, 2011 and the completion of the merger, except as required by law, it will not, without the prior written consent of optionsXpress, amend its certificate of incorporation or bylaws in a manner that would materially and adversely affect the economic benefits of the merger to optionsXpress’ stockholders.
Stockholders’ Meeting and Duty to Recommend
optionsXpress has agreed to hold a meeting of its stockholders as promptly as practicable following the effectiveness of the registration statement of which this proxy statement/prospectus forms a part for the purpose of obtaining stockholder adoption of the merger agreement.
optionsXpress’ board of directors has agreed (1) to recommend the adoption of the merger agreement by optionsXpress stockholders and (2) not to withdraw, modify or qualify its recommendation in any manner adverse to Schwab, or take any action or make any other public statement in connection with the optionsXpress stockholder meeting, or in reference to an acquisition proposal (as defined below), inconsistent with its recommendation. In the event that optionsXpress engages in any of the activities described in clause (2) above, then optionsXpress’ board of directors may submit the merger agreement to optionsXpress’ stockholders without recommendation, in which event the board of directors of optionsXpress may communicate the basis for its lack of a recommendation to the optionsXpress’ stockholders to the extent required by law. In addition, unless the merger agreement is terminated in accordance with its terms, optionsXpress may not submit to the vote of its stockholders any acquisition proposal other than the merger with Schwab and (without Schwab’s consent) adjourn, postpone or cancel (or propose to adjourn, postpone or cancel) the optionsXpress stockholder meeting, except to the extent required to obtain the required stockholder vote.
Notwithstanding the above, if optionsXpress complies with its non-solicitation obligations described under “—No Solicitation of Alternative Transactions,” optionsXpress may engage in any of the activities described in clause (2) above if optionsXpress’ board of directors, based on the advice of its outside counsel, determines in good faith that failure to take such action would be reasonably likely to result in a violation of its fiduciary duties under applicable law, and optionsXpress may engage in any of the activities described in clause (2) above in response to an acquisition proposal if in addition to satisfying the foregoing requirements:
| • | optionsXpress’ board of directors concludes in good faith that such acquisition proposal constitutes a superior proposal (as defined below) after giving effect to all of the adjustments that may be offered by Schwab; |
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| • | optionsXpress notifies Schwab, at least five business days in advance, of its intention to take such action, specifies the material terms and conditions of the superior proposal (including the identity of the person making such proposal) and furnishes to Schwab a copy of the relevant proposed transaction agreement and other material documents; and |
| • | prior to taking such action, optionsXpress negotiates, and causes its financial and legal advisors to negotiate, in good faith with Schwab (to the extent Schwab desires to negotiate) to make such adjustments to the terms and conditions of the merger agreement such that the acquisition proposal no longer constitutes a superior proposal. |
For purposes of the merger agreement, the term “acquisition proposal” means any inquiry, proposal or offer relating to any direct or indirect:
| • | acquisition, purchase or sale of a business or assets that constitute 20% or more of the consolidated business, revenues, net income or assets (including stock of optionsXpress’ subsidiaries) of optionsXpress and its subsidiaries; |
| • | merger, consolidation, business combination, recapitalization, reorganization, share exchange, liquidation, dissolution or similar transaction involving optionsXpress or any of its subsidiaries; or |
| • | purchase or sale of, or tender or exchange offer (including a self-tender offer) for, securities of optionsXpress or any of its subsidiaries that would result in any person (or the stockholders of such person) beneficially owning 20% or more of the equity or total voting power of optionsXpress, any of its subsidiaries or the surviving parent entity in such transaction. |
For purposes of the merger agreement, the term “superior proposal” means a bona fide written acquisition proposal to acquire a majority of the total voting power or assets of optionsXpress that optionsXpress’ board of directors concludes in good faith, after consultation with its financial advisors and receiving the advice of its outside counsel, taking into account timing and all legal, financial, regulatory and other aspects of such proposal and the person making the proposal:
| • | is more favorable to optionsXpress’ stockholders, from a financial point of view, than the merger with Schwab; and |
| • | is reasonably likely to be completed on the terms proposed. |
No Solicitation of Alternative Transactions
optionsXpress has agreed that it will not, and will cause its subsidiaries not to, and use its reasonable best efforts to cause its and its subsidiaries’ respective officers, directors, employees, agents, affiliates and representatives (including any investment bankers, attorneys or accountants) not to, directly or indirectly:
| • | initiate, solicit, encourage or knowingly facilitate (including by way of providing information) any inquiries, proposals or offers or any other efforts or attempts that constitute or may reasonably be expected to lead to any acquisition proposal; |
| • | have any discussions with or provide any nonpublic information to any person relating to an acquisition proposal, or engage in any negotiations concerning an acquisition proposal; |
| • | approve or recommend, or publicly propose to approve or recommend, any acquisition proposal; |
| • | approve or recommend, or publicly propose to approve or recommend, or execute or enter into, any letter of intent, agreement in principle, memorandum of understanding, merger agreement, asset or share purchase or share exchange agreement, option agreement or other similar agreement related to any acquisition proposal; or |
| • | enter into any agreement or agreement in principle requiring, directly or indirectly, optionsXpress to abandon, terminate or fail to complete the merger or breach its obligations under the merger agreement. |
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However, if optionsXpress receives an unsolicited bona fide acquisition proposal after the date of the merger agreement, optionsXpress may engage in discussions with, or provide nonpublic information to, the person making the acquisition proposal, in each case if and only to the extent that:
| • | the special meeting of optionsXpress stockholders has not occurred; |
| • | optionsXpress’ board of directors concludes in good faith that such acquisition proposal constitutes or is reasonably likely to result in a superior proposal; |
| • | prior to providing any nonpublic information, optionsXpress enters into a confidentiality agreement with the person making the acquisition proposal that (1) contains a customary “standstill” provision and other terms no less favorable to optionsXpress than those specified in the confidentiality agreement between optionsXpress and Schwab; and (2) does not contain any provisions that would prevent optionsXpress from complying with its obligations under the merger agreement; |
| • | optionsXpress contemporaneously provides to Schwab any non-public information concerning optionsXpress or its subsidiaries provided to the party making the acquisition proposal which was not previously provided to Schwab; and |
| • | optionsXpress’ board of directors concludes in good faith (after receiving the advice of its outside counsel) that failure to take such actions would be reasonably likely to result in a violation of its fiduciary duties under applicable law. |
In addition, optionsXpress may terminate the merger agreement in order to enter into an agreement with respect to a superior proposal if it complies with the procedures set forth under the last termination right under “—Termination of the Merger Agreement—General” and pays a termination fee set forth under “—Termination of the Merger Agreement—Termination Fee.”
optionsXpress has also agreed to:
| • | advise Schwab promptly (within 24 hours) following receipt of any acquisition proposal, or any inquiry which could reasonably be expected to lead to an acquisition proposal, describing the material terms thereof (including the identity of the person making such acquisition proposal); |
| • | keep Schwab apprised of any related developments, discussions and negotiations and the status and terms thereof (including providing Schwab with a copy of all material documentation and correspondence) on a reasonably current basis; and |
| • | notify Schwab orally and in writing within 24 hours after entering into discussions or negotiations with another person in connection with an acquisition proposal, or providing non-public information or data to another person in connection with an acquisition proposal. |
Immediately following the effective time of the merger, Schwab has agreed that, with respect to the employees of optionsXpress and its subsidiaries, among other things:
| • | such employees will become eligible to participate in the employee benefit plans (excluding equity-based plans and defined benefit pension plans) sponsored or maintained by Schwab pursuant to the terms thereof to the same extent as similarly situated employees of Schwab so participate; |
| • | it will give such employees credit for service with optionsXpress or its subsidiaries for purposes of determining eligibility to participate, vesting, entitlement to benefits and vacation entitlement (but not for accrual of benefits under any post-retirement welfare benefit plan or any sabbatical program of Schwab); however, service with optionsXpress or its subsidiaries will not be recognized to the extent that such recognition would result in a duplication of benefits; |
| • | it will give such employees the same credit for service with optionsXpress or its subsidiaries for the purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any pre-existing condition limitations with respect to any Schwab benefit plan; |
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| • | each Schwab benefit plan will waive pre-existing condition limitations to the same extent waived under the applicable optionsXpress benefit plan; and |
| • | such employees will be given credit, to the extent administratively feasible, for amounts paid under a corresponding optionsXpress or any subsidiary benefit plan during the same period for purposes of applying deductibles, co-payments, out-of-pocket maximums and similar payments as though such amounts had been paid in accordance with the terms and conditions of the Schwab benefit plan during the applicable plan year. |
Each of optionsXpress and its subsidiaries will take all necessary actions to (1) terminate, immediately prior to the effective time of the merger, both its 401(k) plan (in which case each optionsXpress employee shall be fully vested in any unvested amounts contained in his 401(k) plan account and will receive a distribution of such accounts following the Internal Revenue Service approval of such termination) and any health and welfare plan identified by Schwab upon reasonable advance notice to optionsXpress, and (2) permit its employees to be eligible to participate in a corresponding plan maintained by Schwab following the effective time of the merger. Schwab will permit optionsXpress employees to roll any eligible rollover distributions from the terminated optionsXpress 401(k) plan into a corresponding Schwab 401(k) plan.
In addition, prior to the effective time of the merger, each of Schwab and optionsXpress will cause any dispositions of optionsXpress common stock or acquisitions of Schwab common stock resulting from the transactions contemplated by the merger agreement and the voting agreement by each individual subject to the reporting requirements of Section 16(b) of the Exchange Act with respect to optionsXpress to be exempt under the Exchange Act.
All provisions contained in the merger agreement with respect to employees, officers, directors, consultants and independent contractors are included for the sole benefit of optionsXpress and Schwab and shall not create any right (1) in any other person, including optionsXpress benefit plans or any beneficiary thereof or (2) to continued employment with Schwab or any of its affiliates.
Schwab has agreed to indemnify and hold harmless all past and present officers and directors of optionsXpress and its subsidiaries in their capacities as such against all losses, claims, damages, liabilities, costs, expenses, judgments, fines and amounts paid in settlement to the fullest extent such persons would be entitled to such indemnification under the certificate of incorporation and bylaws of optionsXpress as in effect on the date of the merger agreement and permitted by applicable law.
The merger agreement provides that Schwab will use its reasonable best efforts to cause the persons serving as officers and directors of optionsXpress immediately prior to the effective time to be covered for a period of six years after completion of the merger by Schwab’s current directors’ and officers’ liability insurance policies, or policies of at least the same coverage and amount and containing terms and conditions that are not in the aggregate less advantageous than the current policy, subject to specified cost limitations. Alternatively, Schwab or optionsXpress may obtain “tail” insurance policies with a claims period of at least six years of the completion of the merger, subject to specified cost limitations.
Schwab and optionsXpress have also agreed to use their reasonable best efforts to:
| • | take all actions necessary, proper or advisable under the merger agreement and applicable law to complete the merger as soon as practicable; and |
| • | promptly prepare and file all necessary documentation to obtain the consent, approval and authorization of all third parties and governmental entities which are necessary or advisable to complete the merger. |
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The merger agreement also contains covenants relating to cooperation in the preparation of this proxy statement/prospectus and additional agreements relating to, among other things, access to information, notice of specified matters, public announcements and the approval for listing of Schwab common stock on the New York Stock Exchange.
Conditions to Complete the Merger
Conditions to Both Parties’ Obligations. The obligations of Schwab and optionsXpress to complete the merger are subject to the satisfaction of the following conditions:
| • | the adoption of the merger agreement by the affirmative vote of optionsXpress stockholders representing a majority of the shares of optionsXpress common stock outstanding entitled to vote at the special meeting; |
| • | the receipt of specified regulatory approvals and consents and all other regulatory approvals and consents required or advisable to complete the transactions contemplated by the merger agreement and the expiration or termination of all statutory waiting periods, other than those approvals, consents and waiting periods the failure of which to be obtained, expired or terminated would not be material to the business or operations of optionsXpress and Schwab; |
| • | the effectiveness of the registration statement with respect to the Schwab common stock to be issued in the merger under the Securities Act, which includes this proxy statement/prospectus, and the absence of any stop order suspending the effectiveness of the registration statement or proceedings initiated or threatened by the Securities and Exchange Commission for that purpose; |
| • | the approval of the listing of the Schwab common stock to be issued or to be reserved for issuance in connection with the merger on the New York Stock Exchange, subject to official notice of issuance; |
| • | the absence of any order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing completion of the merger and the absence of any law, statute, rule, regulation, judgment, order, decree or injunction of any governmental entity which prohibits or makes illegal the completion of the merger; and |
| • | the expiration or termination of the waiting period applicable to the transactions contemplated by the merger agreement under the HSR Act and, if required, the receipt of other specified clearances, approvals or consents required or advisable to be obtained under antitrust laws of certain other specified jurisdictions. |
Conditions to Each Party’s Obligations. The obligations of each party to complete the merger are subject to the satisfaction or waiver of the following conditions:
| • | the other party’s representations and warranties in the merger agreement being true and correct, subject to the materiality standard contained in the merger agreement, and the performance by the other party in all material respects of its obligations under the merger agreement; and |
| • | the receipt by the party of a legal opinion from its counsel, dated the closing date, to the effect that the merger will be treated for United States federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. |
Termination of the Merger Agreement
General
The merger agreement may be terminated at any time prior to the completion of the merger by mutual written consent of Schwab and optionsXpress, or by either Schwab or optionsXpress if:
| • | any governmental entity which must grant a requisite regulatory approval or antitrust approval denies approval of the merger and such denial becomes final and non-appealable; |
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| • | any governmental entity of competent jurisdiction has issued a final non-appealable order enjoining or otherwise prohibiting the merger; |
| • | the merger is not completed on or before December 31, 2011, provided that neither Schwab nor optionsXpress may terminate the merger agreement for this reason if its failure to perform or observe its covenants and agreements has resulted in the failure of the merger to occur on or before that date; |
| • | the other party is in breach of its representations, warranties, covenants or agreements set forth in the merger agreement and the breach would prevent satisfaction by the other party of the relevant closing condition and the breach, if curable, is not cured within 30 days of written notice of the breach (and the terminating party is not then in material breach of any representation, warranty, covenant or agreement); or |
| • | optionsXpress stockholders fail to adopt the merger agreement at the optionsXpress special meeting or at any adjournment or postponement thereof. |
The merger agreement may also be terminated by Schwab if:
| • | (1) optionsXpress’ board of directors has failed to recommend the merger to optionsXpress stockholders or withdrawn, modified or changed in a manner adverse to Schwab its recommendation of the merger (or has taken any action or made any statement in connection with the optionsXpress stockholder meeting or otherwise inconsistent with its recommendation), (2) optionsXpress has materially breached its “non-solicitation” obligations in any respect adverse to Schwab, (3) optionsXpress’ board of directors has failed to call, give notice of, convene and hold a meeting of optionsXpress stockholders in accordance with the terms of the merger agreement or (4) optionsXpress, its subsidiaries or any of their respective officers, directors, employees, agents or representatives (including investment bankers, attorneys or accountants) negotiates or authorizes the conduct of negotiations (and 10 days have elapsed without such negotiations being discontinued) with a third party regarding an acquisition proposal other than the merger; or |
| • | a tender offer or exchange offer for 15% or more of the outstanding optionsXpress common stock is commenced and optionsXpress’ board of directors recommends that optionsXpress stockholders tender their shares or otherwise fails to recommend that optionsXpress stockholders reject such tender offer or exchange offer within 10 business days of the commencement of the offer. |
The merger agreement may also be terminated by optionsXpress, prior to the approval of the merger agreement by its stockholders, in order to enter into a transaction that is a superior proposal, if optionsXpress’ board of directors authorizes optionsXpress to enter into a definitive agreement with respect to a bona fide acquisition proposal and:
| • | optionsXpress’ board of directors has concluded in good faith after consultation with its outside counsel and financial advisors that such acquisition proposal constitutes a superior proposal after giving effect to all of the adjustments that may be offered by Schwab; |
| • | optionsXpress has notified Schwab, at least five business days in advance, of its intention to take such action, specifies the material terms and conditions of the superior proposal (including the identity of the person making such proposal) and furnishes to Schwab a copy of the relevant proposed transaction agreement and other material documents; |
| • | prior to taking such action, optionsXpress has negotiated, and has caused its financial and legal advisors to negotiate, in good faith with Schwab (to the extent Schwab desires to negotiate) to make such adjustments to the terms and conditions of the merger agreement such that the acquisition proposal no longer constitutes a superior proposal; and |
| • | concurrently with such termination, optionsXpress enters into a definitive agreement with respect to such superior proposal, provided that optionsXpress pays Schwab the termination fee described below prior to or concurrently with such termination. |
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Effect of Termination
In the event the merger agreement is terminated as described above, the merger agreement will become void and none of Schwab, Neon Acquisition Corp., optionsXpress, any of their respective subsidiaries or any of their officers or directors will have any liability under the merger agreement, except that:
| • | each party will remain liable for any willful and material breach of the merger agreement (other than the payment of punitive damages); and |
| • | certain designated provisions of the merger agreement, including the payment of fees and expenses, the confidential treatment of information, and, if applicable, the termination fee described below, will survive the termination. |
Termination Fee
A termination fee of $41,900,000 will be paid by optionsXpress to Schwab as follows:
| • | If Schwab terminates the merger agreement because: |
| • | optionsXpress’ board of directors has failed to recommend the merger to optionsXpress stockholders or withdrawn, modified or changed in a manner adverse to Schwab its recommendation of the merger (or has taken any action or made any statement in connection with the optionsXpress stockholder meeting or otherwise inconsistent with its recommendation), |
| • | optionsXpress has materially breached its “non-solicitation” obligations in any respect adverse to Schwab, |
| • | optionsXpress’ board of directors has failed to call, give notice of, convene and hold a meeting of optionsXpress stockholders, |
| • | optionsXpress, its subsidiaries or any of their respective officers, directors, employees, agents or representatives (including investment bankers, attorneys or accountants) negotiates or authorizes the conduct of negotiations (and 10 days have elapsed without such negotiations being discontinued) with a third party regarding an acquisition proposal other than the merger, or |
| • | a tender offer or exchange offer for 15% or more of the outstanding optionsXpress common stock is commenced and optionsXpress’ board of directors recommends that optionsXpress stockholders tender their shares or otherwise fails to recommend that optionsXpress stockholders reject such tender offer or exchange offer with 10 business days of the commencement of the offer, |
then optionsXpress will pay Schwab the full termination fee on the second business day following termination.
| • | If optionsXpress terminates the merger agreement in order to enter into a definitive agreement with respect to a superior proposal, following the procedures and requirements described above under the last termination right under “—Termination of the Merger Agreement—General”, then optionsXpress will pay Schwab the full termination fee prior to or concurrently with such termination. |
| • | If the merger agreement is terminated: |
| • | by Schwab because optionsXpress is in breach of its representations, warranties, covenants or agreements set forth in the merger agreement and the breach would prevent satisfaction by Schwab of the relevant closing condition and the breach, if curable, is not cured within 30 days of written notice of the breach (and Schwab is not then in material breach of any representation, warranty, covenant or agreement) and an acquisition proposal has been publicly announced prior to such termination, |
| • | by either Schwab or optionsXpress due to the failure of optionsXpress stockholders to adopt the merger agreement at the optionsXpress special meeting and an acquisition proposal has been publicly announced prior to the optionsXpress special meeting; or |
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| • | by either Schwab or optionsXpress because the merger was not completed by December 31, 2011 without a vote of the optionsXpress stockholders at the optionsXpress special meeting having occurred and an acquisition proposal has been publicly announced prior to such termination, |
and if optionsXpress or any of its subsidiaries enters into a definitive agreement with respect to, or completes a transaction contemplated by, any acquisition proposal, within 12 months after such termination, then optionsXpress will pay Schwab the full termination fee on the date of such execution or completion. For purposes of determining whether the termination fee is payable as described in the previous sentence, the term acquisition proposal has the meaning described under “—Stockholders Meeting and Duty to Recommend,” except that the references to “20% or more” in the definition of acquisition proposal will be deemed to be references to “50% or more.”
Amendment, Waiver and Extension of the Merger Agreement
Amendment
Schwab and optionsXpress may amend the merger agreement by action taken or authorized by their respective boards of directors. However, after the approval of the merger agreement by the optionsXpress stockholders, no amendment will be made which by law requires further approval by optionsXpress stockholders without such further approval.
Extension; Waiver
At any time prior to the completion of the merger, Schwab and optionsXpress, to the extent legally allowed, may:
| • | extend the time for performance of any of the obligations or other acts of the other party under the merger agreement; |
| • | waive any inaccuracies in the other party’s representations and warranties contained in the merger agreement or any document delivered pursuant to the merger agreement; and |
| • | waive the other party’s compliance with any of the agreements or conditions contained in the merger agreement. |
All costs and expenses incurred in connection with the merger agreement will be paid by the party incurring such expense, except with respect to the termination fee described under “—Termination of the Merger Agreement—Termination Fee” and except that expenses incurred in connection with printing and mailing this proxy statement/prospectus and in connection with notices or other filings with any governmental entities under any laws will be shared equally by Schwab and optionsXpress.
Schwab and optionsXpress have agreed that they are each entitled to an injunction to prevent breaches of the merger agreement and to enforce specifically the terms and provisions of the merger agreement, this being in addition to any other remedy to which the parties are entitled at law or in equity.
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This section of the document describes the material terms of the voting agreement. The following summary is qualified in its entirety by reference to the complete text of the voting agreement, which is incorporated herein by reference and attached as Annex B to this proxy statement/prospectus. This summary may not contain all of the information about the voting agreement that may be important to you. You are urged to read the full text of the voting agreement.
Concurrently with the execution of the merger agreement, Schwab executed a voting agreement with G-Bar Limited Partnership, JG 2002 Delta Trust and optionsXpress, to facilitate the merger of Schwab and optionsXpress. As of March 18, 2011 and as of the record date, G-Bar and JG Trust, collectively, beneficially owned an aggregate of 13,165,726 shares of optionsXpress common stock, which represented approximately 22.9% of optionsXpress common stock outstanding at March 18, 2011 and [—]% of optionsXpress common stock outstanding at the record date.
Voting of Shares. Pursuant to the voting agreement, and as further described below, each of G-Bar and JG Trust has agreed, prior to termination of the voting agreement, to appear at any meeting of the optionsXpress stockholders or otherwise cause its shares to be counted as present for the purpose of establishing a quorum and to vote its shares or cause its shares to be voted:
| • | in favor of the adoption of the merger agreement and any proposed postponements or adjournments of any meeting of the optionsXpress stockholders at which the adoption of the merger agreement or other related matters are to be considered; |
| • | against any action or agreement submitted for a vote of stockholders that is in opposition to the merger or that would result in a breach of the merger agreement by optionsXpress, or of the voting agreement by G-Bar or JG Trust; and |
| • | against any acquisition proposal (as described under “Proposal No. 1: The Merger Agreement—No Solicitation”) and any other agreement or transaction submitted for a vote of stockholders that is intended, or could reasonably be expected to materially impede, interfere with, delay or adversely affect the transactions contemplated by the merger agreement or the voting agreement or performance of the respective obligations by optionsXpress, G-Bar or JG Trust under the merger agreement or the voting agreement. |
The obligations of G-Bar and JG Trust to vote as described in the paragraph above apply whether or not the merger or any action described above is recommended by the optionsXpress board of directors or any committee of the optionsXpress board of directors.
Grant of Proxy. In furtherance of the voting agreement, each of G-Bar and JG Trust granted an irrevocable proxy to designated officers of Schwab to vote its shares in the manner described above.
Transfer and Other Restrictions. Each of G-Bar and JG Trust has agreed that beginning March 18, 2011 until the termination of the voting agreement, it will not:
| • | enter into a voting agreement, grant a proxy, or knowingly take actions that would prevent it from performing its obligations under the voting agreement; |
| • | sell, transfer, assign, pledge or similarly dispose of its shares of optionsXpress common stock or any interest in optionsXpress common stock (except for transfers to any of its affiliates that agrees to be bound by the voting agreement); or |
| • | take any action that could violate or conflict with its representations, warranties, covenants or obligations under the voting agreement or that could restrict or otherwise affect its legal power, authority and right to perform its covenants and obligations under the voting agreement. |
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No Solicitation. Each of G-Bar and JG Trust has also agreed not to, and not to permit any of its subsidiaries, representatives or affiliates to:
| • | initiate, solicit, initiate, encourage or knowingly facilitate the submission of any inquiries, proposals or offers or any other efforts that constitute or may reasonably be expected to lead to, any acquisition proposal; |
| • | have any discussions with or provide any confidential information or data to any person relating to an acquisition proposal, or engage in any negotiations concerning an acquisition proposal; |
| • | approve or recommend, or publicly propose to approve or recommend, any acquisition proposal; |
| • | approve or recommend, or publicly propose to approve or recommend, or execute or enter into, any letter of intent, agreement in principle, memorandum of understanding, merger agreement, asset or share purchase agreement or other similar agreement related to any acquisition proposal; |
| • | enter into any agreement or agreement in principle requiring optionsXpress to abandon, terminate or fail to complete the transactions contemplated by the merger agreement or breach its obligations under the merger agreement; |
| • | make or participate in any solicitation of proxies, or seek to advise or influence any person with respect to the voting of optionsXpress common stock other than to recommend the adoption of the merger agreement; or |
| • | agree or publicly propose to do any of the foregoing. |
For purposes of the voting agreement, the term acquisition proposal has the meaning described under “Proposal No. 1: The Merger Agreement—Stockholders’ Meeting and Duty to Recommend” beginning on page 65.
Termination. The voting agreement will terminate upon the earlier to occur of:
| • | the completion of the merger; and |
| • | the termination of the merger agreement in accordance with its terms. |
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DESCRIPTION OF SCHWAB CAPITAL STOCK
The following summary is a description of the material terms of Schwab’s capital stock and should be read in conjunction with the section entitled “Comparison of Stockholder Rights” beginning on page 77. This summary is not meant to be complete and is qualified by reference to the applicable provisions of the DGCL, the fifth restated certificate of incorporation of Schwab and the fourth restated bylaws of Schwab. You are urged to read those documents carefully. Copies of the fifth restated certificate of incorporation of Schwab and the fourth restated bylaws of Schwab are incorporated by reference in this proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 84.
General
Schwab’s authorized capital stock consists of 3,000,000,000 shares of common stock, par value $0.01 per share, and 9,940,000 shares of preferred stock, par value $0.01 per share.
Upon completion of the merger, Schwab would have approximately [—] million shares of common stock issued and outstanding. This amount, which may vary as of the actual closing date, was calculated by adding the aggregate number of shares of Schwab common stock expected to be issued in connection with the completion of the merger to the number of shares of Schwab common stock issued and outstanding as of [—], 2011.
Common Stock
Holders of Schwab common stock are entitled to receive dividends when, as and if declared by Schwab’s board of directors out of any funds legally available for dividends. Holders of Schwab common stock are also entitled, upon liquidation, and after claims of creditors and any class or series of preferred stock outstanding at the time of liquidation, to receive a pro rata distribution of Schwab’s net assets. Schwab pays dividends on its common stock only if it has paid or provided for all dividends on any outstanding series of preferred stock, for the then current period and, in the case of any cumulative preferred stock, all prior periods. Schwab’s preferred stock will have preference over its common stock with respect to the payment of dividends and the distribution of assets in the event of liquidation or dissolution. Schwab’s preferred stock also will also have such other preferences as may be fixed by Schwab’s board of directors.
Holders of Schwab common stock are entitled to one vote for each share that they hold and are vested with all of the voting power of Schwab’s capital stock, except as Schwab board of directors may provide with respect to any class or series of preferred stock that Schwab board of directors may hereafter authorize. Schwab’s certificate of incorporation does not provide for cumulative voting. Shares of Schwab common stock are not redeemable, and have no subscription, conversion or preemptive rights.
All outstanding shares of Schwab common stock are, and shares to be issued in the merger will be, when issued, fully paid and nonassessable.
Preferred Stock
Schwab’s board of directors is authorized at any time, and from time to time, to provide for the issuance of shares of preferred stock in one or more series, and to prescribe the designation, powers, relative preferences and rights of the shares of each series and the qualifications, limitations, or restrictions of the shares of each series. This authorization includes the right (A) to fix or alter the voting rights, powers, preferences and privileges, and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, of any wholly unissued series of preferred stock; (B) to fix the number of shares constituting any such series and the designation thereof; and (C) to increase or decrease the number of shares of any series of preferred stock (but not below the number of shares thereof then outstanding). As of [—], 2011, there were no shares of Schwab preferred stock issued and outstanding.
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The issuance of shares of Schwab preferred stock could adversely affect the availability of earnings for distribution to the holders of Schwab common stock if the preferred stock provides for cumulative dividends, dividend preferences, conversion rights or exchange, redemption or other similar rights or preferences.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock of Schwab is Wells Fargo Bank, N.A. The Schwab common stock is listed on the New York Stock Exchange under the symbol “SCHW.”
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COMPARISON OF STOCKHOLDER RIGHTS
Both Schwab and optionsXpress were incorporated under the laws of the State of Delaware. The rights of Schwab stockholders are governed by Delaware law, Schwab’s fifth restated certificate of incorporation, which we refer to as the certificate of incorporation of Schwab, and Schwab’s fourth restated bylaws, which we refer to as the bylaws of Schwab. The rights of optionsXpress stockholders are governed by Delaware law, optionsXpress’ amended and restated certificate of incorporation, which we refer to as the certificate of incorporation of optionsXpress, and optionsXpress’ amended and restated by-laws, which we refer to as the bylaws of optionsXpress.
The following discussion summarizes certain material differences between the rights of holders of optionsXpress common stock and Schwab common stock resulting from the differences in their governing documents. This discussion does not purport to be a complete statement of all differences among the rights of Schwab stockholders and optionsXpress stockholders, and is qualified in its entirety by reference to the governing corporate documents of Schwab and optionsXpress and applicable law. See “Where You Can Find More Information” beginning on page 84.
Capital Stock
Schwab. Schwab’s certificate of incorporation authorizes 3,000,000,000 shares of common stock, par value $0.01 per share, and 9,940,000 shares of preferred stock, par value $0.01 per share. As of [—], 2011, there were [—] shares of Schwab common stock and no shares of Schwab preferred stock issued and outstanding.
optionsXpress. optionsXpress’ certificate of incorporation authorizes 250,000,000 shares of common stock, par value $0.0001 per share, and 75,000,000 shares of preferred stock, par value $0.0001 per share. As of [—], 2011, there were [—] shares of optionsXpress common stock and no shares of optionsXpress preferred stock issued and outstanding.
Board of Directors
The DGCL provides that the board of directors of a Delaware corporation must consist of one or more directors. The certificate of incorporation or bylaws of a corporation may fix the number of directors.
Schwab. Schwab’s certificate of incorporation and bylaws provide that the number of directors shall be determined only by resolution adopted by a majority of the total number of directors. Schwab currently has 10 directors. Schwab’s certificate of incorporation provides that the directors, other than those who may be elected by holders of preferred stock, shall be divided into three classes, as nearly equal in number as is reasonably possible. All the directors of a particular class are elected in the same year for a three-year term of office; only one class of directors is up for election in any particular year.
optionsXpress. optionsXpress’ certificate of incorporation and bylaws provide that, subject to any rights of the preferred stockholders to elect additional directors under specified circumstances, the number of directors constituting the board of directors shall be fixed by resolution adopted by the affirmative vote of two-thirds of the total number of directors then in office. optionsXpress’ certificate of incorporation provides that the directors shall be divided into three classes as nearly equal in size as is practicable, with the term of one class expiring each year. optionsXpress’ board of directors currently consists of eight directors.
Removal of Directors
As described above under “—Board of Directors,” Schwab and optionsXpress have classified boards of directors. Under the DGCL, unless the certificate of incorporation provides otherwise, in a corporation with a classified board of directors any director or the entire board of directors may be removed only for cause and by the holders of a majority of the shares then entitled to vote.
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Schwab. Schwab’s certificate of incorporation and bylaws provide that, subject to certain rights of holders of preferred stock, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of 80% of the combined voting power of then outstanding shares of stock entitled to vote, voting together as a single class.
optionsXpress. optionsXpress’ certificate of incorporation provides that, subject to any rights of the holders of any series of preferred stock then outstanding, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of all shares of common stock entitled to vote generally in the election of directors, voting together as a single class.
Amendment of Certificate of Incorporation
Under Delaware law, an amendment to the certificate of incorporation requires a board resolution advising the amendment and approval by a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon, unless the certificate of incorporation requires a greater proportion of approval.
Schwab. Schwab’s certificate of incorporation provides that Articles Fifth (amendment of bylaws), Sixth (number, classification and removal of directors), Ninth (no cumulative voting), Tenth (business combinations), Eleventh (limitation on stockholder action) and Twelfth (amendment of certificate of incorporation) of the certificate of incorporation may only be altered or amended by the affirmative vote of the holders of at least 80% of the voting power of all shares of Schwab.
optionsXpress. optionsXpress’ certificate of incorporation requires the affirmative vote of the holders of at least 66 2/3% of the voting power of all shares of optionsXpress entitled to vote generally in the election of directors, voting together as a single class, to adopt any provision inconsistent with, to amend, alter, change or repeal any provision of, or to adopt a bylaw inconsistent with, Articles V (board of directors), VI (limitation of liability), VII (indemnification), VIII (action by written consent/special meetings of stockholders) or IX (amendment) of the certificate of incorporation.
Amendment of Bylaws
Under Delaware law, the power to adopt, amend or repeal bylaws is vested in the stockholders, unless the certificate of incorporation confers power to adopt, amend or repeal bylaws upon the directors as well.
Schwab. Schwab’s certificate of incorporation provides that, with limited exceptions, the Schwab board of directors is expressly authorized to adopt, alter, amend or repeal its bylaws by the affirmative vote of the majority of those directors present at any meeting, subject to the right of the stockholders to alter, amend or repeal any bylaws made or amended by the directors. Schwab’s certificate of incorporation and bylaws provide that sections 2.06 (notice of stockholder business and nominations), 2.10 (limits on stockholder action by written consent), 3.02 (number, election, terms and classification of directors), 3.05 (removal of directors), 3.06 (vacancies on the board) and 8.04 (amendment of bylaws) of Schwab’s bylaws may not be amended, altered or repealed, nor may any provision inconsistent with such sections be adopted, except by the affirmative vote of holders of no less than 80% of all the shares entitled to vote in the election of directors, voting together as a class.
optionsXpress. optionsXpress’ certificate of incorporation provides that the board of directors is expressly authorized to adopt, amend, alter, change or repeal its bylaws, and any bylaws made by the directors may be amended, altered, changed or repealed by the directors or by the stockholders. optionsXpress’ certificate of incorporation further provides that its bylaws may not be amended altered, changed or repealed by the stockholders, and no provision inconsistent therewith shall be adopted by the stockholders, without the affirmative vote of the holders of 66 2/3% of the voting power of all shares of optionsXpress entitled to vote generally in the election of directors, voting together as a single class.
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Right to Call Special Meeting of Stockholders
Under the DGCL, a special meeting of stockholders may be called by the board of directors or any other person authorized to do so in the certificate of incorporation or the bylaws.
Schwab. Under Schwab’s bylaws, special meetings of stockholders may be called only by the board of directors, the chairman of the board or a committee of the board which has been duly designated by the board and whose authority includes the power to call such meetings.
optionsXpress. optionsXpress’ certificate of incorporation and bylaws provide that special meetings of the stockholders can only be called by the chairman of the board or pursuant to a resolution adopted by the affirmative vote of the majority of the total number of directors then in office.
Stockholder Nominations and Proposals
Schwab. Schwab’s bylaws require advance notice for stockholder nominations and proposals. Under Schwab’s bylaws, for a matter to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of Schwab not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting, provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by Schwab. In addition, in the event that the number of directors to be elected to the Schwab board is increased and there is no public announcement by Schwab naming all of the nominees for director or specifying the size of the increased board at least 70 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice is also considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary of Schwab not later than the 10th day following the day on which such public announcement is first made by Schwab. A stockholder’s notice must state as to each matter the stockholder proposes to bring before the annual meeting:
| • | a brief description of the matter desired to be brought, the reasons for bringing such a matter before the meeting, and any material interest the stockholder or the beneficial owner on whose behalf the proposal is made has in the matter; |
| • | the name and address of the stockholder proposing such action, and the name and address of any beneficial owner on whose behalf the proposal is made; and |
| • | the class and number of shares of Schwab common stock which are beneficially owned by the stockholder or the beneficial owner. |
If the stockholder proposes to nominate a director for election or re-election, the stockholder must also include all information required to be disclosed in solicitations for proxies for election of directors in an election contest pursuant to Regulation 14A under the Exchange Act, and Rule 14a-11 thereunder.
optionsXpress. optionsXpress’ bylaws require advance notice for stockholder nominations and proposals. In order to be properly considered at a meeting, notice of stockholder nominations and proposals must be in proper written form and must be received by optionsXpress in a timely manner as follows:
| • | in the case of an annual meeting, not less than 90 days prior to the date of the anniversary of the previous year’s annual meeting; provided, however, that in the event the annual meeting is scheduled to be held on a date more than 30 days prior to or delayed by more than 60 days after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the later of 90 days prior to such annual meeting or the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made; and |
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| • | in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the 10th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. |
To be in proper written form, a stockholder’s notice to the Corporate Secretary must set forth as to each matter such stockholder proposes to bring before the annual meeting:
| • | a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; |
| • | the name and record address of such stockholder; |
| • | the class or series and number of shares of optionsXpress capital stock which are owned beneficially or of record by such stockholder; |
| • | a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business; and |
| • | a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. |
If the stockholder proposes to nominate a director for election, the stockholder must also include certain information about each person whom the stockholder proposes to nominate for election as a director, including the information required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder.
Anti-Takeover Provisions
Under the DGCL, a corporation is prohibited from engaging in any business combination with an interested stockholder or any entity if the transaction is caused by the interested stockholder for a period of three years from the date on which any such stockholder first becomes an interested stockholder. There is an exception to the three-year waiting period requirement if:
| • | prior to the stockholder becoming an interested stockholder, the board of directors approves the business combination or the transaction in which the stockholder became an interested stockholder; |
| • | upon the completion of the transaction in which the stockholder became an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation other than shares held by directors who are also officers and certain employee stock plans; or |
| • | the business combination is approved by the board of directors and by the affirmative vote of 66 2/3% of the outstanding voting stock not owned by the interested stockholder at a meeting. |
The DGCL defines the term “business combination” to include transactions such as mergers, consolidations or transfers of 10% or more of the assets of the corporation. The DGCL defines the term “interested stockholder” generally as any person who (together with affiliates and associates) owns (or in certain cases, within the past three years did own) 15% or more of the outstanding voting stock of the corporation. A corporation can expressly elect not to be governed by the DGCL’s business combination provisions in its certificate of incorporation or bylaws, but Schwab and optionsXpress have not done so.
Schwab. Schwab’s certificate of incorporation requires the approval of a supermajority of Schwab stockholders for certain business combinations with interested stockholders. An “interested stockholder” is defined as a person, partnership or group which directly or indirectly beneficially owns 15% or more of the voting power of the outstanding shares of Schwab, or an affiliate or associate thereof.
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Schwab’s certificate of incorporation provides that, notwithstanding any lesser percentage permitted by law, 80% of the voting power of Schwab stockholders, voting together as a single class, must approve any of the following business combinations:
| • | A merger or consolidation of Schwab or any of its subsidiaries with (1) an interested stockholder or (2) any other corporation which after such merger or consolidation would be an affiliate or associate of an interested stockholder; |
| • | Any sale or other arrangement with or for the benefit of an interested stockholder or any affiliate or associate of an interested stockholder involving any assets, securities or commitments of Schwab, any of its subsidiaries, any interested stockholder or any affiliate or associate of any interested stockholder, in each case having an aggregate fair market value of $5,000,000 or more; |
| • | The issuance or transfer by Schwab or any of its subsidiaries of any securities of Schwab or any of its subsidiaries to any interested stockholder or its affiliate or associate in exchange for cash, securities or other property having an aggregate fair market value of $5,000,000 or more; |
| • | The adoption of any plan or proposal for the liquidation or dissolution of Schwab; or |
| • | Any reclassification of securities of Schwab (including any reverse stock split), or any merger or consolidation of Schwab with any of its subsidiaries, or any other transaction which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of voting stock or series thereof of Schwab or any of its subsidiaries which is directly or indirectly owned by any interested stockholder or its affiliate or associate. |
The 80% requirement does not apply to business combinations approved by a majority of the disinterested directors then in office. A disinterested director is defined as any member of the Schwab board who:
| • | is not an interested stockholder; |
| • | is unaffiliated with and not a representative of an interested stockholder; |
| • | is not a party to an agreement or arrangement with an interested stockholder to act in concert with such interested stockholder to direct the management or policies of Schwab; and |
| • | either was a member of the Schwab board prior to the time that the interested stockholder became an interested stockholder, or is a successor of a disinterested director and was nominated to succeed a disinterested director by a majority of the disinterested directors at the time of nomination; provided that, this requirement does not apply if the business combination involves a party that was an interested stockholder of Schwab on July 30, 1987. |
The 80% requirement also does not apply to business combinations meeting fair price and procedural requirements set forth in Schwab’s certificate of incorporation.
optionsXpress. Section 203 of the DGCL applies to optionsXpress.
Stockholder Approval of a Merger
Under the DGCL, a merger must be approved by the board of directors and by a majority (unless the certificate of incorporation requires a higher percentage) of the outstanding stock of the corporation entitled to vote. However, no vote of stockholders of a constituent corporation surviving a merger is required (unless the corporation provides otherwise in its certificate of incorporation) if (1) the merger agreement does not amend such constituent corporation’s certificate of incorporation, (2) each share of stock of such constituent corporation outstanding immediately before the merger is to be an identical outstanding or treasury share of the surviving corporation after the merger and (3) the number of shares to be issued by the surviving corporation in the merger does not exceed 20% of the shares of such constituent corporation outstanding immediately before the merger.
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Schwab. Schwab’s certificate of incorporation provides for a greater vote only in the case of a business combination involving an “interested stockholder” (as defined in Schwab’s certificate of incorporation, as discussed above).
optionsXpress. optionsXpress’ certificate of incorporation and bylaws do not contain super-majority voting provisions with respect to mergers and other business combinations.
Limitations on Ownership
Schwab. The Home Owners’ Loan Act of 1933, as amended, or the HOLA, requires any “savings and loan holding company,” as defined in the HOLA, to obtain the approval of the Office of Thrift Supervision prior to the acquisition of more than 5% of Schwab common stock. Any other company, other than a bank holding company, is required to obtain prior a