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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
120 Kearny Street, San Francisco, CA 94108
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock - $.01 par value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 8, 2001, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $21,677,279,403. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant, and certain investment companies managed
by Charles Schwab Investment Management, Inc. were deemed to be shares of the
voting stock held by affiliates.
The number of shares of Common Stock outstanding as of March 8, 2001 was
1,386,965,389* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 2000 Annual Report to Stockholders by reference to portions of that
document. Part III of this Form 10-K incorporates certain information contained
in the registrant's definitive proxy statement for its annual meeting of
stockholders to be held May 7, 2001 by reference to portions of that document.
* Reflects the May 2000 three-for-two common stock split.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2000
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TABLE OF CONTENTS
Part I
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Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 12
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 13
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 13
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 13
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 14
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 14
Part III
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Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 14
Item 11. Executive Compensation ------------------------------------------------------------------------------- 17
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 17
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 17
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 17
Exhibit Index ---------------------------------------------------------------------------------- 18
Signatures ------------------------------------------------------------------------------------- 23
Index to Financial Statement Schedules --------------------------------------------------------- F-1
FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K, including the information 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. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will,"
"may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management's
beliefs, objectives and expectations as of the date hereof, are necessarily estimates based on the best judgment of our senior
management. These statements relate to, among other things, the Company's ability to pursue its strategy of attracting and retaining
client assets, the availability of the Company's information systems, the impact on U.S. Trust's ability to service its clients of
the repatriation of certain of its systems, and the impact on the Company's results of operations of decimalization. Achievement of
the expressed beliefs, objectives and expectations is subject to certain risks and uncertainties that could cause actual results to
differ materially from those beliefs, objectives and expectations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of documents
incorporated by reference, as of the date of those documents.
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business
The Company
The Charles Schwab Corporation (CSC) was incorporated in 1986 and engages,
through its subsidiaries, in securities brokerage and related financial
services. In this report, the "Company" refers to CSC and its subsidiaries.
Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer, which was
incorporated in 1971, and entered the discount brokerage business in 1974. U.S.
Trust Corporation (USTC, and with its subsidiaries collectively referred to as
U.S. Trust), which merged with CSC on May 31, 2000, is an investment management
firm that through its subsidiaries provides fiduciary services and private
banking services.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), Schwab Capital Markets L.P. (SCM), CyBerCorp Holdings, Inc.
(CyBerCorp) and The Charles Schwab Trust Company (CSTC). CSIM, incorporated in
1989, acts as the investment advisor for Schwab's proprietary mutual funds. The
Company refers to certain funds for which CSIM is the investment advisor as the
SchwabFunds(R). SCM, a subsidiary acquired in 1991, is a market maker in Nasdaq
and other securities providing trade execution services primarily to
broker-dealers and institutional clients. CyBerCorp, a subsidiary acquired on
March 1, 2000, is an electronic trading technology and brokerage firm providing
Internet-based services to highly active, online investors. CSTC, incorporated
in 1992, serves as trustee for employee benefit plans, primarily 401(k) plans.
CSC's international subsidiaries include Charles Schwab Europe (CSE) - a
retail securities brokerage firm acquired in 1995 and located in the United
Kingdom and Charles Schwab Canada, Co. (CS Canada) - acquired in 1998 to provide
financial services to Canadian investors. CSC's international joint ventures
include Charles Schwab Tokio Marine Securities Co., Ltd. (CSTMS) - formed in
1999 to provide retail brokerage and investment services to residents of Japan,
and Charles Schwab Australia Pty Ltd. (CS Australia) - formed in 2000 to provide
financial services to investors in Australia and New Zealand.
Business Combinations
On May 31, 2000, CSC completed its merger (the Merger) with USTC. Under the
terms of the merger agreement, USTC became a wholly owned subsidiary of CSC and
USTC shareholders received 5.1405 shares of CSC's common stock for each common
share of USTC. The Merger was treated as a non-taxable stock-for-stock exchange
and USTC's shareholders received approximately 112,000,000 shares of CSC's
common stock. Upon completion of the Merger, CSC became a financial holding
company, which is a type of bank holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956, as amended (the Act).
The financial information in this report gives retroactive effect to the Merger,
which was accounted for as a pooling of interests. The pooling of interests
method of accounting requires the restatement of all periods presented as if CSC
and USTC had been operating as a combined entity during such periods. Share
information presented throughout this report has been restated to reflect the
common shares issued to USTC shareholders pursuant to the exchange ratio under
the terms of the merger agreement.
On March 1, 2000, the Company acquired CyBerCorp in a non-taxable
stock-for-stock exchange. Pursuant to the acquisition, CyBerCorp became a wholly
owned subsidiary of CSC which resulted in 17,570,000 shares of CSC's common
stock and 3,077,000 options to purchase CSC common stock being exchanged for all
of the outstanding shares, options and equity rights of CyBerCorp. Because the
acquisition was accounted for using the purchase method, the operating results
of CyBerCorp are included in the consolidated results of the Company since the
acquisition date. The historical results of CyBerCorp are not included in
periods prior to the acquisition.
On November 14, 2000, the Company acquired Chicago Investment Analytics,
Inc., a private research firm, to help expand Schwab's research offerings. The
acquisition was treated as a non-taxable stock-for-stock exchange and accounted
for using the purchase method.
New Developments During 2000
The Company responds to changing client needs with continued product,
technology and service innovations. During 2000:
o Schwab launched the Schwab Portfolio Consultation(TM), a package of
analytical services and individual consultations with Schwab investment
specialists designed to assist clients in evaluating their asset allocations.
o Schwab entered into a global financial services alliance with AOL Time Warner
Inc. (AOL) to provide investment information, tools and assistance to AOL's
users and to enable Schwab to reach potential clients. Under the alliance,
Schwab and AOL are expected to engage in a series of marketing and
promotional programs and both companies are expected to incorporate
co-branded initiatives into their ongoing marketing efforts.
o Schwab introduced PocketBroker(TM), a wireless investing service that enables
U.S. clients to access their account information or place an equity order via
PalmPilot(TM), RIM Wireless Handheld(TM) pager and Internet-ready cellular
phones.
o Schwab began offering clients and potential clients referrals to U.S. Trust's
investment management, trust and private banking capabilities as part of the
AdvisorSource(R) referral services program. Schwab created a special version
of the Schwab Signature Services(TM) offering for U.S. Trust clients who want
to utilize Schwab's products and services.
o Schwab introduced Administrative Trustee Services, a program enabling
independent investment managers, through U.S. Trust, to offer trust
administration services to their clients.
o Schwab invested in and formed an alliance with E-LOAN, Inc., to provide
Schwab clients with online access to E-LOAN's broad choice of mortgage
products, as well as online rate search and loan comparison, selection,
application and tracking services, all supported by trained client
representatives.
o As part of its participation in the REDIBook ECN LLC (REDIBook), an
electronic communication network (ECN), Schwab launched a pre-market trading
session, as well as introduced a series of enhancements to its existing
after-hours trading session.
o The Company's joint venture in Japan, CSTMS, commenced business and opened
two branch offices in Tokyo, Japan.
o Through a joint venture with ecorp Limited, the Company formed CS Australia
to provide financial services to investors in Australia and New Zealand.
o Schwab launched a Spanish-language Web site that serves Hispanic clients in
the U.S., the Caribbean, and Central and South America. Additionally, Schwab
introduced a Korean-language Web site and enhanced its Chinese-language Web
site, both of which provide information about the U.S. financial markets
and Schwab products and services.
Stock Split
In May 2000, the Company effected a three-for-two common stock split in the
form of a 50% stock dividend. Share information throughout this report has been
restated to reflect the common stock split.
Subsequent Events
RESTRUCTURING. On March 22, 2001, the Company announced that due to
continued economic uncertainties and difficult market conditions, it plans to
take additional steps to reduce expenses. These steps include reducing full-time
equivalent employees at the Company by 2,750 to 3,400, or 11% to 13%. This
workforce reduction includes mandatory staff reductions totaling 2,000 to 2,300
full-time employees and 150 to 200 contractors during the second quarter of
2001, as well as 600 to 900 full-time employees during the remainder of the year
through voluntary attrition. The Company is also evaluating a reduction in its
existing administrative office space, as well as the removal of certain systems
hardware from service.
The Company expects to recognize a pre-tax charge of $70 to $100 million in
the second quarter of 2001 to reflect this restructuring. The Company estimates
that the restructuring will reduce pre-tax expenses by $40 to $45 million per
quarter, commencing in the third quarter of 2001. Additionally, employee
attrition is estimated to result in pre-tax savings of about $10 million per
quarter beginning in 2002.
SHARE REPURCHASES. On March 21, 2001, the Board of Directors authorized the
repurchase of up to 20 million shares of CSC's common stock. The shares may be
repurchased through open market or privately negotiated transactions based on
prevailing market conditions.
(b) Financial Information About Segments
The Company provides financial services to individuals, institutional
clients and broker-dealers through four segments - Individual Investor,
Institutional Investor, Capital Markets and U.S. Trust. The Individual Investor
segment includes the Company's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. The Capital Markets segment provides trade execution
services in Nasdaq, exchange-listed and other securities primarily to
broker-dealers and institutional clients. The U.S. Trust segment provides
investment management, fiduciary services and private banking services to
individual and institutional clients. For financial information by segment and
geographic area, and for revenues by major client for the three years ended
December 31, 2000, see note "21 - Segment Information" in the Notes to
Consolidated Financial Statements in the Company's 2000 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
(c) Narrative Description of Business
The Company's primary focus is serving retail investors in the U.S., either
directly or through independent investment managers, who want access to a broad
selection of products and services, as well as investment news and information,
tailored to meet their financial needs. The Company, through its subsidiaries,
serves 7.5 million active client accounts(a). Client assets in these accounts
totaled $871.7 billion at December 31, 2000.
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(a) Accounts with balances or activity within the preceding eight months.
The Company's strategy is to attract and retain client assets by focusing
on a number of areas within the financial services industry - retail brokerage,
support services for independent investment managers, 401(k) defined
contribution plans, equity securities market-making, mutual funds, investment
management, fiduciary services and private banking services. To pursue its
strategy and its objective of long-term profitable growth, the Company plans to
continue leveraging its competitive advantages. These advantages include
nationally recognized brands, a broad range of products and services,
multi-channel delivery systems and an ongoing investment in technology. While
the Company's business continues to be predominantly conducted in the U.S., the
Company intends to continue to selectively expand its international presence.
The table below shows the Company's sources of revenues on a comparative
basis for the three years ended December 31, 2000.
Sources of Revenue
(Dollar amounts in thousands)
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
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Amount Percent Amount Percent Amount Percent
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Revenues
Commissions
Nasdaq and other equity securities $ 1,228,812 20% $ 985,870 22% $ 608,877 19%
Exchange-listed securities 729,247 12% 609,032 14% 489,849 15%
Options 204,133 4% 174,814 4% 122,455 4%
Mutual funds 131,953 3% 104,878 2% 96,922 3%
- ---------------------------------------------------------------------------------------------------------------------------
Commissions 2,294,145 39% 1,874,594 42% 1,318,103 41%
- ---------------------------------------------------------------------------------------------------------------------------
Asset management and administration fees
Mutual fund service fees
Proprietary funds (SchwabFunds(R)
and Excelsior(R)) 672,874 12% 541,864 12% 401,268 13%
Mutual Fund OneSource(R) 333,697 6% 229,237 5% 174,980 5%
Other 32,343 17,476 13,014
Asset management and related services 544,184 9% 431,769 10% 347,534 11%
- ---------------------------------------------------------------------------------------------------------------------------
Asset management and administration fees 1,583,098 27% 1,220,346 27% 936,796 29%
- ---------------------------------------------------------------------------------------------------------------------------
Interest revenue
Margin loans to clients 1,771,573 30% 982,683 22% 670,965 21%
Investments, client-related 337,991 6% 404,003 9% 400,453 13%
Private banking loans 219,277 4% 174,514 4% 149,493 5%
Securities available for sale 68,884 1% 57,290 1% 59,607 2%
Other 191,151 4% 99,519 2% 71,123 2%
Interest expense (1,351,776) (24%) (898,219) (20%) (773,998) (25%)
- ---------------------------------------------------------------------------------------------------------------------------
Net interest revenue 1,237,100 21% 819,790 18% 577,643 18%
- ---------------------------------------------------------------------------------------------------------------------------
Principal transactions
Nasdaq and other equity securities 470,139 8% 411,366 9% 231,336 8%
Other 100,068 2% 89,130 2% 55,418 2%
- ---------------------------------------------------------------------------------------------------------------------------
Principal transactions 570,207 10% 500,496 11% 286,754 10%
- ---------------------------------------------------------------------------------------------------------------------------
Other 103,101 3% 71,193 2% 58,574 2%
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,787,651 100% $4,486,419 100% $3,177,870 100%
===========================================================================================================================
This table should be read in connection with the Company's consolidated financial statements and notes in the Company's 2000
Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of this report. All periods have
been restated to reflect the merger of The Charles Schwab Corporation with U.S. Trust Corporation. Certain prior years'
revenues and expenses have been reclassified to conform to the 2000 presentation.
Advertising and Marketing Programs
The Company's worldwide advertising and marketing programs support its
strategy by continually reinforcing the strengths and key attributes of Schwab's
full-service offering, CyBerCorp's trading technology and U.S. Trust's wealth
management services. By maintaining a consistent level of visibility in the
marketplace, the Company seeks to establish Schwab, CyBerCorp and U.S. Trust as
leading financial services brands in a focused and cost-effective manner. The
Company primarily uses a combination of network, cable and local television,
print media, athletic event sponsorship, and online channels in its advertising
to clients and potential clients.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers a broad range of value-oriented products and services to
meet clients' varying investment and financial needs, including help and advice
and access to extensive investment research, news and information.
SCHWAB SERVICES FOR RETAIL INVESTORS. Retail investors at Schwab, through
the Individual Investor segment or indirectly through the Institutional Investor
segment, have access to the accounts, help and advice, investment education,
research and analysis tools and financing described below.
Accounts and Features. Through various types of brokerage accounts, Schwab
offers the purchase and sale of securities which include Nasdaq, exchange-listed
and other equity securities, options, mutual funds, unit investment trusts,
variable annuities and fixed income investments, including U.S. Treasuries,
zero-coupon bonds, exchange-listed and over-the-counter corporate bonds,
municipal bonds, Government National Mortgage Association securities and
certificates of deposit. Schwab also offers certain of its clients initial and
secondary public stock offerings, debt underwritings, and access to futures and
commodities trading. Additionally, Schwab provides clients access to a variety
of life insurance and annuity products through third-party insurance companies.
Clients approved for margin transactions may borrow a portion of the price
of certain securities purchased through Schwab, or may sell securities short.
Clients must have specific approval to trade options; as of December 31, 2000,
369,000 accounts had such approval. To write uncovered options, clients must go
through an additional approval process and must maintain a significantly higher
level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in its standard
Schwab brokerage accounts, it provides clients with an option to have cash
balances in their accounts automatically swept, on a weekly basis, into certain
taxable or state-specific municipal tax-exempt SchwabFunds(R) money market
funds.
A client may receive additional services by qualifying for and opening a
Schwab One(R) brokerage account. A client may access available funds in his or
her Schwab One account either with a personal check, a VISA(R) debit card or
Schwab BillPay(R), in addition to the Schwab MoneyLink(R) service offered with
all brokerage accounts. When a Schwab One client is approved for margin trading,
the checks and debit card also provide access to margin cash available. For cash
balances awaiting investment, Schwab pays interest to Schwab One clients.
Alternatively, qualifying Schwab One clients seeking tax-exempt income may elect
to have cash balances swept daily into state-specific municipal tax-exempt
SchwabFunds money market funds.
Schwab offers the Signature Services(TM) program to clients that either
have at least $100,000 in assets at Schwab or make at least 12 revenue trades
per year and have at least $10,000 in assets at Schwab. This program provides
such benefits as access to a dedicated team of registered representatives for
certain clients, free research, and other services. Within the program, clients
have access to three different levels of services that are based on asset and
trading levels. As part of the Signature Services program, Schwab offers the
Schwab Access(TM) account. Designed to complement the Schwab One account, Schwab
Access is an account allowing clients to conduct everyday payment activities at
Schwab via the Internet. The Schwab Access account features include online bill
payment, unlimited check writing, Gold VISA debit card, returned check copies,
unlimited money transfers within Schwab accounts and no-fee ATM access. Cash
balances in a Schwab Access account are swept daily into a SchwabFunds money
market fund.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs) and Keogh accounts. In Schwab IRAs, cash balances are swept
daily into one of three SchwabFunds money market funds. During 2000, active IRAs
and Keogh accounts increased 19% to 3,000,000 accounts and client assets in all
IRAs and Keogh accounts increased 2% to $173.9 billion.
CyBerCorp offers a brokerage account to its clients. Features of this
account include access to CyBerCorp's proprietary software designed to benefit
highly active investors and the choice of manual or automated order routing for
placing trades.
Help and Advice. The Company's approach to advice is based on long-term
investment strategies and guidance on portfolio diversification and asset
allocation. Schwab strives to demystify investing by educating and assisting
clients in the development of investment plans. This approach is designed to be
offered consistently across all of Schwab's delivery channels and provides
clients with a wide selection of choices for their investment needs. Schwab's
registered representatives can assist investors in developing asset allocation
strategies and evaluating their investment choices, and refer investors who
desire additional guidance to independent investment managers, financial
planners and certified public accountants through the Schwab AdvisorSource(R)
service. Additionally, as part of the AdvisorSource service, Schwab clients and
potential clients can obtain referrals to U.S. Trust's investment management
service, which assists clients in developing long-term plans for managing
wealth, and access to U.S. Trust's private banking service capabilities.
Investment Education, Research and Analysis Tools. Schwab provides
investors with investment education, research and analysis tools which include
WebShops(TM) - a series of workshops designed to help investors increase their
skills in using Schwab's online services. Schwab provides various Internet-based
research and analysis tools including: The Analyst Center(R), which connects
clients to proprietary and third-party investment research, guidance and
decision-making tools; the Positions Monitor(TM), which tracks clients' mutual
fund and equity holdings' historical performance; the Mutual Fund Performance
Profile(TM), which allows clients to analyze the performance of their entire
mutual fund portfolio; the Stock Screener(TM), which allows clients to search
over 9,000 equities using their own criteria; the Schwab Learning Center, which
provides access to interactive courses designed to help clients learn more about
investing principles and use of the online channel; the Charles Schwab Stock
Analyzer(TM), a tool that guides clients through the basics of equity research;
the Schwab Portfolio Checkup(TM), an asset allocation tool that also allows
clients to include non-Schwab holdings in their analyses; the Smart
Investor(TM), a centralized location on Schwab.com(TM) for educational
information about investing; and SchwabWelcome.com(TM), which creates an
efficient and easy way for prospects to get started investing at Schwab. In
addition, Schwab provides SchwabAlerts(TM), which delivers investment and market
activity news to clients via both wireless and regular e-mail.
Client Financing. Clients' securities transactions are conducted on either
a cash or margin basis. Generally, a client buying securities in a cash-only
brokerage account is required to make payment by settlement date, usually three
business days after the trade is executed. However, for purchases of certain
types of securities, such as certain mutual fund shares, a client must have a
cash or money market fund balance in his or her account sufficient to pay for
the trade prior to execution. When selling securities, a client is required to
deliver the securities, and is entitled to receive the proceeds, on settlement
date. In an account authorized for margin trading, Schwab may lend a client a
portion of the market value of certain securities up to the limit imposed by the
Federal Reserve Board, which for most equity securities is initially 50%. These
loans are collateralized by the securities in the client's account. Short sales
of securities represent sales of borrowed securities and create an obligation
for the client to purchase the securities at a later date. Clients may sell
securities short in a margin account subject to minimum equity and applicable
margin requirements and the availability of such securities to be borrowed and
delivered.
Interest on margin loans to clients provides an important source of revenue
to Schwab. During 2000, Schwab's outstanding margin loans to clients averaged
$19.8 billion. After increasing from 1998 to 1999 and reaching a peak of $22.3
billion in April 2000, margin loans to clients declined to $15.8 billion at
December 31, 2000 along with the decline in equity valuations in the securities
markets.
In permitting a client to engage in transactions, Schwab faces credit risk
if the client fails to meet his or her obligations in the event of adverse
changes in the market value of the securities positions in his or her account.
Under applicable rules and regulations for margin transactions, Schwab, in the
event of such an adverse change, requires the client to deposit additional
securities or cash, so that the amount of the client's obligation is not greater
than specified percentages of the cash and market values of the securities in
the account. As a matter of policy, Schwab generally requires its clients to
maintain higher percentages of collateral values than the minimum percentages
required under these regulations.
Schwab may use cash balances in client accounts to extend margin credit to
other clients. Pursuant to the requirements of Rule 15c3-3 under the Securities
Exchange Act of 1934 (Rule 15c3-3), the portion of such cash balances not used
to extend margin credit (increased or decreased by certain other client-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in cash or qualified securities,
as defined by Rule 15c3-3. To the extent client cash balances are available for
use by Schwab at interest costs lower than Schwab's costs of borrowing from
alternative sources, Schwab's cost of funds is reduced and its net income is
enhanced. Such interest savings contribute substantially to Schwab's
profitability and, if a significant reduction of client cash balances were to
occur, Schwab's borrowings from other sources may have to increase and such
profitability would decline. To the extent Schwab's clients elect to have cash
balances in their brokerage accounts swept into certain SchwabFunds(R) money
market funds, the cash balances available to Schwab for investments or for
financing margin loans are reduced. However, Schwab receives asset management
and administration fees from such funds based upon average daily invested
balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Risk Management" in the Company's 2000 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
SERVICES FOR INDEPENDENT INVESTMENT MANAGERS. Schwab provides custodial,
trading and support services to independent investment managers through the
Institutional Investor segment. To attract the business of accounts managed by
these managers, Schwab has a dedicated business unit which includes experienced
registered representatives assigned to individual managers. Independent
investment managers participating in this program who custody client accounts at
Schwab may use SchwabLink(R), the SchwabLink Web(TM) site, the Managed Account
Connection(TM), and the Signature Services Alliance(TM). SchwabLink is a
computer-based information network that enables investment managers to access
information about their clients' accounts directly from Schwab's computer
systems and to enter their clients' trades online. The SchwabLink Web site
enables investment managers to use the Internet to communicate directly with
Schwab service teams, as well as receive news and information. The Managed
Account Connection enables investment managers to provide their clients with
personalized equity portfolio management by a variety of institutional asset
managers. The Signature Services Alliance provides enhanced personalized
services to customers of investment managers, including access to a dedicated
team of representatives and the Schwab Institutional Web site(TM). During 2000,
Schwab client assets held in accounts managed by approximately 5,700 active
independent investment managers increased $21.0 billion, or 10%, to a total of
$234.1 billion. Independent investment managers generated 11% of total
commission revenues in both 2000 and 1999 and 12% in 1998.
RETIREMENT PLAN SERVICES. The Company provides 401(k) recordkeeping and
other retirement plan services through the Institutional Investor segment.
Schwab serves company 401(k) plans directly through a dedicated sales force, as
well as indirectly through alliances with third-party administrators. In the
direct channel, SchwabPlan(R) is the Company's 401(k) retirement plan, which
offers plan sponsors a wide array of investment options, participant education
and servicing, trustee services, participant-level recordkeeping, and online
investment guidance services. During 2000, the Company enhanced SchwabPlan by
introducing an electronic desktop delivery service that allows plan participants
to receive detailed account information via encrypted e-mail; and launched a new
Web site that allows individuals who are using Schwab's retirement plan services
through third-party administrators to utilize the education, planning and
investment tools that are available to SchwabPlan participants. During 2000,
client assets in employer-sponsored retirement plans grew $4.7 billion, or 5%,
to $99.6 billion, including $31.1 billion serviced by Schwab's retirement plan
services business.
MARKET-MAKING ACTIVITIES. Market-making activities in Nasdaq, exchange-
listed and other securities are conducted through the Capital Markets segment.
SCM provides trade execution services in Nasdaq and other securities primarily
to broker-dealers, including Schwab, and institutional clients. As a market
maker in Nasdaq and other securities, SCM generally executes client trades as
principal. While substantially all Nasdaq security trades originated by the
clients of Schwab are directed to SCM, a substantial portion of SCM's trading
volume comes from parties other than Schwab.
Schwab has specialist operations on the Boston Stock Exchange and the
Cincinnati Stock Exchange to make markets in exchange-listed securities. The
majority of trades originated by the clients of Schwab in exchange-listed
securities for which Schwab makes a market are directed to these operations. At
December 31, 2000, Schwab had four specialists on the Boston Stock Exchange and
nine specialists on the Cincinnati Stock Exchange that made markets in 139 and
193 securities, respectively.
In the normal course of their market making in Nasdaq, exchange-listed and
other securities, Schwab and SCM maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
SCM's ownership of securities, short inventory positions represent obligations
of Schwab and SCM to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
gains or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Risk Management" in the Company's 2000 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
MUTUAL FUNDS. The Company's mutual fund services are considered a product
and not a segment. The Company provides mutual fund services primarily through
the Individual Investor and Institutional Investor segments, as well as the U.S.
Trust segment. Schwab's Mutual Fund Marketplace(R) provides clients with the
ability to invest in over 2,000 mutual funds from 341 fund families. Within the
Mutual Fund Marketplace, Schwab's Mutual Fund OneSource(R) service enables
clients to trade 1,280 mutual funds from 237 fund families without incurring
transaction fees. The Mutual Fund Marketplace also includes Schwab's mutual fund
clearing service.
Schwab's Mutual Fund OneSource service allows investors to access multiple
mutual fund companies, avoid brokerage transaction fees, and achieve investment
diversity among fund families. In addition, investors' recordkeeping and
investment monitoring are simplified through one consolidated statement. Fees
received by Schwab for providing services, including recordkeeping and
shareholder services, from the Mutual Fund OneSource program are based upon the
daily balances of client assets invested in the participating funds through
Schwab and are paid by the funds and/or fund sponsors. Client assets invested in
third-party funds that have been purchased through the Mutual Fund OneSource
service, excluding SchwabFunds(R), totaled $98.3 billion at December 31, 2000.
Schwab's mutual fund clearing service provides mutual fund trading and
clearing services to banks and broker-dealers. Client assets invested in
third-party funds through Schwab's mutual fund clearing service totaled $21.2
billion at December 31, 2000.
Client assets invested in Schwab's Mutual Fund Marketplace, excluding the
Mutual Fund OneSource service and mutual fund clearing service, totaled $71.3
billion at December 31, 2000. Schwab charges a transaction fee on trades placed
in the funds included in the Mutual Fund Marketplace (except on trades through
the Mutual Fund OneSource service). These fees are recorded as commission
revenues. Commissions from client transactions in mutual fund shares comprised
6% of total commission revenues in both 2000 and 1999 and 7% in 1998.
In addition to the third-party funds available through the Mutual Fund
Marketplace, Schwab offers a family of proprietary funds, referred to as the
SchwabFunds, and U.S. Trust offers a family of mutual funds, referred to as the
Excelsior(R) funds.
SchwabFunds(R) include money market funds, equity index funds, bond funds,
asset allocation funds, funds that primarily invest in stock, bond and money
market funds, and actively-managed equity funds. Qualifying Schwab clients may
elect to have cash balances in their brokerage accounts automatically invested
in certain SchwabFunds money market funds. Client assets invested in the
SchwabFunds were $127.2 billion at December 31, 2000. Fees received by the
Company from the SchwabFunds, for providing transfer agent services, shareholder
services, administration and investment management, are based upon the daily
balances of client assets invested in these funds.
Excelsior funds include domestic equity funds, international equity funds,
taxable fixed income funds, tax-exempt fixed income funds and money market
funds. Client assets invested in the Excelsior funds were $12.3 billion at
December 31, 2000.
U.S. TRUST INVESTMENT MANAGEMENT, FIDUCIARY SERVICES AND PRIVATE BANKING
SERVICES. U.S. Trust provides personal wealth management services to affluent
individuals and families. U.S. Trust provides both individually managed balanced
accounts and specialized investment management services to clients with $2
million to $50 million in assets at U.S. Trust. U.S. Trust offers Wealth
Advisory Accounts, an investment advisory service that utilizes the Excelsior
family of mutual funds, to clients that have over $250,000 in assets at U.S.
Trust. In addition to investment management services, U.S. Trust provides
specialized fiduciary, financial planning, enhanced master custody and
philanthropic consulting services to clients that have over $50 million in
assets at U.S. Trust. U.S. Trust also offers private banking services to assist
in meeting the credit and liquidity requirements of its clients. These services
include mortgage and personal lending vehicles and an array of deposit-taking
products.
For institutional clients, including corporations, endowments, foundations
and pension plans, U.S. Trust provides investment management, corporate trust,
brokerage and special fiduciary services. Through these investment management
services, U.S. Trust offers a wide range of investment options, including
balanced and specialized domestic and international equity investments,
structured investments, alternative investments, fixed income securities and
short-term cash management. Institutional clients can also utilize the Excelsior
family of mutual funds.
Additionally, U.S. Trust offers to its institutional clients investment,
consulting and fiduciary services for employee stock ownership plans that invest
in significant amounts of employer stock. Special fiduciary services also
include trustee services for non-qualified or supplemental employee benefit
plans, also known as rabbi trusts.
Multi-Channel Delivery Systems
The Company's multi-channel delivery systems allow clients to choose how
they prefer to do business with the Company. In addition to its branch office
network, Schwab maintains five regional client telephone service centers, two
online client support centers as well as automated telephonic and online
channels, primarily serving retail investors through the Individual Investor and
Institutional Investor segments. U.S. Trust maintains offices serving clients
through the U.S. Trust segment.
OFFICE NETWORK. To enable clients to obtain services in person with a
Company representative, the Company maintains a network of offices. At December
31, 2000, Schwab operated 384 domestic branch offices in 48 states, as well as
branches in the Commonwealth of Puerto Rico and the U.S. Virgin Islands. At
December 31, 2000, U.S. Trust operated 31 offices in 11 states. In addition, the
Company has offices in Australia, Brazil, Canada, the Cayman Islands, Hong Kong,
Japan and the United Kingdom. The Company's office network plays a key role in
building its business. With the client service support of regional client
telephone service centers and automated telephonic and online channels, office
personnel focus a significant portion of their time on business development.
Clients can use Schwab's branch offices to open accounts, deliver and receive
checks and securities, obtain market information, place orders, and obtain
related client services in person, yet most of these activities are conducted by
telephone, mail and online channels. Schwab's branch offices also provide
investors with access to the Internet and to Schwab's registered representatives
who can assist investors in developing asset allocation strategies and
evaluating their investment choices. U.S. Trust's clients can meet with their
portfolio managers and other wealth management professionals at regional offices
throughout the country to obtain access to U.S. Trust's wide array of financial
services and products.
REGIONAL CLIENT TELEPHONE SERVICE CENTERS. Schwab's five regional client
telephone service centers, located in Indianapolis, Denver, Phoenix, Orlando and
Austin, handle client trading and service calls twenty-four hours-a-day, seven
days-a-week. Schwab's fifth regional client telephone service center, located in
Austin, began handling calls in 2000. The capacity of the service centers allows
Schwab's branch office network to be maintained at lower staffing levels and for
office personnel to focus on business development.
Schwab's client service approach is to use teams led by registered
representatives in the service centers, who work closely with office network
personnel. Additionally, certain teams at these centers provide specialized
services to clients of the Schwab Signature Services(TM) program. Each
registered representative has immediate access to the client account and
market-related information necessary to respond to client inquiries. For most
client orders, registered representatives can enter the order and confirm the
transaction immediately. As a result of this approach, the departure of a
registered representative generally does not result in a loss of clients for
Schwab.
AUTOMATED TELEPHONIC AND ONLINE CHANNELS. Clients are able to obtain
financial information and execute trades on an automated basis through Schwab's
automated telephonic and online channels. These channels are designed to provide
added convenience for clients and minimize Schwab's costs of responding to and
processing routine client transactions. To assist clients in using online
channels, Schwab maintains two online client support centers that operate both
during and after normal market hours.
Schwab's automated telephonic channels include TeleBroker(R) - Schwab's
touch-tone telephone quote and trading service, and Schwab by Phone(TM) -
Schwab's voice recognition quote and trading service. Schwab's automated
telephonic channels handled over 70% of client calls received in 2000. Online
channels include the Charles Schwab Web Site, an information and trading service
on the Internet at www.schwab.com(TM); the CyBerCorp Web site, an Internet
service for highly active investors at www.cybercorp.com; PocketBroker(TM), a
wireless information and trading service; PC-based services such as
SchwabLink(R), a service for independent investment managers; and Velocity(TM),
an online trading system which provides enhanced trade information and order
execution for certain of Schwab's clients who trade frequently. While the online
channel is the fastest-growing channel, the Company continues to stress the
importance of Clicks and Mortar(TM) access - blending the power of the Internet
with personal service to create a full-service client experience. The Company's
online channels handled 80% of total trades in 2000. Schwab provides every
retail client access to all delivery channels.
The Company offers its clients access to extended-hours trading for certain
Nasdaq, exchange-listed and other securities through its participation in the
REDIBook ECN.
CyBerCorp offers its clients CyBerX(R)2 and CyBerTrader(R)3.0, which are
trading platforms that provide actively trading investors the ability to search
ECNs, market makers and market specialists for favorable equity prices.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access client account information, obtain securities prices and
related information, and enter orders online.
To support its multi-channel delivery systems, as well as other
applications such as clearing functions, account administration, recordkeeping
and direct client access to investment information, Schwab maintains a
sophisticated computer network connecting all of the offices and regional client
telephone service centers. Schwab's computers are also linked to SCM, the major
registered U.S. securities exchanges, the National Securities Clearing
Corporation, The Depository Trust Company and the REDIBook ECN via SCM.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to clients and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds such as security price information, as well as internal
malfunctions such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains backup and recovery functions. These include logging of all critical
files intraday, duplication and storage of all critical data outside of its
central computer site every twenty-four hours, and maintenance of facilities for
backup and communications. They also include the maintenance and periodic
testing of a disaster recovery plan that management believes would permit Schwab
to recommence essential computer operations if its central computer site were to
become inaccessible. To minimize business interruptions, the Company has data
centers intended, in part, to further improve the recovery of business
processing in the event of an emergency.
In addition, USTC has an outsourcing agreement with a third party that
provides data processing, security processing, custodial and other operational
support services. Under the terms of the outsourcing agreement, the third-party
provider has the right to terminate the contract upon the change in control that
resulted from the merger of CSC with USTC. The Company plans to repatriate to
the Company's systems substantially all of the service functions provided by
this third party, and the Company and U.S. Trust expect to be able to provide
for an orderly repatriation of such functions. The transition is expected to be
completed before the end of the third quarter of 2001. While management believes
that there will be a successful transition, there is a possibility that the
transition could result in a significant disruption to U.S. Trust's ability to
service its clients and as a consequence could result in lost business and a
deterioration in U.S. Trust's fee revenues.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in client
accounts. Schwab clears the vast majority of client transactions through the
facilities of the National Securities Clearing Corporation or the Options
Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
client fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab assumes
the risk of the other party's failure to settle the trade. See note "20 -
Financial Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to
Consolidated Financial Statements in the Company's 2000 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Employees
As of December 31, 2000, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 26,300 full-time employees.
Risk Management
The Company's business and activities expose it to different types of
risks. Proper identification, assessment and management of these risks are
essential to the success and financial soundness of the Company. For a
discussion on the Company's principal risks and some of the policies and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition - Risk
Management" in the Company's 2000 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Information Systems" and "Regulation" in this report.
Competition
The Company faces significant competition from companies seeking to attract
client financial assets, including traditional brokerage firms (particularly
firms that have started providing online trading services), discount brokerage
firms, online brokerage firms, mutual fund companies, banks, and asset
management companies. For a discussion of competition see "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Competition and - Looking Ahead" in the Company's 2000 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The Securities and Exchange
Commission (SEC) is the federal agency charged with administration of the
federal securities laws. Schwab, SCM and CyBerCorp, Inc., a subsidiary of
CyBerCorp, are registered as broker-dealers with the SEC. Schwab and CSIM are
registered as investment advisors with the SEC. Additionally, Schwab is
regulated by the Commodities Futures Trading Commission (CFTC) with respect to
its introduced futures and commodities trading activities.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers, Inc. (NASD) and the national securities exchanges such as
the New York Stock Exchange (NYSE), which has been designated by the SEC as
Schwab's primary regulator with respect to its securities activities. The NASD
has been designated by the SEC as SCM's primary regulator with respect to its
securities activities. The Chicago Board Options Exchange (CBOE) has been
designated as Schwab's primary regulator with respect to its options trading
activities for 2000 and 2001. The National Futures Association (NFA) has been
designated by the CFTC as Schwab's primary regulator with respect to its futures
and commodities trading activities. These self-regulatory organizations adopt
rules (subject to approval by the SEC or CFTC) governing the industry and
conduct periodic examinations of broker-dealers. Securities firms are also
subject to regulation by state securities authorities in the states in which
they do business. In addition to its membership in the NYSE, Schwab is also a
member of most other major U.S. securities exchanges and is consequently subject
to their rules and regulations. Schwab and SCM were registered as broker-dealers
in fifty states, the District of Columbia and Puerto Rico as of December 31,
2000.
The principal purpose of regulations and discipline of broker-dealers and
investment advisors is the protection of clients and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisors. The regulations to which broker-dealers and investment
advisors are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
clients' funds and securities, capital structure of securities firms,
recordkeeping and reporting, fee arrangements, disclosure to clients, and the
conduct of directors, officers and employees. As registered investment advisors,
Schwab and CSIM are subject to the requirements of the Investment Advisers Act
of 1940 and the regulations thereunder, which impose, among other things,
various recordkeeping, reporting, and disclosure requirements and impose
limitations on fees and principal transactions between an advisor and its
clients. The state securities law requirements applicable to registered
investment advisors are in certain cases more comprehensive than those imposed
under the federal securities laws.
Additional legislation, changes in rules promulgated by the SEC, other
federal and state regulatory authorities and self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules may
directly affect the method of operation and profitability of broker-dealers and
investment advisors. The profitability of broker-dealers and investment advisors
could also be affected by rules and regulations which impact the business and
financial communities in general, including changes to the laws governing
taxation, antitrust regulation and electronic commerce. The SEC, CFTC,
self-regulatory organizations and state securities authorities may conduct civil
or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
advisor, its officers, or employees. Schwab and SCM have been the subject of
such administrative proceedings.
The SEC ordered the exchanges and Nasdaq to submit a plan to phase in
decimal pricing, which pricing began for certain listed stocks and options on
September 5, 2000, and which pricing begins for certain Nasdaq securities on
March 12, 2001, and for all remaining equity securities and options by April 9,
2001. This change, which will only affect the Capital Markets segment, is likely
to cause decreases in average revenue per share traded, and therefore management
considers it likely that decimalization will adversely impact this segment's
revenues. Applicable laws and regulations also limit SCM's ability to engage in
principal transactions with certain accounts where U.S. Trust acts as a
fiduciary. See also "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Revenues - Principal Transactions" in the
Company's 2000 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
As registered broker-dealers and NASD member organizations, Schwab, SCM and
CyBerCorp, Inc. are required by federal law to belong to the Securities Investor
Protection Corporation (SIPC), which provides, in the event of the liquidation
of a broker-dealer, protection for securities held in client accounts held by
the firm of up to $500,000 per client, subject to a limitation of $100,000 for
claims of cash balances. SIPC is funded through assessments on registered
broker-dealers. In addition, Schwab purchased from a private surety company
account protection for clients above the SIPC limit, as defined, of up to the
net equity value for client securities and cash in each account. Stocks, bonds,
mutual funds, options, unit investment trusts and money market funds are
considered securities for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
Schwab is authorized by the Municipal Securities Rulemaking Board to
conduct transactions in municipal securities on behalf of its clients and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and SCM is subject to the margin rules of the
Federal Reserve Board and the NYSE. Under such rules, broker-dealers are limited
in the amount they may lend in connection with certain purchases and short sales
of securities and are also required to impose certain maintenance requirements
on the amount of securities and cash held in margin accounts. In addition, those
rules and rules of the CBOE govern the amount of margin clients must provide and
maintain in writing uncovered options.
As a California state-chartered trust company, CSTC is primarily regulated
by the State of California Department of Financial Institutions. Since it
provides employee benefit plan trust services, CSTC is also required to comply
with the Employee Retirement Income Security Act of 1974 (ERISA) and,
consequently, is subject to oversight by both the Internal Revenue Service and
Department of Labor. CSTC is required under ERISA to maintain a fidelity bond
for the protection of employee benefit trusts for which it serves as trustee.
The Company's business is also subject to regulation by various non-U.S.
governments, securities exchanges and regulatory bodies, particularly in those
countries where it has acquired subsidiaries. Such regulation may directly
affect the method of operation and profitability of the Company's foreign
operations. CSE is registered as a broker-dealer with the Securities and Futures
Authority in the United Kingdom. CS Canada is a broker-dealer in Canada and is
regulated under the laws of the Canadian provinces by securities commissions and
by the Investment Dealers Association of Canada. CS Canada is also a member of
the Toronto and Winnipeg Stock Exchanges and is subject to their rules and
regulations. Charles Schwab, Hong Kong, Ltd. (CSHK) and Charles Schwab Hong Kong
Securities Limited (CSHKS) are subsidiaries of CSC. CSHK is registered as a
securities dealer and commodity trading advisor with the Securities and Futures
Commission in Hong Kong (SFC). CSHKS is registered as a securities dealer with
the SFC and also as an Exchange Participant of The Stock Exchange of Hong Kong
Limited. CSTMS is a securities firm licensed and regulated by the Japanese
Ministry of Finance. CS Australia is a registered broker in Australia and is
regulated by the Australian Stock Exchange.
NET CAPITAL REQUIREMENTS. As registered broker-dealers, certain subsidiar-
ies of the Company, including Schwab and SCM, are subject to the Uniform Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934 (the Net
Capital Rule), which has also been adopted through incorporation by reference in
NYSE Rule 325. The CFTC and NFA also impose net capital requirements. Schwab is
a member firm of the NYSE, the NASD and the NFA, and SCM is a member firm of the
NASD. The Net Capital Rule specifies minimum net capital requirements that are
intended to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab or SCM failed to maintain
specified levels of net capital, such failure would constitute a default by CSC
under certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to twenty business days.
Schwab and SCM have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 under the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with clients, primarily margin loans. Under the alternative method
of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the payment
or withdrawal of, any subordinated borrowings or (b) pay cash dividends or
permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than fifteen
consecutive business days; NYSE Rule 326 also prohibits the expansion of
business if net capital is less than 5% of aggregate debit items for more than
fifteen consecutive business days. The provisions of NYSE Rule 326 also become
operative if capital withdrawals (including scheduled maturities of subordinated
borrowings during the following six months) would result in a reduction of a
firm's net capital to the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
SCM's operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See also "Management's Discussion and Analysis
of Results of Operations and Financial Condition - Liquidity and Capital
Resources - Liquidity" in the Company's 2000 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
For additional discussion on net capital requirements see note "18 -
Regulatory Requirements" in the Notes to Consolidated Financial Statements in
the Company's 2000 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report.
BANK HOLDING COMPANY ACT REQUIREMENTS. Upon completion of the merger with
USTC, CSC became a financial holding company, which is a type of bank holding
company subject to supervision and regulation by the Federal Reserve Board under
the Act. For a discussion of bank holding company requirements see "Management's
Discussion and Analysis of Results of Operations and Financial Condition - Bank
Holding Company Act Requirements" and note "18 - Regulatory Requirements" in the
Notes to Consolidated Financial Statements in the Company's 2000 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. Schwab also has a lease for 412,000 square feet of office
space located at 211 Main Street in San Francisco, California. The lease expires
in 2018 and includes two ten-year extension options at then current market
rates. A subsidiary of Schwab has entered into an agreement to lease a building,
totaling approximately 386,000 square feet, located at 215 Fremont Street in San
Francisco, California. The lease expires in 2005 and, subject to certain
conditions, includes a renewal option for one additional five-year period. In
addition to these locations, Schwab leases space in other buildings for its San
Francisco operations, including its principal executive offices at 120 Kearny
Street, aggregating 1,218,000 additional square feet. U.S. Trust's headquarters
are located in leased office space, totaling 583,000 square feet, in New York
City, New York. The lease expires in 2014 and includes two ten-year extension
options at the then current market rates. SCM's headquarters are located in
leased office space in Jersey City, New Jersey.
Substantially all of the Company's offices are located in leased premises,
generally with lease expiration dates five to ten years from inception. In
addition, the Company has five regional client telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
286,000 and 164,000 square feet, respectively. The Company also leases an
additional 154,000 square feet as part of its Phoenix service center. The
Company leases its service centers located in Denver and Orlando, with 328,000
and 227,000 square feet, respectively. In 2000, the Company opened its fifth
service center, located in Austin, and leases 116,000 square feet.
The Company owns its data center facilities located in Phoenix totaling
617,000 square feet, including 315,000 square feet added in 2000.
While the corporate headquarters and data centers support all of the
Company's segments, the offices and service centers primarily support the
Individual Investor, Institutional Investor and U.S. Trust segments. U.S.
Trust's headquarters support the U.S. Trust segment and SCM's headquarters
support the Capital Markets segment.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is included
in note "19 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 2000 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2000.
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the ticker symbol SCH. The number of common stockholders of record as of
March 8, 2001 was 12,449. The closing market price per share on that date was
$19.60.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 2000
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is included
in "Selected Financial and Operating Data" in the Company's 2000 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Company's 2000 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 2000 and
1999 are summarized as follows (dollars in millions):
- ------------------------------------------------------------------------------
Three Months Ended
December 31,
2000 1999
- ------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Margin loans to clients:
Average balance outstanding $18,650 $14,982
Average interest rate 9.34% 7.83%
Investments (client-related):
Average balance outstanding $ 6,073 $ 8,415
Average interest rate 5.82% 5.01%
Private banking loans:
Average balance outstanding $ 3,020 $ 2,621
Average interest rate 7.77% 7.31%
Securities available for sale:
Average balance outstanding $ 1,070 $ 996
Average interest rate 6.08% 5.64%
Average yield on interest-earning assets 8.31% 6.82%
Funding Sources (client-related
and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $21,189 $18,701
Average interest rate 5.42% 4.38%
Interest-bearing banking deposits:
Average balance outstanding $ 3,176 $ 3,012
Average interest rate 5.30% 4.44%
Other interest-bearing sources:
Average balance outstanding $ 1,410 $ 1,497
Average interest rate 4.67% 4.32%
Average noninterest-bearing portion $ 3,038 $ 3,804
Average interest rate on funding sources 4.79% 3.76%
Summary:
Average yield on interest-earning assets 8.31% 6.82%
Average interest rate on funding sources 4.79% 3.76%
- ------------------------------------------------------------------------------
Average net interest spread 3.52% 3.06%
==============================================================================
The increase in net interest revenue, net of interest expense, from the
fourth quarter of 1999 to the fourth quarter of 2000 was primarily due to higher
levels of margin loans to clients, partially offset by higher average brokerage
client cash balances. The increase was also due to an increase in the average
rate on margin loans to clients, which was partially offset by an increase in
the average rate on brokerage client cash balances.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Management - Market Risk" in the Company's 2000 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 8. Financial Statements and Supplementary Data
The information required to be furnished pursuant to this item is included
in the Consolidated Financial Statements and "Quarterly Financial Information
(Unaudited)" in the Company's 2000 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the SEC pursuant to Regulation 14A by April 30, 2001 (the Proxy
Statement) under "The Board of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2005, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
================================================================================
Executive Officers of the Registrant
Name Age Title
------ ---- -------
Charles R. Schwab 63 Chairman, Co-Chief Executive Officer,
and Director
David S. Pottruck 52 President, Co-Chief Executive Officer,
and Director
John Philip Coghlan 49 Vice Chairman - Schwab Institutional
Linnet F. Deily 55 Vice Chairman - Office of the President
Christopher V. Dodds 41 Executive Vice President
and Chief Financial Officer
Lon Gorman 52 Vice Chairman - Schwab Capital Markets
Daniel O. Leemon 47 Executive Vice President
and Chief Strategy Officer
Dawn Gould Lepore 46 Vice Chairman and Chief Information Officer
Jeffrey S. Maurer 53 Executive Vice President and Director
Chief Executive Officer of U.S. Trust Corporation
Robert H. Rosseau 52 Executive Vice President - International
Elizabeth Gibson Sawi 48 Executive Vice President
and Chief Administrative Officer
Steven L. Scheid 47 Vice Chairman - Retail
H. Marshall Schwarz 64 Executive Vice President and Director
Chairman of U.S. Trust Corporation
================================================================================
Mr. Schwab has been Co-Chief Executive Officer of the Company since 1998,
and Chairman and a director of the Company since its incorporation in 1986. Mr.
Schwab was Chief Executive Officer of the Company from 1986 to 1997. Mr. Schwab
was a founder of Schwab in 1971 and has been its Chairman since 1978. Mr. Schwab
is currently a director of Gap, Inc.; AudioBase, Inc., a company that provides
music and voice to Internet publishers, advertisers and marketers; and Siebel
Systems, Inc., a company that provides support for software systems. Mr. Schwab
is also a trustee of The Charles Schwab Family of Funds, Schwab Investments,
Schwab Capital Trust and Schwab Annuity Portfolios, all registered investment
companies. In May 2000, Mr. Schwab was named a director of USTC. In June 2000,
Mr. Schwab was named a director of Xign, Inc., a developer of electronic payment
systems using digitally signed electronic check technology.
Mr. Pottruck has been Co-Chief Executive Officer of the Company since 1998,
a director of the Company since 1994, and President of the Company since 1992.
Mr. Pottruck was Chief Operating Officer of the Company from 1994 to 1998. Mr.
Pottruck has been Chief Executive Officer of Schwab since 1992 and President of
Schwab since 1988 (except for the period September 1997 to April 1998). Mr.
Pottruck joined Schwab in 1984. Mr. Pottruck is currently a director of Intel
Corporation, a maker of microcomputer components and related products; McKesson
HBOC, Inc., a healthcare services company; and Epoch Partners, Inc., an online
investment banking firm owned in part by the Company. Mr. Pottruck serves on the
Board of Governors of both the National Association of Securities Dealers, Inc.
and the Nasdaq Stock Market. Mr. Pottruck was a member of the Federal Advisory
Commission on Electronic Commerce from 1998 to 1999. In January 2000, Mr.
Pottruck was named a director of DoveBid, Inc., a provider of online
business-to-business capital asset auctions and valuation services. In May 2000,
Mr. Pottruck was named a director of USTC.
Mr. Coghlan has been Vice Chairman of the Company and Schwab since 1999,
Enterprise President - Schwab Institutional of Schwab since March 2001 and
Executive Vice President of the Company since 1992. Mr. Coghlan was Enterprise
President - Services for Investment Managers of Schwab from 1998 to March 2001
and Enterprise President - Retirement Plan Services of Schwab from 1997 to March
2001. Mr. Coghlan was Executive Vice President of Schwab and General Manager of
Schwab Institutional from 1992 to 1997. Mr. Coghlan joined Schwab in 1986.
Ms. Deily has been Vice Chairman - Office of the President of Schwab since
October 2000, Vice Chairman of the Company and Schwab since 1999 and Executive
Vice President of the Company since 1997. Ms. Deily was President - Retail of
Schwab from 1998 to October 2000, Enterprise President - Services for Investment
Managers of Schwab from 1997 to 1998 and Executive Vice President and General
Manager - Services for Investment Managers of the Company and Schwab from 1996
to 1997. Before joining Schwab in 1996, Ms. Deily was Chairman, President and
Chief Executive Officer of First Interstate Bank of Texas from 1991 to 1996. Ms.
Deily is currently a director of Reliant Energy, Inc., an international utility
company.
Mr. Dodds has been Chief Financial Officer of the Company and Schwab since
1999 and Executive Vice President of the Company and Schwab since 1998. Mr.
Dodds was Corporate Controller of Schwab from 1997 to 1999 and Corporate
Treasurer of Schwab from 1993 to 1997. Mr. Dodds joined Schwab in 1986.
Mr. Gorman has been Vice Chairman of the Company and Schwab since 1999,
Enterprise President - Schwab Capital Markets of Schwab and Executive Vice
President of the Company since 1997. Mr. Gorman was Executive Vice President -
Schwab Capital Markets of the Company and Schwab from 1996 to 1997. Before
joining Schwab in 1996, Mr. Gorman was a Managing Director of Credit Suisse
First Boston Corporation from 1988 to 1996. Mr. Gorman is currently a director
of the Securities Industry Association and REDIBook ECN LLC. In March 2000, Mr.
Gorman was named a director of CyBerCorp Holdings, Inc.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Mr. Leemon joined Schwab in 1995. In July
2000, Mr. Leemon was named a director of E-LOAN, Inc., an online lender and loan
broker, and LiveCapital, a provider of online small business financing.
Ms. Lepore has been Vice Chairman of the Company and Schwab since 1999 and
Chief Information Officer of the Company and Schwab since 1993. Ms. Lepore was
Executive Vice President of the Company and Schwab from 1993 to 1999. Ms. Lepore
joined Schwab in 1983. In January 2000, Ms. Lepore was named a director of eBay
Inc.
Mr. Maurer has been Executive Vice President and a director of the Company
since May 2000. Mr. Maurer has been Chief Executive Officer of USTC and its
principal subsidiary, United States Trust Company of New York (U.S. Trust NY),
since January 2001. Mr. Maurer has been a director of USTC and U.S. Trust NY
since 1989. Mr. Maurer was Chief Operating Officer of USTC from 1994 to December
2000 and President of USTC from 1990 to December 2000. Mr. Maurer joined USTC in
1970. Mr. Maurer is currently a director of Forbes.com, and the Greater New York
Mutual Insurance Companies, a property and casualty insurance company.
Mr. Rosseau has been Executive Vice President and Enterprise President -
International of the Company and Schwab since February 2000. Prior to joining
Schwab, Mr. Rosseau was Chief Executive Officer of ETC Services, Inc. from 1998
to February 2000. Mr. Rosseau was President and Chief Executive Officer of
Deluxe Electronic Payment Systems, Inc. and Senior Vice President of Deluxe
Corporation from 1996 to 1998. Mr. Rosseau was Chairman of Diners Club
International Ltd., and President and Chief Executive Officer of Diners Club
North America from 1991 to 1996.
Ms. Sawi has been Executive Vice President and Chief Administrative Officer
of the Company and Schwab since 1999. Ms. Sawi returned to Schwab full-time in
1999 after a fifteen-month sabbatical. Prior to her sabbatical, Ms. Sawi worked
for Schwab part-time on several projects from 1997 to 1998. Ms. Sawi was
Executive Vice President - Electronic Brokerage of the Company and Schwab from
1995 to 1997. Ms. Sawi joined Schwab in 1982.
Mr. Scheid has been Vice Chairman of the Company and Schwab since 1999,
President - Retail of Schwab since October 2000 and Executive Vice President of
the Company since 1996. Mr. Scheid was Enterprise President - Financial Products
and Services of Schwab from 1998 to October 2000 and Executive Vice President of
Schwab and Chief Financial Officer of the Company and Schwab from 1996 to 1999.
Before joining Schwab in 1996, Mr. Scheid was Executive Vice President of
Finance of First Interstate Bancorp from 1994 to 1996 and was Principal
Financial Officer from 1995 to 1996. Mr. Scheid is currently a director of The
Depository Trust & Clearing Corporation.
Mr. Schwarz has been Executive Vice President and a director of the Company
since May 2000. Mr. Schwarz has been Chairman of USTC and U.S. Trust NY since
1990. Mr. Schwarz has been a director of USTC and U.S. Trust NY since 1977. Mr.
Schwarz was Chief Executive Officer of USTC from 1990 to December 2000. Mr.
Schwarz joined USTC in 1967. Mr. Schwarz is currently a director of Atlantic
Mutual Companies, a property and casualty insurance company, and Bowne & Co.,
Inc., a financial printer and information and document management company.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Director
Compensation," "Summary Compensation Table," "Option Grants," "Options
Exercised," "Compensation Committee Report," "Certain Transactions," and
"Appendix A - Description of Employment and License Agreements."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Principal
Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under "Certain
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are included in
the Company's 2000 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2000.
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form 10-K.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
1.3 The Charles Schwab Corporation Medium-Term Notes Distribution
Agreement filed as Exhibit 1.3 to the Registrant's Form 10-Q for the
quarter ended June 30, 2000 and incorporated herein by reference.
2.1 Agreement and Plan of Merger dated as of January 12, 2000, by and
among The Charles Schwab Corporation, Patriot Merger Corporation and
U.S. Trust Corporation, filed as Exhibit 2.1 to the Registrant's Form
8-K dated January 12, 2000 and incorporated herein by reference.
3.9 Second Restated Bylaws, as amended on September 22, 1998, of the
Registrant (supersedes Exhibit 3.8) filed as Exhibit 3.9 to the
Registrant's Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
3.10 Fourth Restated Certificate of Incorporation, effective July 30, 1999,
of the Registrant, which includes amendments through May 20, 1999
(supersedes Exhibit 3.7), filed as Exhibit 3.10 to the Registrant's
Form 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. Copies of instruments
with respect to long-term debt of lesser amounts will be provided to
the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.57 Registration Rights and Stock Restriction Agreement, dated as of
March 31, 1987, between the Registrant and the holders of the Common
Stock, filed as Exhibit 4.23 to Registrant's Registration Statement
No. 33-16192 on Form S-1 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the
Registrant, filed as Exhibit 10.72 to the Registrant's Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for
the quarter ended September 30, 2000 and incorporated herein by
reference. +
10.101 First Amendment to the Trust Agreement under the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan, effective January 1,
1992, dated December 20, 1991, filed as Exhibit 10.101 to the
Registrant's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference. +
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992,
dated June 30, 1992, filed as Exhibit 10.116 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the Registrant's
Form 10-K for the year ended December 31, 1997 and incorporated herein
by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.149 Employment Agreement dated as of March 31, 1995 between the Registrant
and Charles R. Schwab, filed as Exhibit 10.149 to the Registrant's
Form 10-K for the year ended December 31, 1999 and incorporated herein
by reference. +
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, restated to include amendments through February 26, 1997, with
form of Non-Qualified Stock Option Agreement (Executive Officer Stock
Option Plan (1987)) attached, (supersedes Exhibit 10.159) filed as
Exhibit 10.166 to the Registrant's Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement attached, (supersedes Exhibit
10.160) filed as Exhibit 10.167 to the Registrant's Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996,
dated May 8, 1996 filed as Exhibit 10.169 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified
Stock Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form
of Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as
Exhibit 10.179 to the Registrant's Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit
10.180 to the Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference. +
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147)
filed as Exhibit 10.182 to the Registrant's Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's
Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement
(General Management Plan) attached (supersedes Exhibit 10.160) filed
as Exhibit 10.186 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock
Option Agreement (Executive Officer Stock Option Plan (1987))
attached, (supersedes Exhibit 10.159) filed as Exhibit 10.188 to the
Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.189 Annual Executive Individual Performance Plan restated and amended
January 1, 1998 (supersedes Exhibit 10.146) filed as Exhibit 10.189 to
the Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997 filed as Exhibit 10.190 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171)
filed as Exhibit 10.191 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172)
filed as Exhibit 10.192 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of
The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes
Exhibit 10.173) filed as Exhibit 10.193 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174)
filed as Exhibit 10.194 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.198 Credit Agreement (3-Year Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.200 Form of Indemnification Agreement entered into between Registrant and
members of the Board of Directors of Registrant (supersedes exhibit
10.34), filed as Exhibit 10.200 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
10.202 Fourth Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1998,
filed as Exhibit 10.202 to the Registrant's Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference. +
10.206 Credit Agreement (364-Day Commitment) dated June 25, 1999 between the
Registrant and the financial institutions listed therein (supersedes
Exhibit 10.197), filed as Exhibit 10.206 to the Registrant's Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference.
10.208 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include amendments through December 15, 1999 (supersedes Exhibit
10.207), filed as Exhibit 10.208 to the Registrant's Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference. +
10.209 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, restated to include amendments through October 28, 1999
(supersedes Exhibit 10.204 and 10.157), filed as Exhibit 10.209 to the
Registrant's Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference. +
10.210 The SchwabPlan Retirement Savings and Investment Plan, restated to
include amendments through December 22, 1999 (supersedes Exhibits
10.195, 10.201 and 10.205), filed as Exhibit 10.210 to the
Registrant's Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference. +
10.211 The Charles Schwab Corporation Annual Executive Individual
Performance Plan, amended and restated as of January 1, 2000
(supersedes Exhibit 10.189), filed as Exhibit 10.211 to the
Registrant's Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by reference. +
10.212 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated as of January 1, 2000 (supersedes Exhibit 10.182), filed
as Exhibit 10.212 to the Registrant's Form 10-Q for the quarter ended
March 31, 2000 and incorporated herein by reference. +
10.213 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include amendments through April 19, 2000 (supersedes Exhibit
10.208), filed as Exhibit 10.213 to the Registrant's Form 10-Q for the
quarter ended June 30, 2000 and incorporated herein by reference. +
10.214 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated to
include amendments through December 13, 2000 (supersedes Exhibit
10.213). +
10.215 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
restated to include amendments through December 13, 2000 (supersedes
Exhibit 10.209). +
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 2000 Annual Report to
Stockholders, which have been incorporated herein by reference. Except
for such portions, such annual report is not deemed to be "filed"
herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as amended and
declared effective on September 22, 1987.
+ Management contract or compensatory plan.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 2001.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ Charles R. Schwab
------------------------------------
Charles R. Schwab
Chairman, Co-Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 2001.
Signature / Title Signature / Title
/s/ Charles R. Schwab /s/ David S. Pottruck
- ------------------------------ -------------------------------
Charles R. Schwab, David S. Pottruck,
Chairman, Co-Chief Executive Officer President, Co-Chief Executive Officer
and Director and Director
(principal executive officer) (principal executive officer)
/s/ Christopher V. Dodds
- ------------------------------
Christopher V. Dodds,
Executive Vice President
and Chief Financial Officer
(principal financial
and accounting officer)
/s/ Nancy H. Bechtle /s/ C. Preston Butcher
- ------------------------------ -------------------------------
Nancy H. Bechtle, Director C. Preston Butcher, Director
/s/ Donald G. Fisher /s/ Anthony M. Frank
- ------------------------------ -------------------------------
Donald G. Fisher, Director Anthony M. Frank, Director
/s/ Frank C. Herringer /s/ Jeffrey S. Maurer
- ------------------------------ -------------------------------
Frank C. Herringer, Director Jeffrey S. Maurer, Director
/s/ Stephen T. McLin /s/ Arun Sarin
- ------------------------------ -------------------------------
Stephen T. McLin, Director Arun Sarin, Director
/s/ H. Marshall Schwarz /s/ George P. Shultz
- ------------------------------ -------------------------------
H. Marshall Schwarz, Director George P. Shultz, Director
/s/ Roger O. Walther
- ------------------------------
Roger O. Walther, Director
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Information F-6 - F-8
Schedule II - Valuation and Qualifying Accounts F-9
U.S. Trust Corporation Supplemental Financial Data (Unaudited) F-10 - F-15
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 2000 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 2000 and 1999, and
for each of the three years in the period ended December 31, 2000, and have
issued our report thereon dated February 22, 2001 (which report expresses an
unqualified opinion and includes an explanatory paragraph related to an
accounting change to conform with Statement of Position 98-1); such consolidated
financial statements and report are included in your 2000 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedules (Schedules I and II) of the Company on pages
F-3 through F-9. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
San Francisco, California
February 22, 2001
F-2
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
---------- ----------
Assets
Cash and cash equivalents $ 837,940 $ 232,398
Securities owned - at market value 1,333
Advances to subsidiaries 633,596 985,318
Investments in subsidiaries, at equity 3,772,432 2,101,872
Other assets 53,981 31,157
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5,299,282 $3,350,745
===================================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 199,989 $ 200,008
Accrued expenses and other liabilities 151,581 119,961
Long-term debt 718,000 455,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,069,570 774,969
Stockholders' equity 4,229,712 2,575,776
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5,299,282 $3,350,745
===================================================================================================================================
All periods have been restated to reflect the merger of The Charles Schwab Corporation with U.S. Trust Corporation.
See Notes to Condensed Financial Information.
F-3
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2000 1999 1998
--------- --------- ---------
Interest revenue $119,549 $ 71,428 $ 42,780
Interest expense (50,586) (28,398) (25,429)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 68,963 43,030 17,351
Other revenues (losses) (4,506) 151 409
Other expenses (28,461) (25,392) (12,104)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 35,996 17,789 5,656
Income tax expense 20,020 6,885 2,092
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 15,976 10,904 3,564
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 516,445 496,662 105,607
Dividends paid by subsidiaries 185,716 158,880 300,958
- ------------------------------------------------------------------------------------------------------------------------------------
Total 702,161 655,542 406,565
Net income $718,137 $666,446 $410,129
====================================================================================================================================
All periods have been restated to reflect the merger of The Charles Schwab Corporation with U.S. Trust Corporation.
See Notes to Condensed Financial Information.
F-4
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
2000 1999 1998
---------- ---------- ----------
Cash Flows from Operating Activities
Net income $ 718,137 $ 666,446 $ 410,129
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (516,445) (496,662) (105,607)
Net change in:
Other assets (2,804) (10,995) (3,932)
Drafts payable (19) 200,008
Accrued expenses and other liabilities 26,370 29,030 13,753
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 225,239 387,827 314,343
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (10,000)
Decrease (increase) in net advances to subsidiaries 545,038 (286,393) (26,465)
Decrease (increase) in investments in subsidiaries (436,143) (86,318) 52,124
Cash payments for business combinations and
investments, net of cash received (28,706) (17,511) (1,400)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 70,189 (390,222) 24,259
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from long-term debt 311,000 144,000 30,000
Repayment of long-term debt (48,000) (40,000) (40,000)
Dividends paid (62,366) (61,107) (56,041)
Purchase of treasury stock (53,924) (208,353)
Proceeds from stock options exercised and other 84,891 65,799 36,015
Proceeds from issuance of stock to ESOP 24,589
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 310,114 54,768 (238,379)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 605,542 52,373 100,223
Cash and Cash Equivalents at Beginning of Year 232,398 180,025 79,802
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 837,940 $ 232,398 $ 180,025
====================================================================================================================================
All periods have been restated to reflect the merger of The Charles Schwab Corporation with U.S. Trust Corporation.
See Notes to Condensed Financial Information.
F-5
SCHEDULE I
The Charles Schwab Corporation
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
1. Introduction and basis of presentation
On May 31, 2000, The Charles Schwab Corporation (the Parent Company)
completed its merger (the Merger) with U.S. Trust Corporation (USTC). Under
the terms of the merger agreement, USTC became a wholly owned subsidiary of
the Parent Company and USTC shareholders received 5.1405 shares of the
Parent Company's common stock for each common share of USTC. The Merger was
treated as a non-taxable stock-for-stock exchange and USTC's shareholders
received approximately 112,000,000 shares of the Parent Company's common
stock. The condensed financial statements, included in this Annual Report
on Form 10-K, give retroactive effect to the Merger, which was accounted
for as a pooling of interests in the consolidated financial statements. The
pooling of interests method of accounting requires the restatement of all
periods presented as if the Parent Company and USTC had been operating as a
combined entity during such periods. For the years ended December 31, 2000,
1999 and 1998, stockholders' equity reflects the accounts of the Parent
Company as if the common stock issued to USTC shareholders had been issued
during all of the periods presented.
The condensed financial information of the Parent Company should be read in
conjunction with the consolidated financial statements of The Charles
Schwab Corporation and subsidiaries (collectively referred to as the
Company) and notes thereto included in the Company's 2000 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
2. Supplemental cash flow information
During 1998, the Parent Company recorded a non-cash capital contribution of
$69 million to its subsidiary, Charles Schwab & Co., Inc. (Schwab), through
the assumption of indebtedness.
During 2000, the Parent Company recorded a non-cash capital contribution of
$19 million to its subsidiary, Schwab, through the contribution of net
assets. Also during 2000, the Parent Company recorded a non-cash return of
capital of $82 million from Schwab and a non-cash capital contribution of
$82 million to USTC in connection with Schwab's purchase of rights to
software from USTC.
Certain of the Parent Company's subsidiaries have remitted the tax benefits
from stock options exercised and other stock-based compensation of $178
million in 2000, $213 million in 1999 and $69 million in 1998 to the Parent
Company.
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
Year ended December 31,
2000 1999 1998
-----------------------------------
Income taxes paid $ 9,677 $11,264 $ 5,539
======== ======= =======
Interest paid:
Long-term debt $ 41,899 $24,644 $23,757
Other 559 809 667
-------- ------- -------
Total interest paid $ 42,458 $25,453 $24,424
======== ======= =======
Non-cash investing and
financing activities:
Common stock and options issued
for purchases of businesses $528,815 $45,459 $12,455
======== ======= =======
3. Common stock split
On May 3, 2000, the Board of Directors approved a three-for-two split of
the Parent Company's common stock, which was effected in the form of a 50%
stock dividend. The stock dividend was distributed May 30, 2000 to
stockholders of record May 12, 2000.
F-6
4. Long-term debt
Long-term debt consists of Senior Medium-Term Notes, Series A (Medium-Term
Notes). At December 31, 2000, the Parent Company had $718 million aggregate
principal amount of Medium-Term Notes outstanding, with fixed interest
rates ranging from 5.96% to 8.05%. At December 31, 1999, the Parent Company
had $455 million aggregate Medium-Term Notes outstanding, with fixed
interest rates ranging from 5.96% to 7.50%. Annual maturities on long-term
debt outstanding at December 31, 2000 are as follows (in thousands):
---------------------------------------------------------------------------
2001 $ 39,000
2002 113,000
2003 100,000
2004 80,500
2005 56,000
Thereafter 329,500
---------------------------------------------------------------------------
Total $718,000
===========================================================================
5. Related party transactions
At December 31, 2000, receivables from affiliates, which is included in
advances to subsidiaries, was $37 million. At December 31, 2000, payables
to affiliates, which is included in accrued expenses and other liabilities,
was $9 million and is payable on demand and bears interest at variable
rates (6.3% at December 31, 2000).
The Parent Company provides subordinated revolving credit facilities and
other lending arrangements to its subsidiaries, Schwab, Schwab Capital
Markets L.P. (SCM) and Charles Schwab Europe (CSE).
Schwab has a $1.4 billion subordinated revolving credit facility maturing
in September 2002, of which $520 million was outstanding at December 31,
2000. This credit facility was $1.4 billion at the end of 1999, of which
$905 million was outstanding at December 31, 1999. At year end 2000, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from
the Parent Company maturing in 2002. The outstanding balance of these term
loans was also $25 million at year end 1999.
SCM has a $70 million subordinated lending arrangement maturing in 2002,
which was not used at December 31, 2000. This subordinated lending
arrangement was $35 million at the end of 1999, and was not used at
December 31, 1999. SCM also had a $25 million short-term credit facility at
December 31, 2000 and 1999. No funds were drawn under these facilities at
December 31, 2000 and 1999.
CSE has a total of (pound)70 million, equivalent to $105 million, under
subordinated lending arrangements maturing between May 2001 and September
2003. At December 31, 2000, CSE had outstanding (pound)18 million under
these arrangements, equivalent to $27 million, with (pound)5 million
maturing in 2001 and (pound)13 million maturing in 2003. These lending
arrangements were (pound)20 million, equivalent to $32 million, at the end
of 1999. The amount outstanding at December 31, 1999 was (pound)18 million,
equivalent to $29 million.
The Parent Company also provides other lending arrangements to certain of
its subsidiaries. At December 31, 2000, the total amount provided under
these lending arrangements was $48 million, of which $23 million was
outstanding and matures in 2001. These lending arrangements totaled $10
million and were unused at December 31, 1999.
Interest earned by the Parent Company from these subordinated revolving
credit facilities and other lending arrangements totaled $90 million in
2000, $60 million in 1999 and $37 million in 1998.
F-7
6. Commitments
The Parent Company has provided a residual value guarantee of approximately
$200 million to a lessor, under a lease agreement entered into by one of
Schwab's subsidiaries, in the event the leased property is sold and the
proceeds on the sale are below the guarantee.
F-8
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at -------------------------- Balance at
Beginning Charged End
Description of Year to Expense Other (1) Written off of Year
----------- --------- ---------- --------- ----------- ----------
For the year ended
December 31, 2000:
Allowance for doubtful accounts
of brokerage clients (2) $11,352 $16,318 $1,883 $(18,060) $11,493
=======================================================================
For the year ended
December 31, 1999:
Allowance for doubtful accounts
of brokerage clients (2) $ 7,575 $15,848 $ 917 $(12,988) $11,352
=======================================================================
For the year ended
December 31, 1998:
Allowance for doubtful accounts
of brokerage clients (2) $ 7,717 $ 4,752 $ 231 $ (5,125) $ 7,575
=======================================================================
(1) Represents collections of previously written-off accounts.
(2) Excludes banking-related valuation and qualifying accounts. See note "6 - Loans to Banking Clients and Related
Allowance for Credit Losses" in the Notes to Consolidated Financial Statements of the Company's 2000 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit 13.1 of this report, for such banking-related
information.
F-9
The Charles Schwab Corporation
U.S. Trust Corporation Supplemental Financial Data (Unaudited)
The following supplemental financial data is presented in accordance with the Securities Exchange Act of 1934, Industry Guide 3
- - Statistical Disclosure by Bank Holding Companies. The accompanying unaudited financial information only includes U.S. Trust
Corporation, a subsidiary of The Charles Schwab Corporation, which is an investment management firm that also provides fiduciary and
private banking services.
- ------------------------------------------------------------------------------------------------------------------------------------
1. Analysis of Change in Net Interest Revenue
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume
and rate, on a taxable equivalent basis, is as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
Change in: Change in:
--------------------------------- --------------------------------
Average Average Average Average
Balance Rate Total Balance Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Cash equivalents $(1,637) $ 2,838 $ 1,201 $ 335 $ (938) $ (603)
Loans to banking clients (1) (2) 33,640 11,123 44,763 32,659 (7,638) 25,021
Securities available for sale (3):
U.S. Treasury securities (2,629) (255) (2,884) (9,329) (342) (9,671)
U.S. Government agencies and
collateralized mortgage obligations (4) 9,737 3,298 13,035 7,883 (1,452) 6,431
State and municipal obligations 1,149 (243) 906 1,805 (535) 1,270
Other securities 110 280 390 260 (19) 241
-------- --------- -------- -------- --------- --------
Total securities available for sale 8,367 3,080 11,447 619 (2,348) (1,729)
-------- --------- -------- -------- --------- --------
Other interest-earning assets 322 (127) 195 195 72 267
-------- --------- -------- -------- --------- --------
Total interest-earning assets 40,692 16,914 57,606 33,808 (10,852) 22,956
-------- --------- -------- -------- --------- --------
Interest-bearing sources of funds:
Interest-bearing deposits from banking clients 12,338 25,246 37,584 19,643 (10,000) 9,643
Short-term borrowings 6,953 4,407 11,360 (1,083) (474) (1,557)
Long-term debt (347) 60 (287) (332) (55) (387)
-------- --------- -------- -------- --------- --------
Total sources on which interest is paid 18,944 29,713 48,657 18,228 (10,529) 7,699
-------- --------- -------- -------- --------- --------
Change in net interest revenue - taxable equivalent basis $21,748 $(12,799) $ 8,949 $15,580 $ (323) $15,257
======== ========= ======== =========
Tax equivalent adjustment 122 (770)
-------- --------
Change in net interest revenue $ 9,071 $14,487
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Changes that are not due solely to volume or rate have been allocated ratably to their respective categories.
(1) Includes average principal balances of non-accrual and reduced rate loans.
(2) Includes the loan to the U.S. Trust Corporation ESOP, which was paid off in the first quarter of 1999, and had an average
balance of $4 million in 1998.
(3) The average balance and average rate for securities available for sale have been calculated using their amortized cost.
(4) Includes collateralized mortgage obligations securities issued by agencies including the GNMA, FNMA and FHLMC.
F-10
2. Three-year Net Interest Revenue (Tax Equivalent Basis) and Average Balances
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2000 1999 1998
---------------------------- ---------------------------- ---------------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash equivalents $ 241,291 $ 14,770 6.12% $ 274,405 $ 13,569 4.94% $ 268,074 $ 14,172 5.29%
Securities available for sale (1) (2) 1,132,976 72,193 6.37% 996,534 60,746 6.10% 994,680 62,475 6.28%
Loans to banking clients (3) (4) 2,867,499 219,277 7.65% 2,404,082 174,514 7.26% 1,973,027 149,493 7.58%
Other interest-earning assets 28,001 1,966 7.02% 23,691 1,771 7.48% 20,971 1,504 7.17%
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total interest-earning assets 4,269,767 308,206 7.22% 3,698,712 250,600 6.78% 3,256,752 227,644 6.99%
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Non-interest-earning assets 687,428 484,240 414,516
---------- ---------- ----------
Total Assets $4,957,195 $4,182,952 $3,671,268
========== ========== ==========
Liabilities and Stockholder's Equity:
Interest-bearing deposits from banking
clients 3,070,998 155,073 5.05% 2,779,141 117,489 4.23% 2,350,945 107,846 4.59%
Short-term borrowings 288,056 18,558 6.44% 146,523 7,198 4.91% 168,156 8,755 5.21%
Long-term debt 59,139 4,842 8.19% 63,430 5,129 8.09% 68,396 5,516 8.06%
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Total sources on which interest is paid 3,418,193 178,473 5.22% 2,989,094 129,816 4.34% 2,587,497 122,117 4.72%
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Non-interest-bearing deposits 779,050 641,437 571,928
Non-interest-bearing liabilities 349,062 286,973 272,427
Stockholder's equity 410,890 265,448 239,416
---------- ---------- ----------
Total Liabilities and Stockholder's Equity $4,957,195 $4,182,952 $3,671,268
========== ========== ==========
Net interest revenue-taxable equivalent
basis 129,733 120,784 105,527
Net free funds (4) $ 851,574 $ 709,618 $ 669,255
---------- ---------- ----------
Provision for credit losses (600)
Tax equivalent adjustment (2) (3,549) (3,671) (2,901)
-------- -------- --------
$126,184 $117,113 $102,026
======== ======== ========
Net yield on interest earning assets
(tax equivalent basis) 3.04% 3.26% 3.24%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The average balance and average rate for securities available for sale have been calculated using their amortized cost.
(2) Yields on state and municipal obligations are stated on a taxable equivalent basis, employing the federal statutory income tax
rate adjusted for the effect of state and local taxes, resulting in a marginal tax rate of approximately 40% for 2000, and 47%
for 1999 and 1998.
(3) Includes average principal balances of non-accrual and reduced rate loans.
(4) Includes the loan to the U.S. Trust Corporation ESOP, which was paid off in the first quarter of 1999, and had an average
balance of $4 million in 1998.
F-11
3. Securities Available for Sale
The amortized cost, estimated fair value and gross unrealized gains and losses on securities available for sale are as follows (in
thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. treasury securities:
Amortized cost $ 156,791 $ 178,068 $274,553
Aggregate fair value $ 156,893 $ 176,816 $276,562
Gross unrealized gains $ 245 $ 24 $ 2,050
Gross unrealized losses $ 143 $ 1,276 $ 41
U.S. government sponsored agencies and corporations:
Amortized cost 774,236 690,450 561,095
Aggregate fair value 776,273 672,103 564,256
Gross unrealized gains 6,391 2,507 5,631
Gross unrealized losses 4,354 20,854 2,470
State and municipal obligations:
Amortized cost 134,330 119,633 98,726
Aggregate fair value 135,410 117,936 100,423
Gross unrealized gains 1,392 185 1,715
Gross unrealized losses 312 1,882 18
Collateralized mortgage obligations (1):
Amortized cost 129,459 5,185 10,076
Aggregate fair value 129,408 5,209 10,128
Gross unrealized gains 309 24 53
Gross unrealized losses 360 1
Other securities:
Amortized cost 22,988 22,086 17,768
Aggregate fair value 23,142 21,522 18,079
Gross unrealized gains 510 370 435
Gross unrealized losses 356 934 124
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale:
Amortized cost $1,217,804 $1,015,422 $962,218
Aggregate fair value $1,221,126 $ 993,586 $969,448
Gross unrealized gains $ 8,847 $ 3,110 $ 9,884
Gross unrealized losses $ 5,525 $ 24,946 $ 2,654
====================================================================================================================================
(1) Collateralized by either GNMA, FNMA or FHLMC obligations.
F-12
4. Loans to Banking Clients and Related Allowance for Credit Losses
An analysis of the composition of the loan portfolio is as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Private banking:
Residential real estate mortgages $2,248,566 $1,984,732 $1,630,500 $1,358,003 $1,093,107
Other 849,505 663,977 525,614 537,024 525,446
- ------------------------------------------------------------------------------------------------------------------------------------
Total private banking loans 3,098,071 2,648,709 2,156,114 1,895,027 1,618,553
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to financial institutions
for purchasing and carrying securities 60,552 57,686 31,972 41,064 62,866
All other 9,101 2,979 2,721 2,758 6,722
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,167,724 $2,709,374 $2,190,807 $1,938,849 $1,688,141
====================================================================================================================================
An analysis of nonperforming assets is as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $1,400 $1,673 $6,203 $9,666 $ 8,882
Other real estate owned, net 534 727
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,400 $1,673 $6,737 $9,666 $ 9,609
====================================================================================================================================
Average non-accrual loans $ 655 $ 832 $8,322 $8,829 $12,261
====================================================================================================================================
An analysis of the allowance for credit losses on the loan portfolio is as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $20,169 $19,414 $18,294 $16,693 $16,086
- ------------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Private banking (28) (292) (327) (160) (658)
Other (517)
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (28) (292) (327) (160) (1,175)
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Private banking 148 1,047 800 684 702
Other 47 327 80
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 148 1,047 847 1,011 782
- ------------------------------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries 120 755 520 851 (393)
Provision charged to income 600 750 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $20,289 $20,169 $19,414 $18,294 $16,693
====================================================================================================================================
F-13
The maturities of the loan portfolio at December 31, 2000 is as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
Within 1-5 Over
1 Year Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Private banking:
Residential real estate mortgages (1) $106,535 $197,667 $1,944,364 $2,248,566
Other 778,389 46,387 24,729 849,505
-------- -------- ---------- ----------
Total private banking loans 884,924 244,054 1,969,093 3,098,071
-------- -------- ---------- ----------
Loans to financial institutions for purchasing
and carrying securities 60,552 60,552
All other 6,718 324 2,059 9,101
-------- -------- ---------- ----------
Total $952,194 $244,378 $1,971,152 $3,167,724
======== ======== ========== ==========
Interest sensitivity of loans at December 31, 2000:
Loans with predetermined interest rates $176,835 $1,146,676 $1,323,511
Loans with floating or adjustable interest rates 67,543 824,476 892,019
-------- ---------- ----------
Total $244,378 $1,971,152 $2,215,530
======== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Maturities are based upon the contractual terms of the loans.
5. Summary of Credit Loss on Banking Loans Experience
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans $2,867,499 $2,404,082 $1,968,978 $1,730,134 $1,511,527
Allowance to year end loans .64% .74% .89% .94% .99%
Allowance to nonperforming loans N/M N/M 312.98% 189.26% 187.94%
Net (charge-offs) recoveries to average loans .00% .02% .03% .05% (.03)%
Nonperforming assets to average
loans and real estate owned .05% .07% .34% .56% .64%
- ------------------------------------------------------------------------------------------------------------------------------------
N/M - Not meaningful, greater than one thousand percent.
At December 31, 2000, the loan portfolio included loans to individuals involved in the financial services industry of approximately
$821 million. Recoveries exceeded charge-offs from loans to individuals involved in the financial services industry in 1997 through
2000. Net charge-offs from loans to individuals involved in the financial services industry amounted to $471,000 in 1996. Such net
charge-offs as a percentage of average total loans amounted to three basis points in 1996.
6. Deposits from Banking Clients
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- --------------------
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of average daily deposits:
Noninterest-bearing deposits $ 779,050 $ 641,437 $ 571,928
Certificates of deposits of $100 or more 54,250 5.61% 69,014 4.62% 56,025 5.00%
Money market and other savings deposits 3,016,748 5.15% 2,710,127 4.22% 2,294,870 4.58%
---------- ---------- ----------
Total deposits $3,850,048 $3,420,578 $2,922,823
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
F-14
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates Other
(In Thousands) of Deposit Deposits
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity distribution of interest bearing deposits in
amounts of $100 or more at December 31, 2000:
Three months or less $28,147 $2,828,471
Three through six months 18,120
Six through twelve months 4,027
Over twelve months 1,601
------- ----------
Total $51,895 $2,828,471
======= ==========
- ------------------------------------------------------------------------------------------------------------------------------------
7. Short-term Borrowings
An analysis of outstanding short-term borrowings is as follows (dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased:
Year-end balance $ 12,130 $ 14,630 $ 30,250
Daily average balance 114,766 51,830 45,271
Maximum month-end balance 311,420 127,690 34,075
Weighted-average interest rate during the year 6.50% 4.96% 5.37%
Weighted-average interest rate at year end 5.81% 4.50% 4.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase:
Year-end balance $ 99,833 $ 64,429 $ 90,309
Daily average balance 72,094 79,306 116,740
Maximum month-end balance 101,651 104,164 148,185
Weighted-average interest rate during the year 5.98% 4.76% 5.11%
Weighted-average interest rate at year end 6.39% 4.50% 4.86%
- ------------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds:
Year-end balance $226,871 $ 62,098 $ 20,366
Daily average balance 101,195 15,388 6,145
Maximum month-end balance 226,871 62,098 50,066
Weighted-average interest rate during the year 6.73% 5.72% 5.94%
Weighted-average interest rate at year end 6.76% 6.62% 5.98%
- ------------------------------------------------------------------------------------------------------------------------------------
8. Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholder's equity (1) 10.54% 29.22% 26.20% 22.75% 20.99%
Return on average total assets (1) .87% 1.85% 1.68% 1.49% 1.42%
Average stockholder's equity as a percentage of
average total assets 8.29% 6.35% 6.42% 6.54% 6.76%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes after-tax merger-related and merger retention program costs of $62 million in 2000. Excluding these costs, return on
average stockholder's equity would have been 25.68% and return on average total assets would have been 2.13%.
F-15