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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, 2001 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
------------------- -----------------------------------------
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 14, 2002, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $15,863,822,080. 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 14, 2002 was
1,370,705,388 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 2001 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 13, 2002 by reference to portions of that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2001
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TABLE OF CONTENTS
Part I
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
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
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 14
Item 11. Executive Compensation ------------------------------------------------------------------------------- 16
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 16
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 16
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 16
Exhibit Index ---------------------------------------------------------------------------------- 17
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 as well
as achieve its strategic priorities, the Company's ability to carry out its
plans for its international business and the availability of the Company's
information systems. 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 Charles Schwab Corporation (CSC, and with its subsidiaries collectively
referred to as the Company) was incorporated in 1986 and engages, through its
subsidiaries, in securities brokerage and related financial services. 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 in May 2000, is a wealth management firm that
through its subsidiaries also provides fiduciary services and private banking
services.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), Schwab Capital Markets L.P. (SCM), CyberTrader, Inc. (CyberTrader,
formerly known as CyBerCorp, Inc.), The Charles Schwab Trust Company (CSTC) and
Charles Schwab Europe (CSE). CSIM 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 is a market maker in Nasdaq
and other securities providing trade execution services primarily to
broker-dealers and institutional clients. CyberTrader, a subsidiary acquired in
March 2000, is an electronic trading technology and brokerage firm providing
services to highly active, online investors. CSTC serves as trustee for employee
benefit plans, primarily 401(k) plans. CSE, CSC's primary international
subsidiary, is a retail securities brokerage firm located in the United Kingdom.
(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, serves company 401(k) plan sponsors and
third-party administrators, and supports company stock option plans and stock
purchase programs. The Capital Markets segment provides trade execution services
in Nasdaq, exchange-listed and other securities primarily to broker-dealers,
including Schwab, and institutional clients. The U.S. Trust segment provides
investment and wealth 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, 2001, see note "23 - Segment Information" in the Notes
to Consolidated Financial Statements in the Company's 2001 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
(c) Narrative Description of Business
Business Strategy
The Company's overall strategy is to attract and retain client assets by
focusing on a number of areas within the financial services industry - retail
brokerage, investment and wealth management, fiduciary services, support
services for independent investment managers, 401(k) defined contribution plans,
investment services to companies and their employees, equity securities
market-making, and banking and other financial services. The Company, through
its subsidiaries, serves 7.8 million active client accounts(a). Client assets in
these accounts totaled $845.9 billion at December 31, 2001.
To pursue its strategy and its objective of long-term profitable growth,
the Company plans to leverage its competitive advantages, which include:
o a broad range of products, services, and advice offerings,
o multi-channel delivery systems,
o an ongoing investment in technology, and
o nationally recognized brands.
Management continues to believe that the key to sustaining the Company's
competitive advantages will be its ability to combine people and technology in
ways that provide investors with the access, information, guidance, advice and
control they expect - as well as high quality service - all at a lower cost than
traditional providers of financial services.
The Company's products and services are designed to meet clients' varying
investment and financial needs, including help and advice and access to
extensive investment research, news and information. The Company seeks to
provide clients with customized advice which is objective, uncomplicated, and
not driven by commission. The Company's approach to advice is based on long-term
investment strategies and guidance on portfolio diversification and asset
allocation. This approach is built on fact-based research, with the goal of
improving clients' ability to achieve better investment outcomes.
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
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(a) Accounts with balances or activity within the preceding eight months.
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selection of choices for their investment needs. Schwab's products,
services, and advice offerings cross the spectrum of its clients - those who
manage their own investments and make independent investment decisions, those
who want ongoing access to guidance while retaining control over their
investment decisions, and those who desire to have experienced professionals
manage their assets.
In 2001, the Company focused on aligning its infrastructure and resources
with its current strategic priorities, which include:
o providing the spectrum of affluent investors with the advice, relationships,
and choices that support their desired investment outcomes;
o delivering the information, technology, service, and pricing needed to remain
a leader in serving active traders;
o providing individual investing services through employers, including
retirement and option plans as well as personal brokerage accounts;
o offering selected banking services and developing investment products that
give clients greater control and understanding of their finances;
o retaining a strong capital markets business to address investors' financial
product and trade execution needs; and
o continuing to provide high quality service to clients with smaller investment
portfolios.
For further discussion on the Company's business strategy, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Description of Business - Business Strategy" in the Company's 2001
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
The table below shows the Company's sources of revenues on a comparative
basis for the three years ended December 31, 2001.
- 2 -
THE CHARLES SCHWAB CORPORATION
- ------------------------------------------------------------------------------------------------------------------------------------
Sources of Revenues
(Dollar amounts in millions)
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------
Revenues
Asset management and administration fees
Mutual fund service fees
Proprietary funds (SchwabFunds(R)
and Excelsior(R)) $ 818 19% $ 673 12% $ 542 12%
Mutual Fund OneSource(R) 282 6% 331 6% 227 5%
Other 41 1% 35 19
Asset management and related services 534 12% 544 9% 432 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Asset management and administration fees 1,675 38% 1,583 27% 1,220 27%
- ------------------------------------------------------------------------------------------------------------------------------------
Commissions
Exchange-listed securities 672 15% 729 12% 609 14%
Nasdaq and other equity securities 473 11% 1,229 20% 986 22%
Options 114 3% 204 4% 175 4%
Mutual funds 96 2% 132 3% 105 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Commissions 1,355 31% 2,294 39% 1,875 42%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest revenue
Margin loans to clients 832 19% 1,772 30% 983 22%
Investments, client-related 555 13% 338 6% 404 9%
Private banking loans 240 5% 219 4% 174 4%
Securities available for sale 79 2% 69 1% 57 1%
Other 151 3% 191 4% 100 2%
Interest expense (928) (21%) (1,352) (24%) (898) (20%)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 929 21% 1,237 21% 820 18%
- ------------------------------------------------------------------------------------------------------------------------------------
Principal transactions
Nasdaq and other equity securities 173 4% 470 8% 411 9%
Other 82 2% 100 2% 89 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Principal transactions 255 6% 570 10% 500 11%
- ------------------------------------------------------------------------------------------------------------------------------------
Other 139 4% 104 3% 71 2%
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues $4,353 100% $5,788 100% $4,486 100%
====================================================================================================================================
This table should be read with the Company's consolidated financial statements and notes in the
Company's 2001 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit
No. 13.1 of this report. Certain prior years' revenues and expenses have been reclassified to
conform to the 2001 presentation.
Products, Services, and Advice Offerings
The Company offers a broad range of products, services, and advice
offerings to address its clients' varying investment and financial needs. Such
offerings are made through the Company's four segments - Individual Investor,
Institutional Investor, Capital Markets and U.S. Trust.
Individual Investors
Investors at Schwab, through the Individual Investor segment or indirectly
through the Institutional Investor segment, have access to the accounts,
features, tools, services, and products 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
- 3 -
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, 2001,
393,000 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.
For affluent clients who meet certain trading or asset levels, Schwab
offers additional benefits such as free research, priority handling of their
service calls, access to independent investment managers, and other services.
Additionally, Schwab offers the Schwab Access(TM) account to these clients. The
Schwab Access account 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.
During 2001, Schwab launched Schwab Private Client (SPC) services on a
limited basis to affluent investors. SPC services are designed for investors
with at least $500,000 in assets at Schwab and feature a one-on-one relationship
with a Schwab investment consultant backed by a team of professionals. The SPC
account is structured with an asset-based fee and includes portfolio
construction guidance, ongoing monitoring and commission-free equity trades.
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 2001, Schwab
enhanced its IRA-related services through the introduction of Personal Rollover
Assistant, a service designed to help clients streamline and consolidate their
retirement investments. Active IRAs and Keogh accounts at December 31, 2001
totaled 3,300,000, up 5% from December 31, 2000, while client assets in all IRAs
and Keogh accounts increased 9% to $201.9 billion.
For active traders, Schwab offers accounts that include access to special
features and services such as advanced trading tools, priority access to a
dedicated team of trading specialists, and reduced pricing on equity trades.
CyberTrader also offers a brokerage account to its clients. Features of this
account include access to CyberTrader's proprietary software designed to benefit
highly active traders and the choice of manual or automated order routing for
placing trades.
Help and Advice, Investment Education, Research, and Analysis Tools. The
-----------------------------------------------------------------------
Company's approach to advice is based on long-term investment strategies and
guidance on portfolio diversification and asset allocation. For affluent
investors who make independent investment decisions, the Company offers
research, analytic tools, and access to fee-based portfolio consultations and
financial planning services. Clients looking for more guidance while retaining
control have access to advanced research, trading, and planning resources,
combined with professional advice from Schwab's investment specialists designed
to assist in developing an investment strategy and carrying out investment and
portfolio management decisions. Additionally, SPC provides higher net-worth
clients with more personalized, one-on-one advice interactions, access to
expanded financial planning, asset management capabilities, and enhanced
performance reporting. Schwab also established its MarketPlace, an internal Web
site which includes the AdviceSuite, a software platform that enables service
representatives to apply a consistent set of principles and practices when
providing market viewpoints and investment advice. MarketPlace also provides
tools to support discussions with clients about events such as retirement and
college planning and charitable giving. Schwab's new Mutual Fund internal Web
site provides service representatives with news, research, and analytic tools
designed to support their fund-related advice interactions with clients. Schwab
has also expanded its advice offering to affluent clients by adding Goldman
Sachs research as well as Schwab's proprietary rating system for individual
equities.
Schwab's registered representatives can refer investors who desire
additional guidance to independent investment managers and certified financial
planners through the Schwab AdvisorSource(R) program. Schwab clients and
potential clients who desire personalized wealth management services can receive
referrals to U.S. Trust's investment management,
- 4 -
trust, and private banking capabilities as part of the Schwab AdvisorSource(R)
program.
Schwab strives to demystify investing by educating and assisting clients in
the development of investment plans. Educational tools include : WebShop(R), a
series of workshops designed to help investors increase their skills in using
Schwab's online services; the Schwab Learning Center(R), interactive courses
designed to help clients learn more about investing principles and use of the
online channel; the Smart Investor(TM), a centralized location on Schwab.com(TM)
for educational information about investing; and SchwabWelcome.com(TM), an
efficient and easy way for prospects to get started investing at Schwab. During
2001, Schwab continued to meet ongoing client demand for Schwab-style help and
advice by introducing the Live Online program, a series of workshops that
utilize the Internet to bring Schwab representatives and clients together to
discuss investing strategies, retirement planning and wealth management in a
highly interactive format.
Schwab provides various Internet-based research and analysis tools which
are designed to help clients achieve better investment outcomes, including: the
Positions Monitor, 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
Schwab Portfolio Checkup(R), an asset allocation tool that also allows clients
to include non-Schwab holdings in their analyses; and SchwabAlerts(R), which
delivers investment and market activity news to clients via both wireless and
e-mail. Additionally, Schwab provides a variety of stock selection tools. For
investors seeking ideas, Schwab provides the Stock Screener, which allows
clients to search over 9,000 equities using their own criteria, and the Schwab
Stock List, which is compiled using an unbiased and systematic approach. For
investors desiring to analyze a specific equity security, Schwab provides the
Charles Schwab Stock Analyzer(R), which provides data for the specific equity
security and helps clients interpret such data. During 2001, Schwab expanded its
research and analysis tools to include OptionStreet(TM), which offers improved
online trading screens, tools, and educational content to clients wishing to
gain greater control of their portfolios via options.
Trading Technology and Tools. The Company delivers information, technology,
-----------------------------
service, and pricing which is designed to meet the needs of active traders. For
highly active traders, CyberTrader offers integrated software-based trading
platforms - CyberX(R)2 and CyberTrader Pro(TM), which utilize direct access and
intelligent order routing technology. CyberX2 is a user-friendly trading system
with point and click order entry, advanced charting capabilities, streaming
news, remote Web trading, stock watch lists, multiple ECN Book quotes, and
advanced risk management tools. CyberTrader Pro is a multifaceted trading
platform that offers all of the features of CyberX2 plus additional features
including analytical tools, stock filtering tools, and live charting
capabilities. Additionally, CyberTrader offers CyberTrader Direct(TM), a
software application that gives clients access, via handheld communication
devices, to CyberTrader's proprietary order-routing capabilities, with
connections to 10 ECNs and more than 450 market makers. Real-time quotes,
customizable stock lists, and account information are also available with
CyberTrader Direct. Through CyberTrader's Web site, investors have access to
CyberTrader U(TM) , which offers a variety of introductory and intermediate
online classes committed to assisting individuals become more educated traders.
For active traders, Schwab also offers Velocity(TM), a desktop trading
software, and StreetSmart Pro(R), which leverages CyberTrader's trading
technology and combines Nasdaq Level II quotes, real-time streaming news,
unlimited watch lists, and real-time, streaming interactive charts with account
management features, risk management tools, multi-channel access, and dedicated
personal support. StreetSmart Pro allows clients to execute their trades through
SmartEx(TM) - Schwab's proprietary order-routing technology - without having to
access another trading program. Through education initiatives such as the Branch
Active Trader program, Schwab clients can receive training from specially
qualified representatives on all of these advanced trading platforms.
Client Financing and Clearing Services. 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 established 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 2001,
Schwab's outstanding margin loans to clients averaged $11.4 billion and were
$9.2 billion at December 31, 2001.
In permitting a client to engage in transactions, Schwab faces credit risk
if the client fails to meet his or her
- 5 -
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 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 2001
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report, and "Regulation" in this report.
Schwab performs clearing services for all securities transactions in its
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 "22 -
Financial Instruments Subject to Off-Balance-Sheet Risk or Credit Risk" in the
Notes to Consolidated Financial Statements in the Company's 2001 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Mutual Funds. 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 331 fund families. Within the
Mutual Fund Marketplace, Schwab's Mutual Fund OneSource(R) service enables
clients to trade 1,079 mutual funds from 240 fund families without incurring
transaction fees. The Mutual Fund Marketplace also includes Schwab's mutual fund
clearing service, which provides mutual fund trading and clearing services to
banks and broker-dealers.
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.
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. 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(R), and U.S. Trust
offers the Excelsior(R) family of funds.
SchwabFunds 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. Excelsior funds include
actively-managed domestic equity funds, international equity funds, taxable
fixed income funds, tax-exempt fixed income funds and money market funds. Fees
received by the Company from the SchwabFunds and the Excelsior funds, for
providing shareholder services, administration, investment management and other
services, are based upon the net assets of the funds.
International. The Company's international business serves both foreign
--------------
investors and non-English-speaking U.S. clients. The Company has a presence in
the United Kingdom, Hong Kong, the Cayman Islands, and Brazil. In the U.S., the
Company serves Chinese-, Korean-, Vietnamese-, and Spanish-speaking clients
through a combination of designated branch offices and Web-based and telephonic
services. As of December 31, 2001, client assets in the Company's international
business totaled $22.7 billion. During 2001, in light of slower than expected
progress
- 6 -
towards the financial objectives of its foreign-based operations, as well as
difficult securities market conditions worldwide, the Company withdrew its
operations from Australia and Japan. Additionally, during the first quarter of
2002, the Company sold its Canadian business. Moving forward, the Company
expects that its primary international focus will be growing its remaining
operations in the Americas, Asia and the U.K., as well as serving clients who
live abroad but want to invest in U.S.-dollar-based securities. The Company
believes this strategy will leverage its existing strengths in technology and
U.S.-dollar-based trading.
Institutional Investors
Services for Independent Investment Managers. Schwab provides custodial,
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trading, technology, and other support services to independent investment
managers, whose services are integral to the Company's advice offerings, through
the Institutional Investor segment. To attract the business of 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 the
SchwabLink(R) for Windows(R) product, the Schwab Institutional(R) Web site, and
the Managed Account Connection(R) service, and their clients can use the Schwab
Signature Services Alliance(TM) program. SchwabLink for Windows, a proprietary
software, provides independent investment managers with up-to-date client
account information, as well as mutual fund trading and management fee
capabilities. The Schwab Institutional Web site is the core platform for
independent investment managers to conduct daily business activities online with
Schwab, including trading, submitting client account information and retrieving
news and market information. The Managed Account Connection service enables
independent 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 clients
of independent investment managers, including access to a dedicated team of
representatives and the Schwab Alliance Web site. During 2001, Schwab launched
several new services to help independent investment managers manage and build
their practices, including the Electronic Account Submission service, which
allows independent investment managers to establish new client account numbers
immediately upon request, and the Managed Account Select(TM) service, which
enables independent investment managers to provide clients with access to
pre-screened money managers under a simplified single-fee structure. At December
31, 2001, Schwab client assets held in accounts managed by approximately 5,800
active independent investment managers totaled $235.0 billion.
Corporate Services. The Company also serves individuals through their
--------------------
workplace in a variety of ways. The Company provides 401(k) recordkeeping and
other retirement plan services directly through a dedicated sales force, as well
as indirectly through alliances with third-party administrators. In the direct
channel, SchwabPlan(R), the Company's primary 401(k) retirement plan product,
offers plan sponsors a wide array of investment options, participant education
and servicing, trustee services and participant-level recordkeeping. SchwabPlan
features include an electronic desktop delivery service that allows plan
participants to receive detailed account information via encrypted e-mail, and a
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. In 2001, the
Company launched a bundled 401(k) plan designed specifically to meet the needs
of 401(k) programs with as little as $2 million to $20 million in participant
assets. Additionally, the Company offers stock option plan, stock purchase
program, and restricted stock services to companies, as well as trade execution
and education services to their employees. These services include online tools
such as the Schwab OptionCenter (R), which allows access to stock option
accounts where employees can research, model and exercise their options, and
StockPlanCenter(R), which allows access to employee stock purchase plan accounts
where employees can sell shares. During 2001, client assets in
employer-sponsored retirement plans declined 3% to $97.1 billion, which included
$31.5 billion serviced by Schwab's retirement plan services business.
Capital Markets
The Company provides its clients with quick and efficient access to the
securities markets through its market maker, SCM, and specialist operations. SCM
provides trade execution services in Nasdaq, exchange-listed, and other
securities primarily to broker-dealers, including Schwab, and institutional
clients. As a market maker in Nasdaq, exchange-listed, 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. During 2001, SCM expanded its automated order execution capabilities and
established a securities market-making joint venture in the United Kingdom.
Schwab has specialist operations on the Boston 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 this operation. At December 31, 2001, Schwab
- 7 -
had four specialists on the Boston Stock Exchange that made markets in 224
securities.
Additionally, 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 LLC (REDIBook), an electronic communication
network. The merger of REDIBook and Archipelago ECN LLC was announced in 2001
and closed in the first quarter of 2002.
Clients also have the ability to analyze and trade a variety of fixed
income securities through Schwab's multi-channel delivery systems. Through
Schwab's alliance with Valubond, individual and independent investment manager
clients can analyze and trade fixed income securities through the Schwab Web
site. During 2001, Schwab expanded its fixed income offering by introducing
Schwab CDSource(TM), a service that enables clients to research and purchase
certificates of deposits from a variety of FDIC-insured depository institutions,
including U.S. Trust, entirely online.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Risk Management" in the Company's 2001 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
U.S. Trust
U.S. Trust provides an array of financial services for affluent clients and
their families. These services include investment and wealth management, trust,
financial and estate planning, and private banking, which includes mortgage,
personal lending and deposit products. 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(R) 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. Additionally, higher net worth investors can receive referrals to U.S.
Trust as part of Schwab AdvisorSource(R). In 2001, U.S. Trust introduced an
enhanced Web site which provides clients with secure access to consolidated
account information as well as updated equity pricing, proprietary research, and
financial information from third-party providers.
For institutional clients, including corporations, endowments, foundations,
and pension plans, U.S. Trust provides investment management, 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 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 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,
2001, Schwab operated 395 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, 2001, U.S. Trust operated 34 offices in 12 states. In addition, the
Company has offices in Brazil, the Cayman Islands, Hong Kong 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 and help and advice interactions
with clients. 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 wealth management professionals at regional offices to obtain access
to U.S. Trust's wide array of financial services and products.
- 8 -
Regional Client Telephone Service Centers
Schwab's five regional client telephone service centers, located in Austin,
Denver, Indianapolis, Orlando, and Phoenix, handle client trading and service
calls twenty-four hours a day, seven days a week. The capacity of the service
centers allows branch office personnel to focus on business development and help
and advice interactions with clients.
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 affluent clients. Further, Schwab's approach to advice is designed
to be offered consistently across all of Schwab's delivery channels. 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.
Online and Automated Telephonic 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.
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 75% of client calls received in 2001. Schwab
handled approximately 89 million automated and live calls received in 2001.
Online channels include the Charles Schwab Web Site, an information and
trading service on the Internet at schwab.com(TM); the Schwab Institutional(R)
Web site, a platform for independent investment managers to conduct daily
activities; and PocketBroker(TM), a wireless information and trading service.
Additionally, online mediums designed for highly active traders include
StreetSmart Pro(R) and Velocity(TM), online trading systems which provide
enhanced trade information and order execution, and CyberTrader's integrated
software-based trading platforms. While most client transactions are completed
through the online channel, the Company continues to stress the importance of
Clicks and Mortar 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 2001. Schwab's share of the industry's
online assets was 37% at December 31, 2001. Schwab's share of the industry's
online trades was 22% in 2001.
Technology
The Company's ongoing investment in technology is a key element in
expanding its product and service offerings, enhancing its delivery systems,
providing fast and consistent client service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in client
activity without a corresponding rise in staffing levels. The Company uses
technology to empower its clients to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
The Company's operations rely heavily on its information processing and
communications systems. The Company'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, the Company maintains a
sophisticated computer network connecting all of the offices and regional client
telephone service centers. The Company's computers are also linked to the major
registered U.S. securities markets, the National Securities Clearing
Corporation, and The Depository Trust Company.
Failure of the Company's information processing or communications systems
for a significant period of time could limit the Company's ability to process
its large volume of transactions accurately and rapidly. This could cause the
Company 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, the Company
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 the
Company 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.
- 9 -
Nationally Recognized Brands
The Company's advertising and marketing programs support its strategy by
continually reinforcing the strengths and key attributes of Schwab's
full-service offering, U.S. Trust's wealth management services, and
CyberTrader's trading technology. By maintaining a consistent level of
visibility in the marketplace, the Company seeks to establish Schwab, U.S.
Trust, and CyberTrader 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, direct mail, athletic event
sponsorship, and online channels in its advertising.
Employees
As of December 31, 2001, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 19,600 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 2001 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Technology" and "Regulation" in this report.
Business Environment
The Company's business, like that of other securities brokerage and related
financial services firms, is directly affected by the fluctuations in securities
trading volumes and price levels that occur in fundamentally cyclical financial
markets, as well as by changes in government monetary policies that impact the
growth of bank loans and investments and the level of interest charged for loans
and paid on deposits and other funding sources. The Company may experience
significant variations in revenues from period to period depending on changes in
these factors and the overall business environment. The Company's non-trading
revenues are less cyclical than its trading revenues, but would be impacted by a
sustained downturn in the securities markets. The Company adjusts its expenses
in anticipation of and in response to changes in financial market conditions and
client trading patterns. Certain of the Company's expenses (including variable
compensation, portions of communications, and commissions, clearance and floor
brokerage) vary directly with changes in financial performance or client trading
activity. Expenses relating to the level of contractors, temporary employees,
overtime hours, advertising and market development, and professional services
are adjustable over the short term to help the Company achieve its financial
objectives. Additionally, development spending, which includes media and project
spending, is discretionary and can be altered in response to market conditions.
However, a significant portion of the Company's expenses such as salaries and
wages, occupancy and equipment, and depreciation and amortization do not vary
directly, at least in the short term, with fluctuations in revenues or
securities trading volumes. Also, the Company views its development spending as
essential for future growth and therefore prefers to avoid major adjustments in
such spending unless faced with a sustained slowdown in revenue growth. Given
the prevailing market conditions and the Company's financial performance, the
Company reduced its development spending in 2001 to approximately $406 million,
down 23% from 2000. Additionally in 2001, the Company initiated a restructuring
plan to reduce operating expenses. For a discussion of the Company's
restructuring plan, see "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Results of Operations - Financial Overview"
and note "3 - Restructuring and Other Charges" in the Notes to Consolidated
Financial Statements in the Company's 2001 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report.
Competition
The Company faces significant competition from companies seeking to attract
client financial assets, including traditional, discount and online brokerage
firms, mutual fund companies, banks, asset management, and wealth management
companies. For a discussion of competition see "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Risk Management
- -Competition" in the Company's 2001 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
- 10 -
Regulation
CSC is 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. CSC's depository institution subsidiaries are subject to regulation and
supervision and to various requirements and restrictions under federal and state
law. 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 "20 - Regulatory Requirements" in the
Notes to Consolidated Financial Statements in the Company's 2001 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
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 CyberTrader 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 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
all 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, 2001.
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.
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.
As registered broker-dealers and NASD member organizations, Schwab, SCM,
and CyberTrader 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.
- 11 -
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.
As registered broker-dealers, certain subsidiaries 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 the greater of 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), or a minimum dollar amount, which is based on the type of business
conducted by the broker-dealer. The minimum dollar amount for both Schwab and
SCM is $1 million. "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" and note "20 - Regulatory Requirements" in the Notes to
Consolidated Financial Statements in the Company's 2001 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 2. Properties
The Company's corporate headquarters and its principal executive offices
are located in leased office space, totaling 434,000 square feet, at 120 Kearny
Street in San Francisco, California. The lease expires in 2011 and includes two
five-year extension options at the then current market rates. Schwab also leases
a 28-story building at 101 Montgomery Street in San Francisco, California. The
building contains
- 12 -
295,000 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. This space serves as the
corporate technology support center. The lease expires in 2018 and includes two
seven-year extension options at then current market rates. In addition to these
locations, Schwab leases space in other buildings for its San Francisco
operations aggregating 666,000 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, aggregating 117,000 square feet in Jersey City, New Jersey.
A subsidiary of Schwab leases a building, totaling approximately 373,000
square feet, located at 215 Fremont Street in San Francisco, California. Upon
the expiration of the lease in June 2005, the Company may renew the lease for an
additional five years subject to certain approvals and conditions, or arrange a
sale of the office building to a third party. The Company also has an option to
purchase the office building for $245 million at any time after June 18, 2003.
Substantially all of the Company's branch 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 Austin, Denver, and
Orlando, with 473,000, 328,000, and 235,000 square feet, respectively. The
Company owns its data center facilities located in Phoenix totaling 692,000
square feet.
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 "21 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 2001 Annual Report to
Stockholders, which is 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 2001.
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 14, 2002 was 12,918. The closing market price per share on that date was
$14.52.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 2001
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 2001 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 2001 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 2001 and
2000 are summarized as follows (dollars in millions):
- 13 -
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
2001 2000
- --------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Investments (client-related):
Average balance outstanding $16,667 $ 6,073
Average interest rate 2.55% 5.82%
Margin loans to clients:
Average balance outstanding $ 9,145 $18,650
Average interest rate 5.85% 9.34%
Private banking loans:
Average balance outstanding $ 3,886 $ 3,020
Average interest rate 6.39% 7.77%
Securities available for sale:
Average balance outstanding $ 1,245 $ 1,070
Average interest rate 5.42% 6.08%
Average yield on interest-earning assets 4.12% 8.31%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $22,550 $21,189
Average interest rate 1.57% 5.42%
Interest-bearing banking deposits:
Average balance outstanding $ 3,561 $ 3,176
Average interest rate 2.72% 5.30%
Other interest-bearing sources:
Average balance outstanding $ 903 $ 1,410
Average interest rate 2.55% 4.67%
Average noninterest-bearing portion $ 3,929 $ 3,038
Average interest rate on funding sources 1.53% 4.79%
Summary:
Average yield on interest-earning assets 4.12% 8.31%
Average interest rate on funding sources 1.53% 4.79%
- --------------------------------------------------------------------------------
Average net interest spread 2.59% 3.52%
================================================================================
The decrease in net interest revenue, net of interest expense, from the
fourth quarter of 2000 to the fourth quarter of 2001 was primarily due to lower
levels of, and lower rates received on, margin loans to clients, partially
offset by higher average balances of client-related investments and lower rates
paid 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 2001 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 2001 Annual Report to Stockholders, which is
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, 2002 (the Proxy
Statement) under "The Board of Directors" and "Other Information - 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.
- 14 -
================================================================================
Executive Officers of the Registrant
Name Age Title
---- --- -----
Charles R. Schwab 64 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 53 President, Co-Chief Executive Officer, and Director
John Philip Coghlan 50 Vice Chairman, President - Schwab Institutional
Christopher V. Dodds 42 Executive Vice President and Chief Financial Officer
Lon Gorman 53 Vice Chairman, President - Schwab Capital Markets
Daniel O. Leemon 48 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 47 Vice Chairman - Technology and Administration
Jeffrey S. Maurer 54 Executive Vice President and Director of The Charles
Schwab Corporation, and
Chairman and Chief Executive Officer 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 USTC and its principal subsidiary, U.S. Trust NY;
Gap, Inc.; Siebel Systems, Inc., a company that provides support for software
systems; and Xign, Inc., a developer of electronic payment systems using
digitally signed electronic check technology. 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.
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 USTC;
U.S. Trust NY; the Nasdaq Stock Market; Intel Corporation, a maker of
microcomputer components and related products; and DoveBid, Inc., a provider of
online business-to-business capital asset auctions and valuation services.
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.
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
- 15 -
Schwab from 1996 to 1997. Mr. Gorman joined Schwab in 1996. Mr. Gorman is
currently a director of the Securities Industry Association and REDIBook.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Mr. Leemon joined Schwab in 1995. Mr. Leemon
is currently 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 - Technology and Administration of the
Company and Schwab since October 2001 and Vice Chairman of the Company and
Schwab since 1999. Ms. Lepore was Chief Information Officer of the Company and
Schwab from 1993 to October 2001 and Executive Vice President of the Company and
Schwab from 1993 to 1999. Ms. Lepore joined Schwab in 1983. Ms. Lepore is
currently a director of eBay Inc. and since May 2001, Ms. Lepore has been a
director of Wal-Mart Stores, Inc.
Mr. Maurer has been Executive Vice President and a director of the Company
since 2000. Mr. Maurer has been Chairman of USTC and U.S. Trust NY since
February 2002 and Chief Executive Officer of USTC and 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 2000 and
President of USTC from 1990 to 2000. Mr. Maurer joined USTC in 1970. Mr. Maurer
is currently a director of Forbes.com, an Internet media company; and the
Greater New York Mutual Insurance Companies, a property and casualty insurance
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
"Compensation Committee Interlocks and Insider Participation," "Director
Compensation," "Summary Compensation Table," "Option Grants," "Options
Exercised," "Pension Plan Table," "Compensation Committee Report," "Other
Information - Certain Transactions," "Appendix A - Description of Charles R.
Schwab's Employment and License Agreements," "Appendix B - Description of H.
Marshall Schwarz's Employment and Separation Agreements," and "Appendix C -
Description of Jeffrey S. Maurer's Employment Agreement."
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 "Other
Information - 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 2001 Annual Report to Stockholders, which is 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 2001.
- 16 -
(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.
3.11 Fifth Restated Certificate of Incorporation, effective May 7, 2001, of
the Registrant (supersedes Exhibit 3.10), filed as Exhibit 3.11 to the
Registrant's Form 10-Q for the quarter ended September 30, 2001 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.
+
- 17 -
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.
+
10.169 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.
+
10.177 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.
+
- 18 -
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.
+
10.185 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 Exhibits 10.160, 10.167
and 10.176) 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 Exhibits 10.159, 10.166 and 10.179) filed as
Exhibit 10.188 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.
+
10.190 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.
+
10.200 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.
- 19 -
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.
+
10.210 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.
+
10.214 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated to
include amendments through December 13, 2000 (supersedes Exhibit
10.213), filed as Exhibit 10.214 to the Registrant's Form 10-K for the
year ended December 31, 2000 and incorporated herein by reference.
+
10.215 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
restated to include amendments through December 13, 2000 (supersedes
Exhibit 10.209), filed as Exhibit 10.215 to the Registrant's Form 10-K
for the year ended December 31, 2000 and incorporated herein by
reference.
+
10.216 The SchwabPlan Retirement Savings and Investment Plan, restated to
include amendments through January 1, 2001 (supersedes Exhibit
10.210), filed as Exhibit 10.216 to the Registrant's Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein by reference.
+
10.217 Executive Employment Agreement and Covenants Not to Compete for H.
Marshall Schwarz, filed as Exhibit 10.217 to the Registrant's Form
10-Q for the quarter ended March 31, 2001 and incorporated herein by
reference.
+
10.218 Executive Employment Agreement and Covenant Not To Compete for Jeffrey
S. Maurer, filed as Exhibit 10.218 to the Registrant's Form 10-Q for
the quarter ended March 31, 2001 and incorporated herein by reference.
+
10.219 The Charles Schwab Corporation 2001 Stock Incentive Plan, approved at
the Annual Meeting of Stockholders on May 7, 2001, filed as Exhibit
10.219 to the Registrant's Form 10-Q for the quarter ended June 30,
2001 and incorporated herein by reference.
+
- 20 -
10.220 The Charles Schwab Corporation Annual Executive Individual Performance
Plan, as amended and restated, approved at the Annual Meeting of
Stockholders on May 7, 2001 (supersedes Exhibit 10.211), filed as
Exhibit 10.220 to the Registrant's Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
+
10.221 The SchwabPlan Retirement Savings and Investment Plan, restated and
amended as of April 1, 2001 (supersedes Exhibit 10.216), filed as
Exhibit 10.221 to the Registrant's Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference.
+
10.222 The Charles Schwab Corporation 1987 Stock Option Plan, restated and
amended as of September 20, 2001, with form of Non-Qualified Stock
Option Agreement attached (supersedes Exhibit 10.186), filed as
Exhibit 10.222 to the Registrant's Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
+
10.223 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), restated and amended as of September 20, 2001, with form of
Non-Qualified Stock Option Agreement attached (supersedes Exhibit
10.188), filed as Exhibit 10.223 to the Registrant's Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by reference.
+
10.224 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated and
amended as of September 20, 2001 (supersedes Exhibit 10.214), filed as
Exhibit 10.224 to the Registrant's Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
+
10.225 The Charles Schwab Corporation 2001 Stock Incentive Plan, restated and
amended as of September 20, 2001 (supersedes Exhibit 10.219), filed as
Exhibit 10.225 to the Registrant's Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
+
10.226 The Charles Schwab Corporation Employee Stock Incentive Plan, restated
and amended as of September 20, 2001 (supersedes Exhibit 10.190),
filed as Exhibit 10.226 to the Registrant's Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference.
+
10.227 Benefit Equalization Plan of U.S. Trust Corporation, filed as Exhibit
10.227 to the Registrant's Form 10-Q for the quarter ended September
30, 2001 and incorporated herein by reference.
+
10.228 1990 Change in Control and Severance Policy for Top Tier Officers of
United States Trust Company of New York and Affiliated Companies,
filed as Exhibit 10.228 to the Registrant's Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference.
+
- 21 -
10.229 Executive Deferred Compensation Plan of U.S. Trust Corporation, filed
as Exhibit 10.229 to the Registrant's Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference.
+
10.230 Executive Incentive Plan of U.S. Trust Corporation, filed as Exhibit
10.230 to the Registrant's Form 10-Q for the quarter ended September
30, 2001 and incorporated herein by reference.
+
10.231 1989 Stock Compensation Plan and Predecessor Plans of U.S. Trust
Corporation, filed as Exhibit 10.231 to the Registrant's Form 10-Q for
the quarter ended September 30, 2001 and incorporated herein by
reference.
+
10.232 U.S. Trust Corporation Employees' Retirement Plan, filed as Exhibit
10.232 to the Registrant's Form 10-Q for the year ended September 30,
2001 and incorporated herein by reference.
+
10.233 U.S. Trust Corporation 401(k) Plan, filed as Exhibit 10.233 to the
Registrant's Form 10-Q for the year ended September 30, 2001 and
incorporated herein by reference.
+
10.234 Executive Deferred Compensation Plan of U.S. Trust Corporation, as
amended and restated effective as of January 1, 2001 (supersedes
Exhibit 10.229).
+
10.235 Executive Incentive Plan of U.S. Trust Corporation, as amended and
restated effective as of January 1, 2001 (supersedes Exhibit 10.230).
+
10.236 U.S. Trust Corporation 401(k) Plan, as amended and restated effective
as of January 1, 2001 (supersedes Exhibit 10.233).
+
10.237 U.S. Trust Corporation Employees' Retirement Plan, as amended and
restated effective as of January 1, 2001 (supersedes Exhibit 10.232).
+
10.238 Credit Agreement (364-Day Commitment) dated as of June 22, 2001
between the Registrant and the financial institutions listed therein
(supersedes Exhibit 10.198 and 10.206).
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 2001 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.
- --------------------------------------------------------------------------------
- 22 -
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 27, 2002.
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 27, 2002.
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
- 23 -
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-16
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 2001 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
THE CHARLES SCHWAB CORPORATION
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, 2001 and 2000, and
for each of the three years in the period ended December 31, 2001, and have
issued our report thereon dated March 8, 2002; such consolidated financial
statements and report are included in your 2001 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.
San Francisco, California
March 8, 2002
F-2
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In millions)
December 31, 2001 2000
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,197 $ 838
Securities owned - at market value 11 1
Advances to subsidiaries 324 634
Investments in subsidiaries, at equity 3,550 3,772
Other assets 48 54
- --------------------------------------------------------------------------------
Total $ 5,130 $ 5,299
================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 100 $ 200
Accrued expenses and other liabilities 188 151
Long-term debt 679 718
- --------------------------------------------------------------------------------
Total liabilities 967 1,069
Stockholders' equity 4,163 4,230
- --------------------------------------------------------------------------------
Total $ 5,130 $ 5,299
================================================================================
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 millions)
Year Ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Interest revenue $ 73 $ 120 $ 71
Interest expense (53) (51) (28)
- --------------------------------------------------------------------------------
Net interest revenue 20 69 43
Other revenues (losses) 12 (5)
Restructuring expense (30)
Other gains (expenses) 7 (28) (25)
- --------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 9 36 18
Income tax expense (1) (20) (8)
- --------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 8 16 10
Equity in earnings of subsidiaries
Equity in undistributed earnings/(distributions
in excess of earnings) of subsidiaries (529) 516 497
Equity in extraordinary item of subsidiary 121
Dividends paid by subsidiaries 599 186 159
- --------------------------------------------------------------------------------
Total 191 702 656
Net income $ 199 $ 718 $ 666
================================================================================
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 millions)
Year Ended December 31,
2001 2000 1999
------ ------ ------
Cash Flows from Operating Activities
Net income $ 199 $ 718 $ 666
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings/(distributions
in excess of earnings) of subsidiaries 529 (516) (497)
Equity gain in extraordinary item of subsidiary (121)
Net gain on sale of an investment (26)
Other 10
Net change in:
Other assets (6) (3) (11)
Drafts payable (100) 200
Accrued expenses and other liabilities 9 26 29
- --------------------------------------------------------------------------------
Net cash provided by operating activities 494 225 387
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (6) (10)
Decrease (increase) in net advances to subsidiaries 384 545 (286)
Decrease (increase) in investments in subsidiaries (111) (436) (86)
Cash payments for business combinations and
investments, net of cash received (13) (29) (18)
Proceeds from sale of an investment 49
- --------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 303 70 (390)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from long-term debt 311 144
Repayment of long-term debt (39) (48) (40)
Dividends paid (61) (62) (61)
Purchase of treasury stock (368) (54)
Proceeds from stock options exercised and other 30 85 66
Proceeds from issuance of stock to ESOP 25
- --------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (438) 311 55
- --------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 359 606 52
Cash and Cash Equivalents at Beginning of Year 838 232 180
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $1,197 $ 838 $ 232
================================================================================
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
The condensed financial information of The Charles Schwab Corporation (CSC)
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 2001 Annual
Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
On May 31, 2000, CSC completed its merger (the Merger) with U.S. Trust
Corporation (USTC). 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 CSC and USTC had been operating
as a combined entity during such periods.
2. Supplemental Cash Flow Information
During 2000, CSC recorded a non-cash capital contribution of $19 million to
its subsidiary, Charles Schwab & Co., Inc. (Schwab), through the
contribution of net assets. Also during 2000, CSC 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 CSC's subsidiaries have remitted the tax benefits from stock
options exercised and other stock-based compensation of $37 million in
2001, $178 million in 2000 and $213 million in 1999 to CSC.
Certain information affecting the cash flows of CSC follows (in millions):
Year Ended December 31, 2001 2000 1999
---------------------------------------------------------------------------
Income taxes paid $ 12 $ 10 $ 11
===========================================================================
Interest paid:
Long-term debt $ 52 $ 41 $ 24
Other 2 1 1
---------------------------------------------------------------------------
Total interest paid $ 54 $ 42 $ 25
===========================================================================
Non-cash investing and financing activities:
Common stock and options issued
for purchases of businesses $ 71 $529 $ 45
===========================================================================
3. Long-term Debt
Long-term debt consists of Senior Medium-Term Notes, Series A (Medium-Term
Notes). At December 31, 2001, CSC had $679 million aggregate principal
amount of Medium-Term Notes outstanding with maturities ranging from 2002
to 2010 and fixed interest rates ranging from 6.04% to 8.05%. At December
31, 2000, CSC 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, 2001 and 2000, the Medium-Term Notes carried a
weighted-average interest rate of 7.27% and 7.26%, respectively. Annual
maturities on long-term debt outstanding at December 31, 2001 are as
follows (in millions):
F-6
---------------------------------------------------------------------------
2002 $ 113
2003 100
2004 81
2005 56
2006 68
Thereafter 261
---------------------------------------------------------------------------
Total $ 679
===========================================================================
4. Related Party Transactions
At December 31, 2001, receivables from affiliates, which is included in
advances to subsidiaries, was $27 million. At December 31, 2001, payables
to affiliates, which is included in accrued expenses and other liabilities,
was $28 million and is payable on demand and bears interest at variable
rates (2.1% at December 31, 2001).
CSC provides subordinated revolving credit facilities and other lending
arrangements to certain of its subsidiaries, including Schwab, USTC, Schwab
Capital Markets L.P. (SCM) and Charles Schwab Europe (CSE). The amount
outstanding under these facilities and arrangements totaled $297 million at
December 31, 2001.
Schwab has a $1.4 billion subordinated revolving credit facility maturing
in September 2003, of which $220 million was outstanding at December 31,
2001. This credit facility was $1.4 billion at the end of 2000, of which
$520 million was outstanding at December 31, 2000. At year end 2001, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from
CSC maturing in 2003. The outstanding balance of these term loans was also
$25 million at year end 2000.
USTC has a $300 million short-term credit facility established in 2001,
which matures in 2003. The amount outstanding under this facility was $30
million at December 31, 2001.
SCM has a $70 million subordinated lending arrangement maturing in 2003,
which was not used at December 31, 2001. This subordinated lending
arrangement was $70 million at the end of 2000, and was not used at
December 31, 2000. SCM also had a $50 million short-term credit facility at
December 31, 2001. This facility was $25 million at December 31, 2000. No
funds were drawn under these facilities at December 31, 2001 and 2000.
CSE has a (pound sterling)50 million, equivalent to $73 million,
subordinated lending arrangement maturing in 2004, which was not used at
December 31, 2001. At December 31, 2000, CSE had a total of (pound
sterling)70 million, equivalent to $105 million, under subordinated lending
arrangements. The amount outstanding under these arrangements, at December
31, 2000, was (pound sterling)18 million, equivalent to $27 million.
CSC also provides other lending arrangements to certain of its
subsidiaries. At December 31, 2001, the total amount provided under these
lending arrangements was $48 million, of which $22 million was outstanding
and matures in 2002. These lending arrangements totaled $48 million, of
which $23 million was outstanding at December 31, 2000.
Interest earned by CSC from these subordinated revolving credit facilities
and other lending arrangements totaled $42 million in 2001, $90 million in
2000 and $60 million in 1999.
F-7
5. Commitments
During 2001, a subsidiary of CSC began occupying and making lease payments
on a newly renovated office building. The lease for the building was
arranged by working with a bank to create a special purpose trust (Trust).
The Trust, through an agent, raised the $245 million needed to acquire and
renovate the building by issuing long-term debt ($235 million) and raising
equity capital ($10 million). The subsidiary's lease payments, which are
guaranteed by CSC, to the Trust vary with fluctuations in interest rates
and are structured to cover the interest on the debt obligations and a
specified return on the equity. This financing arrangement is known as a
synthetic lease. CSC has provided the Trust with a residual value
guarantee, which means that if the building is sold to a third party CSC is
responsible for making up any shortfall between the actual sales price and
the $245 million funded by the Trust, up to a maximum of $202 million. CSC
has recently obtained a preliminary appraisal of $200 million for the
estimated value of the building at the end of the lease term. The shortfall
in estimated value below $245 million will be recorded as expense using the
straight-line method over the remaining term of the lease.
F-8
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In millions)
Additions
Balance at ------------------- Balance at
Beginning Charged Written End
Description of Year to Expense Other(1) off of Year
----------- ---------- ---------- -------- ------- ----------
For the year ended
December 31, 2001:
Allowance for doubtful
accounts of brokerage
clients (2) $ 11 $ 3 $ (9) $ 5
===================================================
For the year ended
December 31, 2000:
Allowance for doubtful
accounts of brokerage
clients (2) $ 11 $16 $ 2 $(18) $11
===================================================
For the year ended
December 31, 1999:
Allowance for doubtful
accounts of brokerage
clients (2) $ 8 $15 $ 1 $(13) $11
===================================================
(1) Represents collections of previously written-off accounts.
(2) Excludes banking-related valuation and qualifying accounts. See "U.S. Trust
Corporation Supplemental Financial Data (Unaudited) - Loans to Banking
Clients and Related Allowance for Credit Losses" in 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 millions):
- ------------------------------------------------------------------------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
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 $ 6 $ (9) $ (3) $(2) $ 3 $ 1
Loans to banking clients (1)(2) 46 (26) 20 34 11 45
Securities available for sale (3):
U.S. Treasury securities (1) (1) (2) (2) (2)
U.S. Government agencies and
collateralized mortgage obligations (4) 11 11 10 3 13
State and municipal obligations 2 2 1 1
Other securities
----- ------ ------ ----- ------ ------
Total securities available for sale 12 (1) 11 9 3 12
----- ------ ------ ----- ------ ------
Other interest-earning assets 1 1
----- ------ ------ ----- ------ ------
Total interest-earning assets 65 (36) 29 41 17 58
----- ------ ------ ----- ------ ------
Interest-bearing sources of funds:
Interest-bearing deposits from banking clients 15 (42) (27) 12 26 38
Short-term borrowings 22 (16) 6 7 4 11
Long-term debt (1) (1)
----- ------ ------ ----- ------ ------
Total sources on which interest is paid 36 (58) (22) 19 30 49
----- ------ ------ ----- ------ ------
Change in net interest revenue - taxable equivalent basis $29 $ 22 $ 51 $22 $(13) $ 9
===== ====== ===== ======
Tax equivalent adjustment (1)
------ ------
Change in net interest revenue $ 50 $ 9
====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
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.
(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, 2001 2000 1999
---------------------------- ---------------------------- ---------------------------
Average Average Average Average Average Average
(Dollars in Millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash equivalents $ 338 $ 12 3.48% $ 241 $ 15 6.12% $ 274 $ 14 4.94%
Securities available for sale (1)(2) 1,317 83 6.33% 1,133 72 6.37% 997 60 6.10%
Loans to banking clients (3) 3,469 240 6.91% 2,868 219 7.65% 2,404 174 7.26%
Other interest-earning assets 38 3 7.14% 28 2 7.02% 24 2 7.48%
------ ---- ----- ------ ---- ----- ------ ---- -----
Total interest-earning assets 5,162 338 6.54% 4,270 308 7.22% 3,699 250 6.78%
------ ---- ----- ------ ---- ----- ------ ---- -----
Non-interest-earning assets 776 687 484
------ ------ ------
Total Assets $5,938 $4,957 $4,183
====== ====== ======
Liabilities and Stockholder's Equity:
Interest-bearing deposits from banking
clients 3,365 128 3.80% 3,071 155 5.05% 2,779 117 4.23%
Short-term borrowings 619 24 3.90% 288 18 6.44% 147 7 4.91%
Long-term debt 52 4 8.42% 59 5 8.19% 63 5 8.09%
------ ---- ----- ------ ---- ----- ------ ---- -----
Total sources on which interest is paid 4,036 156 3.87% 3,418 178 5.22% 2,989 129 4.34%
------ ---- ----- ------ ---- ----- ------ ---- -----
Non-interest-bearing deposits 797 779 642
Non-interest-bearing liabilities 469 349 287
Stockholder's equity 636 411 265
------ ------ ------
Total Liabilities and Stockholder's Equity $5,938 $4,957 $4,183
====== ====== ======
Net interest revenue - taxable equivalent
basis 182 130 121
Net free funds (4) $1,126 $ 852 $ 710
------ ------ ------
Tax equivalent adjustment (2) (5) (4) (4)
---- ---- ----
$177 $126 $117
==== ==== ====
Net yield on interest earning assets
(tax equivalent basis) 3.51% 3.04% 3.26%
- ------------------------------------------------------------------------------------------------------------------------------------
(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 42% for 2001, 40% for
2000 and 47% for 1999.
(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.
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 millions):
- ---------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
U.S. treasury securities:
Amortized cost $ 159 $ 157 $ 178
Aggregate fair value $ 160 $ 157 $ 177
Gross unrealized gains $ 1
Gross unrealized losses $ 1
U.S. government sponsored agencies and corporations:
Amortized cost 748 774 691
Aggregate fair value 754 776 672
Gross unrealized gains 7 6 3
Gross unrealized losses 1 4 22
State and municipal obligations:
Amortized cost 154 134 120
Aggregate fair value 158 135 118
Gross unrealized gains 4 1
Gross unrealized losses 2
Collateralized mortgage obligations (1):
Amortized cost 84 129 5
Aggregate fair value 84 129 5
Gross unrealized gains
Gross unrealized losses
Other securities:
Amortized cost 32 23 22
Aggregate fair value 33 23 22
Gross unrealized gains 1
Gross unrealized losses
- ---------------------------------------------------------------------------------------------------------------
Total securities available for sale:
Amortized cost $ 1,177 $ 1,217 $ 1,016
Aggregate fair value $ 1,189 $ 1,220 $ 994
Gross unrealized gains $ 13 $ 7 $ 3
Gross unrealized losses $ 1 $ 4 $ 25
===============================================================================================================
(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 millions):
- --------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Private banking:
Residential real estate mortgages $ 3,085 $ 2,249 $ 1,985 $ 1,630 $ 1,358
Other 943 849 664 526 537
- --------------------------------------------------------------------------------------------------------
Total private banking loans 4,028 3,098 2,649 2,156 1,895
- --------------------------------------------------------------------------------------------------------
Loans to financial institutions
for purchasing and carrying securities 32 61 57 32 41
All other 7 8 3 3 3
- --------------------------------------------------------------------------------------------------------
Total $ 4,067 $ 3,167 $ 2,709 $ 2,191 $ 1,939
========================================================================================================
An analysis of nonperforming assets is as follows (in millions):
- --------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Non-accrual loans $ 5 $ 1 $ 2 $ 6 $ 10
Other real estate owned, net 1
- --------------------------------------------------------------------------------------------------------
Total $ 5 $ 1 $ 2 $ 7 $ 10
========================================================================================================
Average non-accrual loans $ 4 $ 1 $ 1 $ 8 $ 9
========================================================================================================
An analysis of the allowance for credit losses on the loan portfolio is as follows (in millions):
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 20 $ 20 $ 19 $ 18 $ 16
Charge-offs:
Private banking
Other
- --------------------------------------------------------------------------------------------------------
Total charge-offs
- --------------------------------------------------------------------------------------------------------
Recoveries:
Private banking 1 1 1 1
Other
- --------------------------------------------------------------------------------------------------------
Total recoveries 1 1 1 1
- --------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries 1 1 1 1
Provision charged to income 1
- --------------------------------------------------------------------------------------------------------
Balance at end of year $ 21 $ 20 $ 20 $ 19 $ 18
========================================================================================================
F-13
The maturities of the loan portfolio at December 31, 2001 is as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
Within 1-5 Over
1 Year Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Private banking:
Residential real estate mortgages (1) $ 377 $ 895 $ 1,813 $ 3,085
Other 862 61 20 943
- ------------------------------------------------------------------------------------------------------------------------------------
Total private banking loans 1,239 956 1,833 4,028
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to financial institutions for purchasing
and carrying securities 32 32
All other 3 4 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,274 $ 956 $ 1,837 $ 4,067
====================================================================================================================================
Interest sensitivity of loans at December 31, 2001:
Loans with predetermined interest rates $ 291 $ 1,100 $ 1,391
Loans with floating or adjustable interest rates 665 737 1,402
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 956 $ 1,837 $ 2,793
====================================================================================================================================
(1) Maturities are based upon the contractual terms of the loans.
5. Summary of Credit Loss on Banking Loans Experience
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Millions) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans $3,469 $2,867 $2,404 $1,969 $1,730
Allowance to year end loans .53% .64% .74% .89% .94%
Allowance to nonperforming loans N/M N/M N/M N/M 189%
Net recoveries(charge-offs) to average loans .01% .02% .03% .05%
Nonperforming assets to average
loans and real estate owned .14% .05% .07% .34% .56%
- ------------------------------------------------------------------------------------------------------------------------------------
N/M - Not meaningful, greater than two hundred percent.
At December 31, 2001, the loan portfolio included loans to individuals involved in the financial services industry of approximately
$1.0 billion. Recoveries exceeded charge-offs from loans to individuals involved in the financial services industry in 1997 through
2001.
6. Deposits from Banking Clients
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------- ---------------------- ---------------------
(Dollars in Millions) Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of average daily deposits:
Noninterest-bearing deposits $ 797 $ 779 $ 642
Certificates of deposits of $100 or more 80 4.21% 54 5.61% 69 4.62%
Money market and other savings deposits 3,285 3.79% 3,017 5.15% 2,710 4.22%
------ ------ ------
Total deposits $4,162 $3,850 $3,421
====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
F-14
- ------------------------------------------------------------------------------------------------------------------------------------
Certificates Other
(In Millions) of Deposit Deposits
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity distribution of interest bearing deposits in
amounts of $100 or more at December 31, 2001:
Three months or less $ 51 $ 3,494
Three through six months 7
Six through twelve months 5
Over twelve months 5
---- -------
Total $ 68 $ 3,494
==== =======
- ------------------------------------------------------------------------------------------------------------------------------------
7. Short-term Borrowings
An analysis of outstanding short-term borrowings is as follows (dollars in millions):
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased:
Year-end balance $ 26 $ 12 $ 15
Daily average balance 66 115 52
Maximum month-end balance 63 311 128
Weighted-average interest rate during the year 3.89% 6.50% 4.96%
Weighted-average interest rate at year end 1.71% 5.81% 4.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase:
Year-end balance $ 183 $ 100 $ 64
Daily average balance 136 72 79
Maximum month-end balance 225 102 104
Weighted-average interest rate during the year 3.66% 5.98% 4.76%
Weighted-average interest rate at year end 2.26% 6.39% 4.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds:
Year-end balance $ 354 $ 227 $ 62
Daily average balance 415 101 15
Maximum month-end balance 867 227 62
Weighted-average interest rate during the year 3.99% 6.73% 5.72%
Weighted-average interest rate at year end 3.80% 6.76% 6.62%
- ------------------------------------------------------------------------------------------------------------------------------------
F-15
8. Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholder's equity (1) 22.50% 10.54% 29.22% 26.20% 22.75%
Return on average total assets (1) 2.41% .87% 1.85% 1.68% 1.49%
Average stockholder's equity as a percentage of
average total assets 10.70% 8.29% 6.35% 6.42% 6.54%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes after-tax extraordinary gain on sale of corporate trust business of $121 million, merger retention program costs of
$31 million, and restructuring and other charges of $28 million in 2001. Excluding these costs, return on average stockholder's
equity would have been 12.67% and return on average total assets would have been 1.36%. In 2000, includes after-tax
merger-related and merger retention program costs of $62 million. 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-16