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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, 1998 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 94104
(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 18, 1999, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $29,311,165,334. 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 Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 18, 1999 was
406,353,252* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1998 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 17, 1999 by reference to portions of that document.
* Reflects the December 1998 three-for-two common stock split.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
Part I
Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 9
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 10
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 10
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 11
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 11
Part III
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 11
Item 11. Executive Compensation ------------------------------------------------------------------------------- 13
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 13
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 13
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 13
Exhibit Index ---------------------------------------------------------------------------------- 15
Signatures ------------------------------------------------------------------------------------- 21
Index to Financial Statement Schedules --------------------------------------------------------- F-1
FORWARD-LOOKING STATEMENTS - In addition to historical information, this Annual
Report on Form 10-K contains forward-looking statements that reflect
management's beliefs, objectives and expectations as of the date hereof. These
statements relate to, among other things, the Company's strategy, information
systems, the Year 2000 project, competition, average commission per revenue
trade and average revenue per share traded. 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.
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. In this report, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Mayer & Schweitzer, Inc.
(M&S), a subsidiary acquired in 1991, is a market maker in Nasdaq and other
securities that provides trade execution services primarily to broker-dealers
and institutional customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and Charles Schwab Europe
(CSE). CSIM, incorporated in 1989, acts as the investment advisor for Schwab's
proprietary mutual funds. The Company refers to certain funds for which CSIM is
the investment advisor as the SchwabFunds(R). CSTC, incorporated in 1992, serves
as trustee for employee benefit plans, primarily 401(k) plans. CSE, acquired in
1995 to expand the Company's international operations, is a retail securities
brokerage firm located in the United Kingdom. In December 1998, the Company
entered into agreements to purchase Canadian-based Priority Brokerage Inc. and
Porthmeor Securities Inc. The acquisitions were completed in early 1999 and the
two companies were combined to create Charles Schwab Canada, Co., a subsidiary
of CSC. The cost of these Canadian acquisitions was not material to the
Company's financial position.
New developments in the Company's business during 1998 include the
integration of its online and traditional brokerage services and reduction of
the price of online trades for most of its customers. This resulted in an
increase in the proportion of trades placed through the Company's online
channels and a decline in its average commission per revenue trade. However, an
increase in trading activity more than offset the effect of the lower average
commission per revenue trade. In 1998, the Company continued to expand its
products and services. During 1998, Schwab announced alliances with Intuit, Inc.
and Excite, Inc. to provide investors with investment education, research and
analysis tools. Additionally, Schwab began to offer equity research reports from
Credit Suisse First Boston Corporation (CSFB) and Hambrecht & Quist L.L.C., and
expanded its offerings to certain customers to include debt underwritings
lead-managed by CSFB.
The Company is also enhancing the ways it helps investors develop, evaluate
and access their investment choices. In 1998, Schwab introduced a number of new
Internet-based investment services, including: The Analyst Center(TM), which
connects customers to proprietary and third-party investment research, guidance
and decision-making tools; the Positions Monitor(TM), which tracks customers'
mutual fund and equity holdings' historical performance; the Mutual Fund
Performance Profile(TM), which allows customers to analyze the performance of
their entire mutual fund portfolio; and the Stock Screener(TM), which allows
customers to search over 9,000 equities on the Web. Schwab also introduced two
new services to provide investors with greater access and flexibility in
managing their finances: Schwab MoneyLink(R), which allows customers to transfer
funds electronically between Schwab and other financial institutions via the
Internet, automated telephone system or Schwab representatives; and Schwab
BillPay(TM), which allows customers to use the Internet to initiate payments
electronically. In addition, Schwab introduced a Web site that enables investors
to review their accounts and trade securities in Chinese, and CSE launched a Web
site in the United Kingdom to offer online trading in stocks listed on the
London Stock Exchange.
During 1998, the Company's Board of Directors declared a three-for-two
common stock split, distributed December 1998, effected in the form of a 50%
stock dividend. Share and per share information throughout this report have been
restated. The Board increased the quarterly cash dividend 5% to $.0280 per share
in 1998.
(b) Financial Information About Segments. The Company provides financial
services to individuals, institutional customers and broker-dealers through
three segments -- Individual Investor, Institutional Investor and Capital
Markets. The Individual Investor segment includes the Company's domestic and
international retail operations. The Institutional Investor segment provides
custodial, trading and support services to independent investment managers, and
serves company 401(k) plan sponsors and third-party administrators. The Capital
Markets segment provides trade execution services in exchange-listed, Nasdaq and
other securities primarily to broker-dealers and institutional customers. The
Company's mutual fund services are considered a product and not a segment.
Mutual fund service fees are included in both the Individual Investor and
Institutional Investor segments. For financial information by segment and
geographic area, and for revenues by major customer for the three years ended
December 31, 1998, see note "14. Segment Information" in the Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
(c) Narrative Description of Business. The Company's strategy is to attract
and retain customer assets by focusing on a number of areas within the financial
services industry -- retail brokerage, mutual funds, support services for
independent investment managers, 401(k) defined contribution plans and equity
securities market-making. To pursue its strategy and its objective of long-term
profitable growth, the Company plans to continue to leverage its competitive
advantages. These advantages include a nationally recognized brand, a broad
range of products and services, multi-channel delivery systems and an ongoing
investment in technology.
The Company's primary focus is serving retail investors in the U.S., either
directly or through independent investment managers, who want access to a broad
selection of products and services, as well as investment news and information,
tailored to meet their financial needs. The Company, through Schwab, serves 5.6
million active customer accounts(a). Customer assets in these accounts totaled
$491.1 billion at December 31, 1998.
The table below shows the Company's revenues on a comparative basis for the
three years ended December 31, 1998.
Sources of Revenues
(Dollar amounts in thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ----------------------------
Amount Percent Amount Percent Amount Percent
-------------------------- -------------------------- ----------------------------
Revenues
Commissions
Exchange-listed securities $ 485,343 18% $ 527,321 23% $ 423,232 23%
Nasdaq 604,712 22% 465,137 20% 393,882 21%
Options 122,409 5% 103,372 5% 66,210 4%
Mutual funds 96,919 3% 78,193 3% 70,805 4%
- --------------------------------------------------------------------------------------------------------------------------
Commissions 1,309,383 48% 1,174,023 51% 954,129 52%
- --------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees 559,241 20% 427,673 19% 311,067 17%
Interest revenue
Margin loans to customers 670,965 24% 489,197 21% 339,433 18%
Investments, customer-related 400,453 15% 376,243 16% 312,841 17%
Other 56,080 2% 34,595 2% 28,586 2%
Interest expense (651,881) (24%) (546,483) (24%) (425,872) (23%)
- --------------------------------------------------------------------------------------------------------------------------
Interest revenue, net of
interest expense 475,617 17% 353,552 15% 254,988 14%
- --------------------------------------------------------------------------------------------------------------------------
Principal transactions 286,754 10% 257,985 11% 256,902 14%
Other 105,226 5% 85,517 4% 73,836 3%
- --------------------------------------------------------------------------------------------------------------------------
Total $2,736,221 100% $2,298,750 100% $1,850,922 100%
==========================================================================================================================
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1998 Annual Report to
Stockholders, which are 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 1998 presentation.
- --------------------------------------------------------------------------------
(a) Effective in 1998, active accounts are defined as accounts with balances or
activity within the preceding eight months instead of twelve months as
previously defined. This change in definition had the effect of decreasing
the number of active accounts in 1998 by approximately 200,000.
- --------------------------------------------------------------------------------
Advertising and Marketing Programs
The Company's nationwide advertising and marketing programs are designed to
strengthen the Schwab brand, as well as distinguish its products and services.
The Company's advertising and market development expense was $155 million in
1998, compared to $130 million in 1997 and $84 million in 1996. Expenditures for
these programs helped Schwab attract $80.8 billion in net new customer assets in
1998, compared to $68.9 billion in 1997 and $54.2 billion in 1996. New accounts
opened totaled 1,380,000 in 1998, compared to 1,164,000 in 1997 and 985,000 in
1996. Customer assets from new accounts represented approximately 50% of net new
customer assets in each of the three years ended December 31, 1998.
The Company primarily uses a combination of network, cable and local
television, national and local radio, print media, and athletic event
sponsorship in its advertising to investors. Schwab also engages extensively in
targeted direct mail advertising through monthly statement "inserts" and special
mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers a broad range of products and services to meet
customers' varying investment and financial needs, including access to
investment news and information.
Services for Retail Investors. Retail investors, through the Individual
Investor segment or indirectly through the Institutional Investor segment, have
access to the accounts, financing and mutual funds described below.
Accounts and Features. The Company offers the purchase and sale of
securities which include exchange-listed, Nasdaq 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.
The Company also offers certain of its customers initial and secondary public
stock offerings, debt underwritings, and access to futures and commodities
trading. In addition, customers have access to equity research reports through
the Company's Web site. Customers approved for margin transactions may borrow a
portion of the price of certain securities purchased through Schwab, or may sell
securities short. Customers must have specific approval to trade options; as of
December 31, 1998, 273,000 accounts had such approval. To write uncovered
options, customers 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 basic brokerage
accounts, it provides customers 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 customer may receive additional services by qualifying for and opening a
Schwab One(R) brokerage account. A customer may access available funds in his or
her Schwab One account either with a personal check or a VISA(R) debit card, in
addition to the Schwab MoneyLink(R) and Schwab BillPay(TM) services offered with
all brokerage accounts. When a Schwab One customer 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
customers. Alternatively, qualifying Schwab One customers seeking tax-exempt
income may elect to have cash balances swept daily into state-specific municipal
tax-exempt SchwabFunds money market funds.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three
SchwabFunds money market funds. During 1998, active IRAs increased over 30% to
2,100,000 accounts and customer assets in all IRAs increased over 30% to $116.4
billion. Schwab also acts as custodian and broker for Keogh accounts.
Customer Financing. Customers' securities transactions are conducted on
either a cash or margin basis. Generally, a customer 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 customer
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 customer 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
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers 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 customers provides an important source of
revenue to Schwab. During 1998, Schwab's outstanding margin loans to customers
averaged $8.8 billion.
In permitting a customer to engage in transactions, Schwab faces credit
risk if the customer fails to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer'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
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 under the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by Schwab
at interest costs lower than Schwab's costs of borrowing from alternative
sources, Schwab's cost of funds is reduced and its net income is enhanced. Such
interest savings contribute substantially to Schwab's profitability and, if a
significant reduction of customer cash balances were to occur, Schwab's
borrowings from other sources may have to increase and such profitability would
decline. To the extent Schwab's customers 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 mutual fund service 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 1998 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
Mutual Funds. Schwab's Mutual Fund Marketplace(R) provides customers with
the ability to invest in over 1,600 third-party mutual funds from 261 fund
families. Within the Mutual Fund Marketplace, Schwab's Mutual Fund OneSource(R)
service enables customers to trade 1,024 mutual funds from 179 fund families
without incurring transaction fees.
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' record keeping and
investment monitoring are simplified through one consolidated statement. Fees
received by Schwab for providing services, including record keeping and
shareholder services, from the Mutual Fund OneSource program are based upon the
daily balances of customer assets invested in the participating funds through
Schwab and are paid by the funds and/or fund sponsors. Customer assets held by
Schwab that have been purchased through the Mutual Fund OneSource service
totaled $69.9 billion at the end of 1998.
Customer assets invested in Schwab's Mutual Fund Marketplace, excluding the
Mutual Fund OneSource service, totaled $59.2 billion at the end of 1998. Schwab
charges a transaction fee on trades placed in the funds included in the Mutual
Fund Marketplace (except on trades through the Mutual Fund OneSource service).
These fees are recorded as commission revenues. Commissions from customer
transactions in mutual fund shares comprised approximately 7% of total
commission revenues during the last three years.
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. SchwabFunds include money market funds, equity index funds, bond
funds, asset allocation funds, and funds that primarily invest in stock, bond
and money market funds. Qualifying Schwab customers may elect to have cash
balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds were
$81.5 billion at the end of 1998. Fees received by the Company from the
SchwabFunds, for providing transfer agent services, shareholder services,
administration and investment management, are based upon the daily balances of
customer assets invested in these funds.
Services for Independent Investment Managers. The Company provides
custodial, trading and support services to independent investment managers
through the Institutional Investor segment. To attract the business of accounts
managed by these managers, Schwab has a dedicated business unit which includes
experienced registered representatives assigned to individual managers.
Independent investment managers participating in this program who custody
customer accounts at Schwab may use SchwabLink(R) and the SchwabLink Web(TM)
site. SchwabLink is a computer-based information network which enables
investment managers to access information about their customers' accounts
directly from Schwab's computer systems and to enter their customers' trades
online. The SchwabLink Web site enables investment managers to use the Internet
to communicate directly with Schwab service teams, as well as receive news and
information. In 1998, Schwab introduced the Managed Account Connection(TM),
which enables investment managers to provide their clients with personalized
equity portfolio management by a variety of institutional asset managers. During
1998, Schwab customer assets held in accounts managed by approximately 5,400
active independent investment managers increased $40.6 billion, or 38%, to a
total of $146.4 billion. Independent investment managers generated approximately
12% of total commission revenues during the last three years.
Retirement Plan Services. The Company provides 401(k) record keeping and
other retirement plan services through the Institutional Investor segment.
Schwab serves company 401(k) plans directly through a dedicated sales force, as
well as indirectly through alliances with national and regional third-party
administrators. In the direct channel, SchwabPlan(R) is the Company's
comprehensive 401(k) retirement plan, which offers plan sponsors a wide array of
investment options, participant education and servicing, trustee services, and
participant-level record keeping. During 1998, Schwab continued to develop its
retirement plan services business, with customer assets in corporate retirement
plans growing $6.4 billion, or 47%, to $20.1 billion.
Market-Making Activities. Market-making activities in exchange-listed,
Nasdaq and other securities are conducted through the Capital Markets segment.
M&S provides trade execution services in Nasdaq and other securities primarily
to broker-dealers, including Schwab, and institutional customers. As a market
maker in Nasdaq and other securities, M&S generally executes customer trades as
principal. While substantially all Nasdaq security trades originated by the
customers of Schwab are directed to M&S, the majority of M&S' trading volume
comes from parties other than Schwab.
Schwab has specialist operations on the Pacific Exchange and the Boston
Stock Exchange to make markets in exchange-listed securities. The majority of
trades originated by the customers of Schwab in exchange-listed securities for
which Schwab makes a market are directed to these operations. At December 31,
1998, Schwab had eleven specialists on the Pacific Exchange and three
specialists on the Boston Stock Exchange that collectively made markets in 800
and 100 securities, respectively.
In the normal course of their market making in exchange-listed, Nasdaq and
other securities, Schwab and M&S maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
M&S' ownership of securities, short inventory positions represent obligations of
Schwab and M&S to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, long or short inventory positions may result in gains
or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Management" in the Company's 1998 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
Multi-Channel Delivery Systems
The Company's multi-channel delivery systems allow customers to choose how
they prefer to do business with the Company. In addition to its branch office
network, the Company maintains four regional customer telephone service centers,
two online customer support centers as well as automated telephonic and online
channels, primarily serving retail investors through the Individual Investor and
Institutional Investor segments.
Branch Office Network. At December 31, 1998, Schwab operated 291 domestic
branch offices in 47 states, as well as branches in the Commonwealth of Puerto
Rico, the United Kingdom and the U.S. Virgin Islands. In addition, the Company
has offices in Hong Kong and the Cayman Islands. The Company's branch office
network plays a key role in building its business. With the customer service
support of regional customer telephone service centers and automated telephonic
and online channels, branch personnel are focusing a significant portion of
their time on business development. Customers can use branch offices to open
accounts, deliver and receive checks and securities, obtain market information,
place orders, and obtain related customer services in person, yet most of these
activities are conducted by telephone and mail. Branch offices also provide
investors with access to the Internet.
The Company is enhancing the ways in which it may help investors by using
the branch office network to assist investors in developing asset allocation
strategies and evaluating their investment choices. Branch representatives also
refer investors who desire additional guidance to independent investment
managers through the Schwab AdvisorSource(TM) service.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle customer trading and service calls twenty-four hours-a-day,
seven days-a-week. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows the branch office network to be maintained at lower staffing
levels and to focus on business development.
The Company's customer service approach is to use teams led by registered
representatives in the service centers, who work closely with branch office
network personnel. Additionally, certain teams at these centers provide
specialized services to active and affluent investors. Each registered
representative has immediate access to the customer account and market-related
information necessary to respond to customer inquiries. For most customer
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 customers for
the Company.
Automated Telephonic and Online Channels. Customers are able to obtain
financial information and execute trades on an automated basis through the
Company's automated telephonic and online channels. These channels are designed
to provide added convenience for customers and minimize Schwab's costs of
responding to and processing routine customer transactions. To assist customers
in using online channels, the Company maintains two online customer support
centers that operate both during and after normal market hours.
Automated telephonic channels include TeleBroker(R) -- Schwab's touch-tone
telephone quote and trading service, and VoiceBroker(TM) -- Schwab's voice
recognition quote and trading service. Schwab's automated telephonic channels
handled over 70% of total customer calls received in 1998. Online channels
include the Charles Schwab Web Site(TM) -- an information and trading service on
the Internet for individual investors, and PC-based services such as
SchwabLink(R) for independent investment managers. The Company's online channels
handled 54% of total trades in 1998.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer 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, record keeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered U.S. securities exchanges, M&S, the National Securities
Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds such as security price information, as well as internal
malfunctions such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains backup and recovery functions. These include logging of all critical
files intraday, duplication and storage of all critical data outside of its
central computer site every twenty-four hours, and maintenance of facilities for
backup and communications. They also include the maintenance and periodic
testing of a disaster recovery plan that management believes would permit Schwab
to recommence essential computer operations if its central computer site were to
become inaccessible. To reduce the exposure to system failures caused by
external factors, including earthquakes, the Company's two primary data centers
are located in Phoenix. In 1998, the Company built the second data center in
Phoenix intended, in part, to further improve the recovery of business
processing in the event of an emergency.
Year 2000. Many existing computer programs use only two digits to identify
a specific year and therefore may not accurately recognize the upcoming change
in the century. If not corrected, many computer applications could fail or
create erroneous results by or at the year 2000. Due to the Company's dependence
on computer technology to operate its business, and the dependence of the
financial services industry on computer technology, the nature and impact of
Year 2000 processing failures on the Company's business, financial position,
results of operations or cash flows could be material. The Company is currently
modifying its computer systems in order to enable its systems to process data
and transactions incorporating year 2000 dates without material errors or
interruptions. Because systems critical to the Company's functioning other than
its computer systems may be affected by the century change, the Company's Year
2000 compliance efforts also encompass facilities and equipment which rely on
date-dependent technology, such as building equipment that contains embedded
technology. For a discussion on the Company's state of readiness, project costs
and risks, and contingency plans regarding the Year 2000 issue, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Year 2000" in the Company's 1998 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer 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
customer fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab takes the
risk of the other party's failure to settle the trade. See note "13. Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to Consolidated
Financial Statements in the Company's 1998 Annual Report to Stockholders, which
are incorporated herein by reference to Exhibit No. 13.1 of this report.
Employees
As of December 31, 1998, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 13,300 full-time employees.
Risk Management
The Company's business and activities expose it to different types of
risks. Proper identification, assessment and management of these risks are
essential to the success and financial soundness of the Company. For a
discussion on the Company's principal risks and some of the policies and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition -- Risk
Management" in the Company's 1998 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Information Systems," "Competition" and "Regulation" in this report.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including full-commission brokerage firms, discount
brokerage firms, online brokerage firms, mutual fund companies and banks.
Certain of these competitors have significantly greater financial resources than
the Company, particularly given the consolidation trend within the financial
services industry. In addition, the recent expansion and customer acceptance of
conducting financial transactions online has attracted competition from
providers of online services and software development companies. The Company
experienced declines in its average commission per revenue trade in 1998 mainly
due to the Company's integration of its online and traditional brokerage
services and reduction of the price of online trades for most of its customers,
resulting in an increase in the proportion of trades placed through its online
channels. As the Company focuses on further enhancements to its electronic
service offering and online trades increase, average commission per revenue
trade is expected to continue to decline.
Many brokerage firms employ substantial funds in advertising and direct
solicitation of customers to increase their market share of commission dollars
and other securities-related income. Most discount brokerage firms and online
brokerage firms charge commissions lower than Schwab. Full-commission brokerage
firms also offer discounted commissions to selected retail brokerage customers.
In addition, some full-commission brokerage firms have begun to offer discounted
or free online trades, usually as part of a fee-based account. Such competition
may negatively impact the Company's customer asset growth, revenue growth and
profit margin.
While certain competitors, especially brokerage firms focused on trading
via online channels, are expected to continue price-based competition,
management believes that providing superior service and value are crucial to
appealing to a broad set of investors. Management believes that the Company
primarily competes on the basis of its ability to combine people and technology
in ways that provide investors with the access, information, guidance and advice
they expect, as well as superior service, all at a significantly lower cost than
traditional providers of financial services. As a result, the Company expects to
increasingly compete with full-commission brokerage firms, banks and other
traditional providers of financial products and services.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The Securities and Exchange
Commission (SEC) is the federal agency charged with administration of the
federal securities laws. Schwab and M&S 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 M&S' primary regulator with respect to its
securities activities. The NYSE has been designated as Schwab's primary
regulator with respect to its options trading activities for 1998 and 1999. The
National Futures Association (NFA) has been designated by the CFTC as Schwab's
primary regulator with respect to its introduced futures and commodities trading
activities. These self-regulatory organizations adopt rules (subject to approval
by the SEC or CFTC) governing the industry and conduct periodic examinations of
broker-dealers. Securities firms are also subject to regulation by state
securities authorities in the states in which they do business. In addition to
its membership in the NYSE, Schwab is also a member of most other major U.S.
securities exchanges and is consequently subject to their rules and regulations.
Schwab was registered as a broker-dealer in fifty states, the District of
Columbia and Puerto Rico as of December 31, 1998. M&S was registered as a
broker-dealer in thirty-two states and the District of Columbia as of December
31, 1998.
The principal purpose of regulations and discipline of broker-dealers and
investment advisors is the protection of customers 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
customers' funds and securities, capital structure of securities firms, record
keeping 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 record
keeping, reporting, and disclosure requirements and impose limitations on fees
and principal transactions between an advisor and its clients. The state
securities law requirements applicable to registered investment advisors are in
certain cases more comprehensive than those imposed under the federal securities
laws.
Additional legislation, changes in rules promulgated by the SEC, other
federal and state regulatory authorities and self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules may
directly affect the method of operation and profitability of broker-dealers and
investment advisors. The profitability of broker-dealers and investment advisors
could also be affected by rules and regulations which impact the business and
financial communities in general, including changes to the laws governing
taxation, antitrust regulation and electronic commerce. The SEC, CFTC,
self-regulatory organizations and state securities authorities may conduct civil
or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
advisor, its officers, or employees. Schwab and M&S have been the subject of
such administrative proceedings.
Certain SEC rules and rule amendments, known as the Order Handling Rules,
have significantly altered the manner in which orders for both Nasdaq and
exchange-listed securities are handled. These rules were implemented in phases
between January 20, 1997 and October 13, 1997. Additionally, in June 1997, most
major U.S. securities markets, including Nasdaq and the NYSE, began quoting and
trading most securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share. Mainly as a result of these regulatory changes
and changes in industry practices, M&S' average revenue per share traded
declined during 1998 as compared to 1997. The major U.S. securities markets have
announced that at an unspecified date after the beginning of 2000, they intend
to begin quoting and trading securities in decimal increments. This change is
likely to cause further decreases in average revenue per share traded. See also
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Revenues -- Principal Transactions" in the Company's 1998 Annual
Report to Stockholders, which is incorporated herein by reference to Exhibit No.
13.1 of this report.
As registered broker-dealers and NASD member organizations, Schwab and M&S
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 customer accounts held by the
firm of up to $500,000 per customer, 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
additional account protection of up to $99.5 million per customer, as defined,
for customer securities in each account, of which $500,000 is available for
claims of cash balances. Stocks, bonds, mutual funds 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 customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System 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 Chicago Board Options
Exchange govern the amount of margin customers 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.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority (SFA) in the United Kingdom,
and engages in business development activities on behalf of Schwab.
Charles Schwab Europe is registered as a broker-dealer with the SFA in the
United Kingdom.
Charles Schwab, Hong Kong, Ltd., a subsidiary of CSC, is registered as a
securities dealer and commodity trading advisor under the Securities and Futures
Commission in Hong Kong.
Net Capital Requirements
As registered broker-dealers, Schwab and M&S 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 M&S 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 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 M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 under the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, 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
M&S' operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See also "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources -- Liquidity" in the Company's 1998 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1998, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $194 million and had total net capital of $987
million. At December 31, 1998, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $793 million, $600 million and $503 million,
respectively.
At December 31, 1998, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total net capital of $14
million. At December 31, 1998, the amount in excess of its minimum required net
capital was $13 million.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. Schwab also has a lease for 398,000 square feet of office
space located at 211 Main Street in San Francisco, California. The lease expires
in 2018 and includes two ten-year extension options at then current market
rates. In addition to these locations, Schwab leases space in other buildings
for its San Francisco operations, including its principal executive offices at
120 Kearny Street, aggregating 960,000 additional square feet. M&S' headquarters
are located in leased office space in Jersey City, New Jersey.
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 four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
288,000 and 164,000 square feet, respectively. The Company also leases an
additional 148,000 square feet as part of its Phoenix service center. The
Company leases the service centers located in Orlando and Denver, with 213,000
and 163,000 square feet, respectively.
The Company owns its two primary data center facilities located in Phoenix
totaling 147,000 square feet.
While the corporate headquarters and data centers support all of the
Company's segments, the branch offices and service centers primarily support the
Individual Investor and Institutional Investor segments and M&S' headquarters
supports the Capital Markets segment.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is included
in note "12. Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1998 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1998.
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 18, 1999 was 7,350.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 1998
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 1998 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 1998 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 1998 and
1997 are summarized as follows (dollars in millions):
Three Months Ended
December 31,
1998 1997
- ---------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $ 9,048 $ 7,702
Average interest rate 7.54% 7.74%
Investments:
Average balance outstanding $ 8,895 $ 6,353
Average interest rate 4.95% 5.42%
Average yield on interest-earning assets 6.25% 6.69%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $14,586 $11,180
Average interest rate 4.13% 4.63%
Other interest-bearing sources:
Average balance outstanding $ 1,305 $ 1,217
Average interest rate 3.75% 4.43%
Average noninterest-bearing portion $ 2,052 $ 1,658
Average interest rate on funding sources 3.63% 4.07%
Summary:
Average yield on interest-earning assets 6.25% 6.69%
Average interest rate on funding sources 3.63% 4.07%
- ---------------------------------------------------------------------
Average net interest margin 2.62% 2.62%
=====================================================================
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1997 to the fourth quarter of 1998 was primarily due to higher levels
of average earning assets, partially offset by higher levels of average customer
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 1998 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 1998 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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 within 120 days after
December 31, 1998 (the Proxy Statement) under "The Board of Directors" and
"Principal Stockholders."
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 2003, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
==============================================================================================================================
Executive Officers of the Registrant
Name Age Title
Charles R. Schwab 61 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 50 President, Co-Chief Executive Officer, and Director
Karen W. Chang 50 Enterprise President - General Investor Services
John Philip Coghlan 47 Enterprise President - Services for Investment Managers and
Retirement Plan Services
Linnet F. Deily 53 President - Retail Group
Lon Gorman 50 Enterprise President - Capital Markets and Trading
Daniel O. Leemon 45 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 44 Executive Vice President and Chief Information Officer
Susanne D. Lyons 41 Enterprise President - Retail Client Services
Gideon Sasson 43 Enterprise President - Electronic Brokerage
Steven L. Scheid 45 Executive Vice President, Chief Financial Officer, and
Enterprise President - Financial Products and Services
Luis E. Valencia 54 Enterprise President - International
==============================================================================================================================
Mr. Schwab has been Co-Chief Executive Officer of the Company since January
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 The Gap, Inc., Transamerica Corporation,
Siebel Systems, Inc., AirTouch Communications, Inc. and 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
January 1998, 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
September 1998. Mr. Pottruck has been Chief Executive Officer of Schwab since
1992 and President of Schwab since 1988 (except for the period September 1997 to
April 1998). Mr. Pottruck joined Schwab in 1984. Mr. Pottruck is currently a
director of Intel Corporation, McKesson HBOC, Inc. and Preview Travel, Inc. In
1998, Mr. Pottruck was named to the Federal Advisory Commission on Electronic
Commerce.
Ms. Chang has been Enterprise President - General Investor Services of
Schwab and Executive Vice President of the Company since 1997. Ms. Chang was
Executive Vice President - Retail Branch Network of the Company and Schwab from
1996 to 1997 and Senior Vice President - Retail Branch Network of the Company
and Schwab from 1994 to 1996. Prior to joining Schwab in 1994, Ms. Chang was
Senior Marketing Vice President of American Express Company from 1989 to 1994.
Mr. Coghlan has been Enterprise President - Services for Investment
Managers of Schwab since May 1998, Enterprise President - Retirement Plan
Services of Schwab since 1997 and Executive Vice President of the Company since
1992. Mr. Coghlan was Executive Vice President of Schwab and General Manager of
Schwab Institutional from 1992 to 1997. Mr. Coghlan joined Schwab in 1986,
became Vice President in 1988 and became Senior Vice President in 1990.
Ms. Deily has been President - Retail Group of Schwab since May 1998 and
Executive Vice President of the Company since 1997. Ms. Deily was Enterprise
President - Services for Investment Managers of Schwab from 1997 to 1998 and
Executive Vice President and General Manager - Services for Investment Managers
of the Company and Schwab from 1996 to 1997. Before joining Schwab in 1996, Ms.
Deily was Chairman, President and Chief Executive Officer of First Interstate
Bank of Texas from 1991 to 1996.
Mr. Gorman has been Enterprise President - Capital Markets and Trading of
Schwab and Executive Vice President of the Company since 1997. Mr. Gorman was
Executive Vice President - Capital Markets and Trading of the Company and Schwab
from 1996 to 1997. Before joining Schwab in 1996, Mr. Gorman was a Managing
Director of Credit Suisse First Boston Corporation from 1988 to 1996. Mr. Gorman
was named a director of the Securities Industry Association in 1998.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon
held various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
Ms. Lepore has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 1993. Ms. Lepore joined Schwab in 1983. In 1998,
Ms. Lepore was named a director of the Times Mirror Company.
Ms. Lyons has been Enterprise President - Retail Client Services of Schwab
and Executive Vice President of the Company since 1997. Ms. Lyons was Executive
Vice President - Retail Marketing of the Company and Schwab from 1996 to 1997
and Senior Vice President - Active Trader of the Company and Schwab from 1994 to
1996. Ms. Lyons was Senior Vice President - Retail Service Delivery of the
Company and Schwab from 1993 to 1994. Ms. Lyons joined Schwab in 1992.
Mr. Sasson has been Enterprise President - Electronic Brokerage of Schwab
and Executive Vice President of the Company since 1997. Mr. Sasson was Senior
Vice President - Electronic Brokerage of the Company and Schwab from 1995 to
1997. Before joining Schwab in 1995, Mr. Sasson was Vice President - Information
Services of International Business Machines Corporation in 1995. Mr. Sasson was
Vice President, Systems Engineering of FYI Online, a joint venture of MCI
Communications Corporation and Equifax, Inc., from 1992 to 1995.
Mr. Scheid has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since 1996 and Enterprise President - Financial Products
and Services of Schwab since May 1998. Before joining Schwab in 1996, Mr. Scheid
was Executive Vice President of Finance of First Interstate Bancorp from 1994 to
1996 and was Principal Financial Officer from 1995 to 1996. From 1990 to 1994,
Mr. Scheid was Chief Financial Officer of First Interstate Bank of Texas.
Mr. Valencia has been Enterprise President - International of Schwab since
May 1998 and Executive Vice President of the Company and Schwab since 1996. Mr.
Valencia served as Chief Administrative Officer of the Company and Schwab from
1996 to December 1998. From 1994 to 1996, Mr. Valencia was Executive Vice
President - Human Resources of the Company and Schwab. Before joining Schwab in
1994, Mr. Valencia served as a Managing Director of Commercial Credit Company, a
subsidiary of Travelers Group Inc. engaged in consumer finance for Travelers
Group Inc., from 1993 to 1994.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Director
Compensation," "Summary Compensation Table," "Option Grants," "Options
Exercised," "Compensation Committee Report," "Certain Transactions," and
"Appendix A -- Employment and Severance Agreements."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Principal
Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under "Certain
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are included in
the Company's 1998 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
3.7 Third Restated Certificate of Incorporation, as amended on May 6,
1996, of the Registrant, filed as Exhibit 3.7 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference.
3.8 Second Restated Bylaws, as amended on July 17, 1996, of the
Registrant, filed as Exhibit 3.8 to the Registrant's Form 10-Q for the
quarter ended September 30, 1996 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.
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. *
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab & Co.,
Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated
February 21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta Systems,
Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush
Street Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant and
certain members of the Board of Directors of Registrant, filed
as Exhibit 10.34 to the Registrant's Form 10-K for the year ended
December 31, 1993.
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, 1994 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, 1995 and incorporated herein by
reference. +
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, effective January 1, 1992,
dated December 20, 1991, filed as Exhibit 10.101 to the Registrant's
Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference. +
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992,
dated June 30, 1992, filed as Exhibit 10.116 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the Registrant's
Form 10-K for the year ended December 31, 1997 and incorporated herein
by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995, filed as Exhibit 10.146 to the Registrant's Form 10-K for the
year ended December 31, 1994 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, 1994 and incorporated herein
by reference. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by
letter agreement dated September 21, 1995 and by Second Amendment to
Agreement of Sale dated September 22, 1995, between American Express
Company and Charles Schwab & Co., Inc., regarding American Express
Western Regional Operations Center located at 2423 Lincoln Drive,
Phoenix, Arizona, filed as Exhibit 10.156 in the Registrant's Form
10-Q for the quarter ended September 30, 1995 and incorporated herein
by reference.
10.157 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
effective January 1, 1996, filed as Exhibit 10.157 to the Registrant's
Form 10-K for the year ended December 31, 1995 and incorporated herein
by reference. +
10.158 Credit Agreement dated June 28, 1996 between the Registrant and the
banks listed therein, filed as Exhibit 10.158 to the Registrant's Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference.
10.162 The Charles Schwab Corporation Deferred Compensation Plan, as amended
September 17, 1996, filed as Exhibit 10.162 to the Registrant's Form
10-Q for the quarter ended September 30, 1996 and incorporated herein
by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co. and
Charles Schwab & Co., Inc. dated October 8, 1996, filed as Exhibit
10.163 to the Registrant's Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between
Post-Montgomery Associates and Charles Schwab & Co., Inc. dated
October 4, 1996, filed as Exhibit 10.164 to the Registrant's Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, restated to include amendments through February 26, 1997, with
form of Non-Qualified Stock Option Agreement (Executive Officer Stock
Option Plan (1987)) attached, (supersedes Exhibit 10.159) filed as
Exhibit 10.166 to the Registrant's Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement attached, (supersedes Exhibit
10.160) filed as Exhibit 10.167 to the Registrant's Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996,
dated May 8, 1996 filed as Exhibit 10.169 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified
Stock Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form
of Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as
Exhibit 10.179 to the Registrant's Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit
10.180 to the Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference. +
10.181 Commercial office lease of 211 Main Street between Main Plaza, LLC and
Charles Schwab & Co., Inc. dated August 8, 1997 filed as Exhibit
10.181 to the Registrant's Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference.
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147)
filed as Exhibit 10.182 to the Registrant's Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's
Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement
(General Management Plan) attached (supersedes Exhibit 10.160) filed
as Exhibit 10.186 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.187 The Charles Schwab Corporation 1992 Stock Incentive Plan (Restated to
include Amendments through October 22, 1997) (supersedes Exhibit
10.170) filed as Exhibit 10.187 to the Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference. +
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock
Option Agreement (Executive Officer Stock Option Plan (1987))
attached, (supersedes Exhibit 10.159) filed as Exhibit 10.188 to the
Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.189 Annual Executive Individual Performance Plan as amended January 1,
1998 filed as Exhibit 10.189 to the Registrant's Form 10-K for the
year ended December 31, 1997 and incorporated herein by reference. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997 filed as Exhibit 10.190 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171)
filed as Exhibit 10.191 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172)
filed as Exhibit 10.192 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of
The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes
Exhibit 10.173) filed as Exhibit 10.193 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174)
filed as Exhibit 10.194 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.195 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 1, 1997 (supersedes Exhibit 10.168) filed as
Exhibit 10.195 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.196 Credit Agreement dated June 27, 1997 between the Registrant and the
banks listed therein (supersedes Exhibit 10.158) filed as Exhibit
10.196 to the Registrant's Form 10-Q for the quarter ended March 31,
1998 and incorporated herein by reference.
10.197 Credit Agreement (364-Day Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.198 Credit Agreement (3-Year Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.199 The Charles Schwab Corporation Deferred Compensation Plan, as amended
through July 24, 1998 (supersedes Exhibit 10.162), filed as Exhibit
10.199 to the Registrant's Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference. +
10.200 Form of Indemnification Agreement entered into between Registrant and
members of the Board of Directors of Registrant (supersedes exhibit
10.34).
10.201 Seventh Amendment to the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan (Amendments 1 through 6 of the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan are incorporated
under Exhibit 10.195, filed with the Registrant's Form 10-K for the
fiscal year ended December 31, 1997). +
10.202 Fourth Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1998. +
10.203 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include Amendments through March 20, 1998 (supersedes Exhibit
10.187). +
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1998 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.
27.1 Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as
amended and declared effective on September 22, 1987.
+ Management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 25, 1999.
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 25, 1999.
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
and Director Officer and Director
(principal executive officer) (principal executive officer)
/s/ Steven L. Scheid
- --------------------------------
Steven L. Scheid,
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
- -------------------------------- --------------------------------
Donald G. Fisher, Director Anthony M. Frank, Director
/s/ Frank C. Herringer /s/ Stephen T. McLin
- -------------------------------- --------------------------------
Frank C. Herringer, Director Stephen T. McLin, Director
/s/ Mark A. Pulido /s/ Arun Sarin
- -------------------------------- --------------------------------
Mark A. Pulido, Director Arun Sarin, Director
/s/ George P. Shultz /s/ Roger O. Walther
- -------------------------------- --------------------------------
George P. Shultz, Director Roger O. Walther, Director
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Information F-6
Schedule II - Valuation and Qualifying Accounts F-7
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 1998 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, and have
issued our report thereon dated February 22, 1999; such consolidated financial
statements and report are included in your 1998 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the financial
statement schedules of the Company listed in Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/DELOITTE & TOUCHE LLP
San Francisco, California
February 22, 1999
F-2
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
December 31,
1998 1997
---- ----
Assets
Cash and cash equivalents $ 180,025 $ 79,802
Advances to subsidiaries 460,848 350,606
Investments in subsidiaries, at equity 1,223,417 1,083,122
Other assets 8,683 4,618
- ------------------------------------------------------------------------------------------------------------------------
Total $ 1,872,973 $ 1,518,148
========================================================================================================================
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 93,351 $ 12,031
Borrowings 351,000 361,000
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 444,351 373,031
Stockholders' equity 1,428,622 1,145,117
- ------------------------------------------------------------------------------------------------------------------------
Total $ 1,872,973 $ 1,518,148
========================================================================================================================
See Notes to Condensed Financial Information.
F-3
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Interest revenue $ 42,780 $ 30,699 $ 26,287
Interest expense (25,429) (20,546) (19,091)
- -------------------------------------------------------------------------------------------------------------------------
Net interest revenue 17,351 10,153 7,196
Other revenues 409 544 268
Other income (expenses) (12,104) 4,423 (3,400)
- -------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 5,656 15,120 4,064
Income tax expense 2,092 5,692 1,568
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 3,564 9,428 2,496
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 56,913 199,869 154,922
Dividends paid by subsidiaries 287,985 60,980 76,385
- -------------------------------------------------------------------------------------------------------------------------
Total 344,898 260,849 231,307
Net income $ 348,462 $ 270,277 $ 233,803
=========================================================================================================================
See Notes to Condensed Financial Information.
F-4
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities
Net income $ 348,462 $ 270,277 $ 233,803
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (56,913) (199,869) (154,922)
Change in other assets (3,932) 279 (157)
Change in accrued expenses and other liabilities 13,753 (4,122) (7,805)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 301,370 66,565 70,919
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Increase in net advances to subsidiaries (26,465) (51,939) (8,554)
Increase in investments in subsidiaries (800) (50,614) (10,132)
Cash payments for businesses acquired (1,400) (1,200) (4,709)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (28,665) (103,753) (23,395)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 30,000 111,000 64,000
Repayment of borrowings (40,000) (28,000) (26,000)
Dividends paid (43,068) (37,091) (31,495)
Purchase of treasury stock (150,180) (18,234) (28,171)
Proceeds from stock options exercised and other 30,766 14,530 7,729
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (172,482) 42,205 (13,937)
- ------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 100,223 5,017 33,587
Cash and cash equivalents at beginning of year 79,802 74,785 41,198
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 180,025 $ 79,802 $ 74,785
==================================================================================================================
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 (the
Parent Company) should be read in conjunction with the consolidated
financial statements of The Charles Schwab Corporation and subsidiaries
(the Company) and notes thereto found in the Company's 1998 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No.
13.1 of this report.
2. Supplemental cash flow information
During 1998, the Parent Company recorded a non-cash capital contribution of
$69 million to its subsidiary, Charles Schwab & Co., Inc. (Schwab), through
the assumption of indebtedness.
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
Year ended December 31,
1998 1997 1996
---- ---- ----
Income taxes paid (received) $ 5,539 $ 2,608 $ (48)
========= ========= =========
Interest paid:
Borrowings $ 24,113 $ 18,773 $ 16,887
Other 306 364 339
--------- --------- ---------
Total interest paid $ 24,419 $ 19,137 $ 17,226
========= ========= =========
3. Common stock split
The Parent Company's Board of Directors declared a three-for-two common
stock split, distributed December 1998, effected in the form of a 50% stock
dividend.
4. Related party transactions
The Parent Company provides subordinated revolving credit facilities to
its subsidiaries, Schwab and Mayer & Schweitzer, Inc. (M&S). Schwab had a
$450 million subordinated revolving credit facility maturing in September
2000, of which $405 million was outstanding at December 31, 1998. This
credit facility was $400 million at the end of 1997, of which $315
million was outstanding at December 31, 1997. At year end 1998, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans
from the Parent Company maturing in 2000. The outstanding balance of these
term loans was also $25 million at year end 1997. M&S had a $35
million subordinated lending arrangement maturing in 2000, which was not
used in 1998 or 1997. Interest earned by the Parent Company from these
subordinated lending arrangements totaled $37 million in 1998, $26 million
in 1997 and $22 million in 1996.
F-6
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at ------------------------ Balance at
Beginning Charged End
Description of Year to Expense Other Written off of Year
----------- --------- ---------- ----- ----------- -------
For the year ended
December 31, 1998:
Allowance for doubtful accounts $ 7,717 $ 4,752 $ 231 $(5,125) $ 7,575
=======================================================================
For the year ended
December 31, 1997:
Allowance for doubtful accounts $ 5,518 $ 3,896 $ 195 $(1,892) $ 7,717
=======================================================================
For the year ended
December 31, 1996:
Allowance for doubtful accounts $ 3,700 $ 2,651 $ 99 $ (932) $ 5,518
=======================================================================
F-7