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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, 1993 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)
101 MONTGOMERY 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 - $0.01 par value New York Stock Exchange, Inc.
The Pacific Stock Exchange Incorporated
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 11, 1994, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $973,497,672. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant and by the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 11, 1994 was
57,215,482* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in
the registrant's 1993 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 9, 1994 by reference to portions of that
document.
* Reflects the 1993 three-for-two common stock split.
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THE CHARLES SCHWAB CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1993
TABLE OF CONTENTS
Part I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 11
Item 4a. Executive Officers of the Registrant . . . . . . 11
Part II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . 11
Item 8. Financial Statements and Supplementary Data . . 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . 12
Part III
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Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . 12
Item 11. Executive Compensation . . . . . . . . . . . . . 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions . 15
Part IV
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Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . 15
Exhibit Index . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . 21
Index to Financial Statement Schedules . F-1
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THE CHARLES SCHWAB CORPORATION
PART I
ITEM 1. BUSINESS
(a) General Development of Business. The Charles Schwab Corporation (CSC)
is a holding company engaged, through its subsidiaries, in brokerage and
related investment services. CSC's principal operating subsidiary, Charles
Schwab & Co., Inc. (Schwab), serves an estimated 44% of the discount brokerage
market as measured by commission revenue. Another subsidiary, Mayer &
Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade
execution services to institutional clients and broker-dealers. During 1993,
customer orders handled by M&S totaled over 4 billion shares, or over 6% of the
total shares traded on Nasdaq. As used herein, the "Company" refers to CSC and
subsidiaries.
Schwab was incorporated in California in 1971 and adopted the name Charles
Schwab & Co., Inc. after Mr. Charles R. Schwab became its owner and President.
In 1974, Schwab participated in the Securities and Exchange Commission's (SEC)
pilot program to permit discounts on securities commissions. In 1975, when
fixed commission rates were abolished, Schwab focused its strategy on providing
financial services to investors who wish to conduct their own research and make
their own investment decisions and who do not wish to pay, through brokerage
commissions, for research or portfolio management. Schwab grew significantly
through January 1983 when, to ensure the availability of sufficient capital for
continued expansion, Schwab merged with an affiliate of BankAmerica Corporation
(BAC).
CSC was incorporated in November 1986 for the purpose of acquiring Schwab
from BAC. In March 1987, Schwab was acquired from BAC in a management-led
leveraged buyout. In September 1987, the Company raised $123 million in its
initial public offering, using the offering proceeds to expand its business and
repay debt issued in the leveraged buyout.
Since becoming a publicly-owned entity, the Company has continued to
experience significant growth in revenues, customer assets and number of
accounts. This growth has been accomplished through investment in technology,
product and service development, marketing programs and customer service
delivery systems. In addition, the Company has broadened its service
capability through the acquisition and development of additional businesses.
In October 1989, Charles Schwab Investment Management, Inc. (CSIM) was
formed as a subsidiary of CSC. In January 1990, CSIM became the general
investment adviser (employing a sub-adviser to perform portfolio management for
certain funds), as well as the administrator for three money market mutual
funds organized as portfolios of the then newly organized The Charles Schwab
Family of Funds. Substantially all of the balances previously invested by
Schwab customers in other money market mutual funds having similar investment
objectives were transferred to these money market mutual funds in January 1990.
Schwab subsequently introduced additional mutual funds, some as portfolios of
two separate Massachusetts business trusts, Schwab Investments and Schwab
Capital Trust. The Company refers to all funds for which CSIM is the
investment adviser as the SchwabFunds (registered trademark).
During July 1992, Schwab introduced nationally its no-transaction-fee
mutual fund service, known as the Mutual Fund OneSource (trademark) service,
which by December 31, 1993, enabled customers to trade over 200 mutual funds in
25 well-known fund families without incurring brokerage transaction fees.
Customer assets held by Schwab that have been purchased through the Mutual Fund
OneSource service, excluding SchwabFunds, totaled $8.3 billion at December 31,
1993.
In response to the continued growth of customer trading activity in Nasdaq
securities and a desire to secure a capability to execute customer trades in
these and other securities, CSC acquired M&S in July 1991. Since the
acquisition, M&S has executed essentially all the Nasdaq security trades
originated by the customers of Schwab, which in 1993 accounted for
approximately 20% of Schwab's total trading volume. Principal transaction
revenues generated by M&S have contributed significantly to the Company's
operating results.
In March 1992, the Company opened The Charles Schwab Trust Company (CSTC),
which provides custody services for investment portfolios and serves as trustee
for employee benefit plans (primarily 401(k) plans). CSTC, based in San
Francisco, is regulated as a limited-purpose bank by the California State
Banking Department. CSTC's primary focus is to provide services to
independent, fee-based financial advisers and 401(k) plan record keepers and
administrators.
In November 1992, the Company capitalized Charles Schwab Limited, its
first European subsidiary. The wholly owned subsidiary is registered as an
arranger with the United Kingdom Securities and Futures Authority, and engages
in business development activities on behalf of Schwab. The subsidiary's first
office, located in London, was opened in February 1993.
DEVELOPMENTS DURING 1993 AND EARLY 1994
During 1993, the Company experienced record revenues, net income, and
growth in customer assets and accounts. Net income for 1993 was $118 million,
or $1.98 per share, up from $81 million, or $1.39 per share, in 1992 and $49
million, or $.84 per share, in 1991. Reflected in
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THE CHARLES SCHWAB CORPORATION
1993's operating results is an extraordinary charge of $.11 per share relating
to CSC's prepayment of its Junior and Senior Subordinated Debentures. Schwab
opened 706,000 new accounts during 1993, which contributed significantly to the
$30.2 billion, or 46%, increase in assets held in Schwab customer accounts.
The Company made significant capital expenditures during 1993, investing
$77 million in a new primary data center, a fourth regional customer telephone
service center, which opened in January 1994, and enhancements to its data
processing and telecommunications systems. The Company also opened 23 branch
offices and made improvements to certain existing office facilities.
A new Massachusetts business trust, Schwab Capital Trust, was formed in
July 1993. During 1993, Schwab added to the SchwabFunds (registered trademark)
by introducing two new funds under the Schwab Capital Trust, an international
index fund and an index fund that attempts to track the performance of common
stocks of the second 1,000 largest United States corporations. During 1993,
Schwab also introduced a long-term government bond fund and two
short/intermediate tax-free bond funds. Customer assets invested in the
SchwabFunds at December 31, 1993 totaled $15.8 billion, a 39% increase over the
prior year.
Several financing transactions were completed during 1993. The Company
prepaid its 10% Senior and 9% Junior Subordinated Debentures totaling $116
million, and paid a related prepayment premium of approximately $11 million.
The Company prepaid the debentures using proceeds received from the issuance of
medium-term notes with an average interest rate of 5.91%.
In March 1993, the Company's Board of Directors approved a three-for-two
stock split of the Company's common stock, which was effected in the form of a
50% stock dividend. The stock dividend was paid on June 1, 1993 to
stockholders of record May 3, 1993. In January 1994, the Board increased the
Company's quarterly cash dividend 40% to $.070 per share payable February 15,
1994 to stockholders of record February 1, 1994.
(b) Financial Information About Industry Segments. The Company operates
in a single industry segment: securities brokerage and related investment
services. No material part of the Company's consolidated revenues is received
from a single customer or group of customers, or from foreign operations. As
of December 31, 1993, approximately 29% of Schwab's total customer accounts
were located in California. The next highest geographic concentrations of
total customer accounts were approximately 7% in each of New York and Florida.
(c) Narrative Description of Business. Schwab provides brokerage and
related investment services to more than 2.5 million active investor accounts.
These accounts held $95.8 billion in assets at December 31, 1993. M&S operates
four offices in four states offering trade execution services for Nasdaq
securities to institutional clients and broker-dealers, including Schwab.
Schwab's primary focus is serving retail clients who seek a wide selection of
quality investment services at fees that, in most cases, are substantially
lower than those of full-commission firms. The table on the following page
sets forth on a comparative basis the Company's revenues for the three years
ended December 31, 1993. These revenue figures reflect developments in, and
the composition of, the Company's business.
Schwab provides its customers, most of whom are retail investors, with
convenient and prompt execution of their orders to purchase and sell
securities, and with rapid access to market-related information. A key to both
the quality and speed of Schwab's service and to its ability to provide
commission discounts is its sophisticated communications and information
processing systems.
Schwab primarily serves investors who wish to conduct their own research
and make their own investment decisions and do not wish to pay, through
brokerage commissions, for research or portfolio management. To attract and
accommodate investors who want research and portfolio management services,
however, Schwab offers a variety of fee-based (primarily third-party) research
and portfolio management products. This customer segment has become
increasingly significant to Schwab's growth in customer assets and accounts.
During 1993, Schwab client assets held in customer accounts managed by
financial advisors increased $9.6 billion (73%) to a total of $22.9 billion.
Schwab does not generally maintain inventories of securities for sale to
its customers or engage in principal transactions with its customers.
Exceptions to this general rule include: (1) having temporary positions
resulting from execution errors, unavailability of the various exchanges'
automated trade execution facilities, or nonpayment by customers, (2)
positioning of listed securities to accommodate institutional customers, and
(3) engaging in certain riskless principal and other similar transactions
where, in response to a customer order, Schwab will purchase securities
(generally municipal and government securities) from another source and resell
them to customers at a markup. Schwab concentrates on the execution of
unsolicited transactions on an agency basis.
Schwab's customer service delivery system reduces dependency on the need
for personal relationships between Schwab's customers and employees to generate
orders. Schwab does not generally assign customers to individual employees.
Each customer-contact employee has immediate access to the customer account
and market-related information necessary to respond to any customer's
inquiries, and for most customer orders, can enter the order and confirm the
transaction. Customer orders involving certain
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THE CHARLES SCHWAB CORPORATION
SOURCES OF REVENUES
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1992 1991
---------------------- -------------------- --------------------
TYPE OF REVENUE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- --------- -------
Commissions
Listed securities $ 300,229 31.1% $ 251,453 33.6% $ 202,743 35.6%
Nasdaq 168,855 17.5% 122,022 16.3% 89,328 15.7%
Mutual funds 46,189 4.8% 35,507 4.7% 25,104 4.4%
Options 36,933 3.8% 32,290 4.3% 31,192 5.5%
Other -- -- 157 -- 553 0.1%
--------- ---- --------- ---- --------- ----
TOTAL COMMISSION REVENUES 552,206 57.2% 441,429 58.9% 348,920 61.3%
--------- ---- --------- ---- --------- ----
PRINCIPAL TRANSACTIONS 169,081 17.5% 130,013 17.3% 63,421 11.1%
Interest revenues
Investments 112,944 11.7% 140,428 18.7% 207,710 36.5%
Margin loans 132,471 13.7% 104,337 13.9% 88,129 15.5%
Other 6,816 0.7% 6,266 0.9% 6,359 1.1%
Interest expense (132,382) (13.7%) (159,491) (21.3%) (225,558) (39.6%)
--------- ---- --------- ---- --------- ----
INTEREST REVENUE, NET OF
INTEREST EXPENSE 119,849 12.4% 91,540 12.2% 76,640 13.5%
--------- ---- --------- ---- --------- ----
MUTUAL FUND SERVICE FEES 98,554 10.2% 63,391 8.5% 54,152 9.5%
OTHER REVENUES 25,323 2.7% 23,139 3.1% 26,494 4.6%
--------- ---- --------- ---- --------- ----
REVENUES $ 965,013 100.0% $ 749,512 100.0% $ 569,627 100.0%
========= ===== ========= ===== ========= =====
Certain prior years' revenues and expenses have been reclassified to conform to
the 1993 presentation.
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
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types of transactions, such as those in fixed income securities and mutual
funds, are handled by separate groups of registered representatives that
specialize in such transactions. As a result of this approach, the departure
of a registered representative generally does not result in a loss of customers
for the firm.
As a market maker in Nasdaq securities, M&S executes customer trades
generally as principal. M&S' business practices call for competitively priced
customer executions. As a member of the National Association of Securities
Dealers, Inc. (NASD), M&S provides its customers with the highest bid price on
a customer's sell order and the lowest offer price on a customer's buy order
available through the network of NASD member firms that are market makers.
Customer trades exceeding certain sizes are executed on a negotiated basis.
M&S maintains inventories in Nasdaq securities on both a "long" and
"short" basis. While long inventory positions represent M&S' ownership of
securities, short inventory positions represent obligations of 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 to M&S as market values
of these securities fluctuate.
The securities brokerage industry is directly affected by
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THE CHARLES SCHWAB CORPORATION
fluctuations in volumes and price levels of securities transactions generally,
which are affected by many national and international economic and political
factors that cannot be predicted, including broad trends in business and
finance, legislation and regulation affecting the United States and
international business and financial communities, currency values, and the
level and volatility of interest rates. Sustained low volumes of retail
investment activity or of securities transactions generally, particularly if
accompanied by low securities prices, could substantially reduce the Company's
transaction-based revenues and could lead to reduced margin account balances,
thus reducing interest revenue as well. Shifts in customer investment vehicle
preferences from individual equity securities to products that have lower
commissions per transaction, such as mutual funds, could also reduce
transaction-based revenues.
In connection with its information processing systems, its branch network,
and other aspects of its business, the Company incurs substantial expenses that
do not vary directly, at least in the short term, with fluctuations in
securities transaction volumes and revenues. In the event of a material
reduction in revenues, the Company may not reduce such expenses quickly and, as
a result, the Company could experience reduced profitability or losses.
Conversely, sudden surges in transaction volume can result in increased profits
and profit margins. To ensure that it has the capacity to process projected
increases in transaction volumes, the Company has historically made substantial
capital and operating expenditures in advance of such projected increases,
including during periods of low transaction volumes. In the event that such
growth in transaction volumes does not occur, the expenses related to such
investments could, as they have in the past, cause reduced profitability or
losses.
COMPETITION
The Company encounters rigorous competition from full-commission and
discount brokerage firms, as well as from financial institutions, mutual fund
sponsors, market makers in Nasdaq securities and other organizations. The
recent general financial success of the securities industry has strengthened
existing competitors, and management believes that such success will continue
to attract additional competitors such as banks and insurance companies. Some
of these competitors are larger, more diversified, and have greater capital
resources than the Company. In many instances the Company is competing with
such organizations for the same customers. Management believes that the main
competitive factors are quality, convenience, price of services and products
offered, and breadth of product line.
Most discount brokerage firms charge commissions lower than Schwab. Full-
commission brokerage firms also offer discounted commissions to selected retail
customers. 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. If the well-capitalized brokerage
firms pursue these competitive strategies successfully, Schwab's new account
growth, commission revenues and profit margins could be adversely affected.
Many of the large full-commission brokerage firms, as well as other
financial institutions, including commercial banks and insurance companies,
offer a wider range of services and financial products than does the Company.
Particularly as financial services and products proliferate, to the extent such
competitors are able to attract and retain customers on the basis of the
convenience of one-stop shopping, the Company's business or its ability to grow
could be adversely affected. Schwab's philosophy of generally refraining from
directly recommending particular securities and its methods of marketing may
cause it not to offer some of the financial products and services offered by
others.
MARKETING AND PROMOTION
Advertising plays a crucial role in obtaining new customers, which have
constituted an important source of revenue and revenue growth for the Company.
The Company's advertising and market development expense for the years ended
December 31, 1993, 1992 and 1991 was $41 million, $34 million and $25 million,
respectively. For the same years, the numbers of new accounts opened were
approximately 706,000, 562,000 and 384,000, respectively. New account openings
represent a significant portion of the growth in customer assets, which the
Company believes is critical to growth in revenues. The Company estimates that
accounts opened during 1993 generated 16% of total commission revenues during
that year and that accounts opened during 1992 and 1991 generated 18% and 19%
of total commission revenues during each of those years, respectively.
The branch office network also plays a key role in building Schwab's
business. Many customers prefer to open accounts in person in Schwab branch
offices. With the customer service support of the regional customer telephone
service centers and TeleBroker (trademark), branch personnel are able to focus
a significant portion of their time on business development. Branch training
programs and compensation plans emphasize identifying customer needs that can
be satisfied with Schwab products and services, and increasing customer assets
held in Schwab accounts.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications. Schwab
advertisements appear regularly on national and local cable television and
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THE CHARLES SCHWAB CORPORATION
periodically on radio and independent television stations. Schwab's national
network television advertising campaign, launched during the fourth quarter of
1991, has resulted in significant increases in Schwab brand awareness among
investors. Schwab employs volume-buying and other strategies to minimize the
expense of broadcast advertising. Through these broadcast-buying strategies
and by using Schwab employees to produce and buy print advertising, management
believes Schwab realizes savings on its promotional expenses. 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 aggressively promoted the name and likeness of its
Chairman, Mr. Schwab. The Company believes there is a substantial benefit
related to Mr. Schwab's association with the Company and that Schwab's
marketing programs and overall business is dependent on the ability to continue
to use Mr. Schwab's name and likeness. The Company has entered into 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
Securities and Other Investments Available. Schwab's customers may
purchase and sell both listed and unlisted corporate securities, and listed
put, call and index options.
Through its Mutual Fund Marketplace (registered trademark) program, Schwab
purchases and redeems for its customers shares of over 700 mutual funds in
approximately 100 fund families sponsored by third parties. This program
provides Schwab's customers with the convenience of purchasing and redeeming
mutual fund shares with a single telephone call and of using margin credit to
purchase most mutual fund shares. Schwab charges a transaction fee on trades
placed in the funds included in its Mutual Fund Marketplace (except as
described below), or in some cases, receives compensation directly from the
funds and/or fund sponsors. Commissions from customer transactions in mutual
fund shares comprised approximately 9% of Schwab's total commission revenues in
1993, compared to approximately 8% in 1992 and approximately 7% in 1991.
During July 1992, Schwab introduced nationally its no-transaction-fee
mutual fund service, known as the Mutual Fund OneSource (trademark) service,
which by December 31, 1993, enabled customers to trade over 200 mutual funds in
25 well-known fund families without incurring brokerage transaction fees. The
service is particularly attractive to investors who previously chose to execute
mutual fund trades directly with multiple mutual fund companies to avoid
brokerage transaction fees and achieve investment diversity among fund
families. Mutual fund trades placed through the Mutual Fund OneSource service
grew from an average of 1,000 per day in July 1992, including 500 per day in
SchwabFunds (registered trademark), to an average of 9,800 per day in December
1993, including 1,200 per day in SchwabFunds. While Schwab does not receive
transaction fees (commissions) on customer trades in the Mutual Fund OneSource
participating mutual funds, it is compensated directly by the participating
funds or their sponsors via fees received for providing record keeping and
shareholder services. Such compensation is ongoing, based on daily balances of
customer assets invested in the participating funds and held at Schwab. These
revenues are recorded as mutual fund service fees.
Fixed income investments available through Schwab include U.S. Treasuries,
zero-coupon bonds, listed and OTC corporate bonds, municipal bonds, GNMAs, unit
investment trusts and bond mutual funds. Schwab also makes available to its
customers certificates of deposit (CDs) with specific financial institutions
located in a variety of states. Schwab does not perform a credit evaluation of
such institutions. Such institutions pay Schwab fees for its services in
making such CDs available and in transmitting funds and performing certain
accounting functions. Schwab's customers do not pay any commission or fee when
they purchase CDs.
Accounts and Features. Each Schwab customer has a brokerage account
through which securities may be purchased or sold. If approved for margin
transactions, a customer 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, 1993,
approximately 131,000 accounts were so approved. 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 into money market mutual fund portfolios available
through the SchwabFunds. For basic brokerage accounts opened after January 1,
1991, cash balances (that exceed specified minimum amounts) are automatically
swept into the Schwab Money Market Fund unless customers elect otherwise.
A customer may receive additional services by qualifying for and opening a
Schwab One (registered trademark) Brokerage Account. A customer may remove
available funds from his or her Schwab One account either with a personal check
or a VISA debit card. If a Schwab One customer is approved for margin trading,
which most are, the checks and debit card also provide access to margin cash
available. For cash
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THE CHARLES SCHWAB CORPORATION
balances awaiting investment, Schwab pays interest to Schwab One (registered
trademark) customers at a discretionary rate of interest. Alternatively,
Schwab One customers seeking tax-exempt interest income may elect to have cash
balances swept into one of three tax-exempt money market mutual funds,
including two that are available through the SchwabFunds (registered
trademark). During 1993, the number of active Schwab One accounts increased
19% and the customer assets in all Schwab One accounts increased 42%. The
Company considers all customer accounts with cash balances, positions or
trading activity within the preceding twelve months to be active.
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 mutual funds. During 1993, active IRAs
increased 31% and customer assets in all IRAs increased 53%. Schwab also acts
as custodian and broker for Keogh accounts.
During 1992, Schwab introduced an IRA that does not carry an annual fee
for accounts with balances of $10,000 or more, which was offered to existing
and prospective IRA customers. The Company had previously charged an annual
account fee of $22 on virtually all IRAs. At December 31, 1993, over
two-thirds of the Company's 760,000 active IRAs were included in the
no-annual-fee program. In order for the Company to maintain a competitive
pricing structure, this lifetime no-annual-fee offer will continue through
1994.
Customer Financing. Customers' securities transactions are effected 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 five business days after the trade is executed. However, for purchases
of certain types of securities, such as mutual fund shares, a customer must
have a cash 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 the 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 the year ended December 31, 1993, Schwab's
outstanding margin loans to its customers averaged approximately $2.2 billion,
up from 1992's average of $1.6 billion.
In permitting a customer to engage in transactions, Schwab takes the risk
of such customer's failure 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. Under the SEC's Rule 15c3-3, 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 may 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 (e.g., balances in Schwab One brokerage
accounts) or at no interest cost (e.g., balances in other accounts and
outstanding checks that have not yet cleared Schwab's bank), 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 would 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 money market mutual 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 on the average daily invested balances.
See also "Regulation" on page 9 and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Company's 1993 Annual
Report to Stockholders, which is incorporated herein by reference to Exhibit
No. 13.1 of this report.
Mutual Funds. CSIM provides investment advisory and administrative
services to the SchwabFunds, which consisted of six money market funds, a
broad-based equity index fund, an international index fund, an index fund that
attempts to track the performance of common stocks of the second 1,000 largest
United States corporations and six bond funds at December 31, 1993. Customer
assets invested in the SchwabFunds totaled approximately $15.8 billion at
December 31, 1993.
- 6 -
9
THE CHARLES SCHWAB CORPORATION
The Company intends to offer additional mutual funds to its customers in
the future.
Market Making In Nasdaq Securities. M&S provides trade execution services
in Nasdaq securities to institutional and broker-dealer clients. These
services feature highly automated, competitively priced executions of both
Nasdaq and non-Nasdaq stocks and warrants. In most instances, customer orders
are routed directly to M&S' trading system and are executed automatically.
Other Activities. To attract the business of accounts managed by
independent fee-based financial advisors, Schwab has a dedicated group through
which, among other things, it assigns specific, experienced registered
representatives to individual financial advisors and occasionally provides
certain research materials for the benefit of the advised accounts. Financial
advisors participating in this program may access the information in their
clients' accounts directly from Schwab's computer data bases. During 1993,
Schwab added approximately 1,000 advisors to this program, which at December
31, 1993 included more than 4,200 financial advisors.
Schwab has taken other steps to provide services tailored to meet the
specialized needs of other professional investors, including corporations and
institutions such as pension funds and investment companies. For example,
Schwab's institutional brokerage department provides its customers with
technical information and analysis of general conditions and trends in the
securities market. Schwab also acts as agent for corporations in repurchasing
their securities and in implementing dividend reinvestment plans.
Schwab's brokerage business generated by financial advisors and other
professional investors represented approximately 11% of Schwab's total
commission revenues in 1993, 10% in 1992 and 9% in 1991.
DELIVERY SYSTEMS
Branch Office Network. Schwab believes that the existence of branch
offices is important to increasing new account openings and maintaining high
levels of customer satisfaction. At December 31, 1993, the Company maintained
a network of 198 branches throughout the United States, including a branch
office in the United Kingdom. Schwab plans to continue its branch expansion
program in 1994 by opening approximately 28 new branches. Customers can use
branch offices to obtain market information, place orders, open accounts,
deliver and receive checks and securities and obtain related customer services
in person, yet most branch activities are conducted by telephone and mail.
Branch offices remain open during normal market hours to service customers
in person and by telephone. Many branch offices offer extended office hours.
Customer calls received during nonbranch hours are routed to customer telephone
service centers.
Customer Telephone Service Centers. Schwab's four customer telephone
service centers, located in Indianapolis, Denver, Phoenix and Orlando (which
opened in January 1994), handle calls to many of Schwab's toll-free numbers,
customer calls that otherwise would have to wait for available registered
representatives at branches during business hours, and calls routed from
branches after hours and on weekends. Through the service centers, customers
may place orders twenty-four hours a day, seven days a week, except for certain
holidays. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows new branches to be opened and maintained at lower staffing
levels. The service centers, the first of which was opened in 1990, have
developed into a significant component of Schwab's overall service delivery
system and handled 28% of customer calls and 31% of customer trades during
1993.
Electronic Delivery Services. Schwab provides automated brokerage
services through which investors may place orders, receive account information
and obtain securities market information. These services are designed to
provide added convenience for customers and minimize Schwab's costs of
responding to and processing routine customer transactions.
Schwab's TeleBroker Service (registered trademark), which enables
customers to place orders for stocks, options and certain mutual funds, as well
as obtain real-time securities quotes and account information electronically
from any touchtone telephone, was introduced in 1989 and was made available to
customers nationally during 1991. TeleBroker (trademark), which provides
customers with an additional 10% discount on commissions, has become
increasingly important in providing customers access to Schwab, particularly
during periods of heavy customer activity. During 1992, Schwab more than
doubled the processing capacity of TeleBroker to accommodate increased customer
usage and continued to increase capacity in 1993. In November 1993, TeleBroker
was enhanced to accommodate Mutual Fund OneSource (trademark) transactions.
On-line access to brokerage and investment information services is also
available through Schwab's on-line trading software, StreetSmart (trademark)
for Windows (trademark), introduced in October 1993. During 1993, TeleBroker
and other on-line brokerage services handled over 53% of Schwab's customer
calls and 22% of customer trades.
Information Systems. Schwab's system for processing a securities
transaction is highly automated. Registered
- 7 -
10
THE CHARLES SCHWAB CORPORATION
representatives equipped with on-line computer terminals can access customer
account information, obtain securities prices and related information and enter
orders on-line. Most equity market orders are automatically executed and the
representative is able to confirm execution to the customer while on the
telephone. A written confirmation is generated automatically and is generally
sent to the customer on the next business day. Under normal circumstances,
most customer orders are executed without any Schwab employee filling out a
single piece of paper.
To support its service delivery system, 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. Schwab's computers are
also linked to the major registered United States securities exchanges, M&S,
the National Securities Clearing Corporation and The Depository Trust Company.
In 1979, Schwab obtained from Beta Systems, Inc. a non-exclusive license
to use its basic software for executing brokerage functions. Since that time,
Schwab has made substantial additions and modifications to that program.
Schwab's computer systems also support on-line employee training, management
information systems, software development activities and telecommunication
network control functions.
During periods of exceptionally high trading volume, the Company takes
steps to provide customer service functions with maximum processing capacity.
These steps include rescheduling processing jobs unrelated to customer trading
functions and restricting on-line access to the Company's mainframe computer
functions. The Company's computer capacity is continuously monitored and
efforts are made to achieve an optimal balance between the costs of additional
processing capacity and the customer service benefits it provides during
high-volume periods.
Schwab's operations rely heavily on its information processing and
communications systems. External events, such as an earthquake or power
failure, loss of external information feeds, such as security price
information, as well as internal malfunctions, could render part of or all such
systems inoperative. To enhance the reliability of the system and integrity of
data, Schwab maintains carefully monitored 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 24 hours, and
maintenance of facilities for backup and communications in San Francisco. They
also include the maintenance and periodic testing of a disaster recovery plan
that management believes would permit Schwab to recommence essential operations
within 72 hours if its central computer site were to become inaccessible. In
March 1994, Schwab installed a new recovery system which permits essential
operations to recommence within 24 hours.
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, could cause it to be unable to
satisfy its obligations to customers and other securities firms, and could
result in regulatory violations. The Company constructed a computer data
center in Phoenix and relocated its primary data center to this site in 1993.
This move strengthens the Company's backup recovery capability and provides
additional support in the event of extended interruptions in existing
processing capability.
CLEARING AND ACCOUNT MAINTENANCE
Schwab performs clearing services for all securities transactions in
customer accounts. These services involve the confirmation, receipt,
execution, settlement and delivery functions involved in securities
transactions. Among other things, performing its own clearing services allows
Schwab to provide margin loans and use customer cash balances to finance them.
During the year ended December 31, 1993, Schwab processed over nine million
separate securities, options and mutual fund trades.
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
"Commitments, Contingent Liabilities and Other Information" in the Notes to
Consolidated Financial Statements in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
Customer securities are typically held by Schwab in nominee name, on
deposit at one or more of the recognized securities industry depository trust
companies, or in the case of government and certain other fixed-income
securities and other instruments (e.g., certain limited partnership interests),
at a custodial bank. Schwab collects dividends and interest on securities held
in nominee name, making the appropriate credits to customer accounts. Schwab
also facilitates exercise of subscription rights on securities held for
customers. Schwab arranges for the transmittal of proxy and tender offer
materials and company reports to customers.
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11
THE CHARLES SCHWAB CORPORATION
EMPLOYEES
As of December 31, 1993, the Company had approximately 6,500 employees,
including full-time, part-time and temporary employees, as well as persons
employed on a contract basis. None of the employees are represented by a
union, and the Company believes its relations with its employees are good.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The 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 advisers with the SEC.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges such as the New York Stock Exchange, Inc. (NYSE), which has been
designated by the SEC as Schwab's primary regulator with respect to its
securities activities. The NASD has been designated as M&S' primary regulator
by the SEC with respect to its securities activities. During 1993, the NASD
was Schwab's designated primary regulator with respect to options trading
activities. Currently, the American Stock Exchange is Schwab's designated
primary regulator with respect to options trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC)
governing the industry and conduct periodic examinations of broker-dealers.
Securities firms are also subject to regulation by state securities commissions
in the states in which they do business. Schwab is registered as a
broker-dealer in 50 states, the District of Columbia and Puerto Rico. M&S is
registered as a broker-dealer in 17 states as of December 1993.
The regulations to which broker-dealers and investment advisers 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,
fee arrangements, disclosure to clients, and the conduct of directors, officers
and employees. Additional legislation, changes in rules promulgated by the SEC
and by 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 advisers. The
SEC, self-regulatory organizations, and state securities commissions may
conduct administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
adviser, its officers, or employees. In the past, Schwab occasionally has been
the subject of such administrative proceedings. The principal purpose of
regulations and discipline of broker-dealers and investment advisers is the
protection of customers and the securities markets, rather than protection of
creditors and stockholders of broker-dealers and investment advisers.
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 on
claims for cash balances. SIPC is funded through assessments on registered
broker-dealers. SIPC assessments currently are .054% of net operating revenues
(as defined) per year. In addition, Schwab has purchased from private insurers
additional account protection of up to $24.5 million per customer, as defined,
in 1993 for customer securities positions only. This account protection is up
from protection in 1992 of $2 million. Mutual funds, including money market
funds, are considered securities for the purposes of SIPC coverage and the
supplemental coverage.
Schwab is also authorized by the Municipal Securities Rulemaking Board to
effect 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. For example, Schwab is registered with
the SEC as a transfer agent in connection with certain services it provides to
the SchwabFunds (registered trademark).
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 authorized to
conduct business in California, and is primarily regulated by the California
State Banking Department. Since it provides custody services to employee
benefit plan trusts, 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 state law to maintain a fidelity bond for the protection of
account holders.
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12
THE CHARLES SCHWAB CORPORATION
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Schwab and M&S are subject to the Uniform
Net Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule),
which has also been adopted through incorporation by reference in NYSE Rule
325. Schwab is a member firm of the NYSE and the NASD, and M&S is a member
firm of the NASD. The Net Capital Rule specifies minimum net capital
requirements for all registered broker-dealers and is designed to measure
financial integrity and liquidity. 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, Schwab's
failure to maintain specified levels of net capital 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.
During 1991, the SEC adopted Net Capital Rule amendments which limit
withdrawals of equity capital from broker-dealers. The amendments require
notice of withdrawals be provided to the SEC prior to and subsequent to
withdrawals exceeding certain sizes. The amendments prohibit 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
amendments also allow the SEC, under limited circumstances, to restrict a
broker-dealer from withdrawing net capital for up to 20 business days.
Schwab has 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 (SEC Rule 15c3-3). "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 15 consecutive days; NYSE
Rule 326 also prohibits the expansion of business if net capital is less than
5% of aggregate debit items for 15 consecutive 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.
Since its acquisition by the Company and through February 27, 1992, M&S
computed net capital under the aggregate indebtedness method of the Net Capital
Rule. Effective February 28, 1992, M&S elected to compute net capital under
the alternative method of the Net Capital Rule.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and Schwab's ability to repay its subordinated debt to the
Company, this in turn could limit the Company's ability to repay debt, pay cash
dividends, and purchase shares of its outstanding stock. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in
the Company's 1993 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report.
At December 31, 1993, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $53 million and had total regulatory net capital
of $260 million. At December 31, 1993, the amounts in excess of 2%, 4% and 5%
of aggregate debit items were $207 million, $155 million and $128 million,
respectively.
At December 31, 1993, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital
of $13 million. At December 31, 1993, the amounts in excess of 2%, 4% and 5%
of aggregate debit items all exceeded $12 million.
During 1993, CSIM was deemed no longer to be subject to the regulations
for investment advisers promulgated by the State of California Department of
Corporations and, therefore, has no net capital requirements.
CSTC's capital requirement is established by the California Superintendent
of Banks under the California Financial Code. The Code requires that CSTC's
ratio of contributed capital, as defined, to accumulated deficit shall exceed
2.5 to 1. At December 31, 1993 the ratio of contributed capital to accumulated
deficit was 2.8 to 1. If CSTC's capital declines, or if the Superintendent of
Banks determines that additional capital is required for other reasons, CSC
could be required to contribute additional capital to CSTC.
- 10 -
13
THE CHARLES SCHWAB CORPORATION
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco. The building contains approximately
295,000 square feet and is leased by Schwab under a term expiring in the year
2000. The current rental is approximately $8.6 million per year, subject to
certain increases and obligations to pay certain operating expenses such as
utilities, insurance and taxes. Schwab has three successive five-year options
to renew the lease at the then market rental value. Schwab also leases space
in other buildings for its San Francisco operations aggregating approximately
380,000 square feet at year-end 1993. M&S' headquarters are located in leased
office space in Jersey City, New Jersey.
In 1992, the Company purchased land in the Phoenix area and in 1993
completed construction of a data center that is Schwab's centralized computer
processing facility. The data center has approximately 105,000 square feet of
floor space.
All of Schwab's branch offices and customer telephone service centers and
M&S' branch offices are located in leased premises, generally with lease
expiration dates five to ten years from inception.
ITEM 3. LEGAL PROCEEDINGS
The information required to be furnished pursuant to this item is set
forth under the caption "Commitments, Contingent Liabilities and Other
Information" in the Notes to the Consolidated Financial Statements in the
Company's 1993 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 1993.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 in Part III of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item is set
forth under the captions "Common Stock Data" and "Quarterly Financial
Information (Unaudited)" in the Company's 1993 Annual Report to Stockholders,
which are 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 set
forth under the captions "Operating Results (for the year)," "Other (at year
end)" and "Other (for the year)" in the Company's 1993 Annual Report to
Stockholders, which are 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 set
forth under the caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Company's 1993 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report. Additional statistics for the fourth quarters of 1993 and 1992
are presented as follows.
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14
THE CHARLES SCHWAB CORPORATION
Average balances and interest rates for the fourth quarters of 1993 and
1992 are summarized as follows (dollars in millions):
Three Months Ended
December 31,
--------------------
1993 1992
------ ------
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $3,564 $3,448
Average interest rate 3.23% 3.48%
Margin loans to customers:
Average balance outstanding $2,448 $1,769
Average interest rate 5.97% 6.02%
Average yield on earning assets 4.35% 4.34%
FUNDING SOURCES (CUSTOMER-RELATED
AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $4,883 $4,405
Average interest rate 2.39% 2.69%
Other interest-bearing sources:
Average balance outstanding $ 329 $ 222
Average interest rate 3.17% 4.61%
Average noninterest-bearing portion $ 800 $ 590
Average interest rate on funding sources 2.11% 2.47%
SUMMARY:
Average yield on earning assets 4.35% 4.34%
Average interest rate on funding sources 2.11% 2.47%
------ ------
Average net interest margin 2.24% 1.87%
====== ======
Average balances of investments increased 3% and margin loans to customers
increased 38% from the fourth quarter of 1992 to the fourth quarter of 1993.
The average yield on investments and margin loans to customers increased one
basis point from the fourth quarter of 1992 to the fourth quarter of 1993.
Over this same period, interest-bearing customer cash balances increased 11%,
and the average interest rate paid on these balances declined 30 basis points.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is set
forth in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1993 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 Securities and Exchange Commission pursuant to Regulation
14A within 120 days after December 31, 1993 (the Proxy Statement) under the
captions "Election of Directors" (excluding all information under the
subcaption "Information about the Board of Directors and Committees of the
Board") 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.
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15
THE CHARLES SCHWAB CORPORATION
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Charles R. Schwab 56 Chairman and Chief Executive Officer, and
Director
Lawrence J. Stupski 48 Vice Chairman, and Director
David S. Pottruck 45 President and Chief Operating Officer, and
Director
Ronald W. Readmond 51 Senior Executive Vice President
Tom Decker Seip 44 Senior Executive Vice President - Retail
Brokerage
Darell W. Choate 53 Executive Vice President - Retail Service
Delivery
John Phillip Coghlan 42 Executive Vice President - Schwab Institutional
A. John Gambs 48 Executive Vice President - Finance and Chief
Financial Officer
Dawn Gould Lepore 40 Executive Vice President and Chief Information
Officer
Helen D. Ojha 46 Executive Vice President - Core Services
Elizabeth Gibson Sawi 42 Executive Vice President - Mutual Funds
John N. Tognino 55 Executive Vice President - Capital Markets and
Trading
Luis E. Valencia 49 Executive Vice President - Human Resources
MR. SCHWAB has been Chairman and Chief Executive Officer and a director of
the Company since its incorporation in November 1986. Mr. Schwab was a founder
of Schwab in 1971 and has been its Chairman since 1978. He also served as
Chief Executive Officer of Schwab from 1978 to July 1988. Mr. Schwab is
currently a director of The Gap, Inc., Transamerica Corporation and Chairman of
Schwab Investments and The Charles Schwab Family of Funds and was formerly a
director of BankAmerica Corporation. Mr. Schwab currently serves as
Governor-at-Large of the National Association of Securities Dealers, Inc.
MR. STUPSKI has been Vice Chairman of the Company since July 1992 and a
director of the Company since its incorporation in November 1986. Mr. Stupski
was Chief Operating Officer of the Company from November 1986 to March 1994,
the Company's President from November 1986 to July 1992, and its Chief
Financial Officer from April 1987 to March 1988. Mr. Stupski has been a
director of Schwab since 1981. He also served as President of Schwab from 1981
to July 1988, and as Chief Executive Officer of Schwab from that date to July
1992. He served as Chief Operating Officer of Schwab from 1981 to July 1992.
During 1990 and 1991, Mr. Stupski was a member of the board of directors of
the Chicago Board Options Exchange. From 1982 to 1985, Mr. Stupski was a
Governor of The Pacific Stock Exchange Incorporated.
MR. POTTRUCK was named Chief Operating Officer and a director of the
Company in March 1994 and has been President of the Company since July 1992.
Mr. Pottruck was Executive Vice President from March 1987 until July 1992. Mr.
Pottruck joined Schwab in 1984 and served as Executive Vice President -
Marketing and Branch Management until his appointment as President and a
director of Schwab in July 1988. He was promoted to Chief Executive Officer of
Schwab in July 1992. Mr. Pottruck was Senior Vice President of Consumer
Marketing and Advertising for Shearson/American Express from 1981 until joining
Schwab, with responsibility for execution of all retail marketing, advertising,
direct response and consumer communications.
MR. READMOND has been Senior Executive Vice President of the Company and
Schwab, as well as Chief Operating Officer of Schwab, since July 1992. From
August 1989 until July 1992, he was Executive Vice President - Operations,
Trading and Credit of the Company and Schwab. Prior to joining Schwab, Mr.
Readmond held various positions with Alex Brown & Sons, Inc., including
Operations Principal in 1985, Managing Director in 1986 and Division Manager of
Information Systems and Operations from 1987 until he joined Schwab.
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THE CHARLES SCHWAB CORPORATION
MR. SEIP was named Senior Executive Vice President - Retail Brokerage of
the Company and Schwab in March 1994. He has been President of Charles Schwab
Investment Management, Inc. (CSIM) since July 1992 and Chief Operating Officer
of CSIM since June 1991. From July 1992 until March 1994, he was Executive
Vice President - Mutual Funds and Fixed Income Products. Mr. Seip has been
with the Company since January 1983. Prior to becoming Senior Vice President
of the Company and assuming his mutual fund responsibilities in June 1991, Mr.
Seip was the divisional executive in charge of Schwab's retail branches east of
the Mississippi. From 1985 to 1988, Mr. Seip founded and was responsible for
Schwab's Financial Advisors Service. Before joining Schwab, he was a Vice
President and Partner at Korn Ferry International.
MR. CHOATE has been Executive Vice President - Retail Service Delivery of
the Company and Schwab since March 1991. Mr. Choate was Executive Vice
President of Branch Systems with Security Pacific Bank from 1988 until joining
Schwab, responsible for the statewide branch banking system. He held a full
range of branch administration positions with Security Pacific Bank from 1969
to 1988, including Division Administrator, Regional Vice President and Branch
Manager.
MR. COGHLAN has been Executive Vice President and General Manager of
Schwab Institutional of the Company and Schwab since July 1992. Mr. Coghlan
joined Schwab in 1986, became a Vice President in 1988 and became Senior Vice
President in 1990. From 1988 to 1990, he was also an Adjunct Professor of
Marketing at the McLaren School of Business at the University of San Francisco
and from 1985 to 1987 he was a Lecturer in the Department of Marketing and
Management in the School of Business at San Francisco State University.
MR. GAMBS has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since March 1988. Mr. Gambs was Deputy Treasurer of
Merrill Lynch & Co., Inc. from 1987 until he joined Schwab, and from 1984 to
1987 was Vice President/Corporate Staff, with responsibilities for financing,
cash management and credit relationships.
MS. LEPORE has been Executive Vice President and Chief Information Officer
of the Company and Schwab since October 1993. Ms. Lepore joined Schwab in
1983, became a Vice President in 1987 and became Senior Vice President in 1989.
Prior to joining Schwab, Ms. Lepore was a consultant with Informatics, an
information consulting firm in San Francisco.
MS. OJHA has been Executive Vice President - Core Services of the Company
and Schwab since March 1993. Before joining the Company, Ms. Ojha served as a
Director and then a Partner in the National Advanced Technology Group, of
Coopers & Lybrand, an international professional service firm, since 1987.
From 1975 to 1987, Ms. Ojha was a consultant in the Operations Research
Practice and then a manager in the Center for Applied Artificial Intelligence
of Arthur D. Little, Inc.
MS. SAWI was named Executive Vice President - Mutual Funds in March 1994
and she was Executive Vice President - Marketing and Advertising from January
1992 until March 1994. Ms. Sawi joined Schwab in 1982, became a Vice President
in 1984 and became Senior Vice President in 1985. Before joining Schwab in
1982, Ms. Sawi was a Marketing Manager for the travel and entertainment card
division of American Express.
MR. TOGNINO joined the Company in October 1993 as the Executive Vice
President of Capital Markets and Trading. Prior to joining Schwab, Mr. Tognino
was a Managing Director at Merrill Lynch in New York since 1991, and was based
in London as Managing Director of the equity product from 1990 to 1991. He
served as Managing Director of Unlisted Trading from 1987 to 1988, and
previously served as Managing Director of the OTC department, which included
agency orders, institutional sales trading and market making. Mr. Tognino
serves on the Nasdaq Board of Governors as Chairman of the Securities Traders
Association and as President of the Securities Traders Association of New York.
MR. VALENCIA joined the Company and was named Executive Vice President -
Human Resources of the Company and Schwab in March 1994. Before joining the
Company, Mr. Valencia served as a Managing Director of Commercial Credit
Corp., a subsidiary of the Travelers engaged in consumer finance for the
Travelers, from January 1993 to February 1994. From 1975 to 1993, he held
various positions with Citicorp, including Regional Business Manager in the New
York Banking Division from 1981 to 1984, President and Chief Executive Officer
of Citicorp Savings from 1984 to 1990, and President and Chief Executive
Officer of Transaction Technology, a subsidiary of Citicorp, from 1990 to 1993.
Prior to Citicorp, Mr. Valencia held Human Resource positions with Pfizer, Inc.
- 14 -
17
THE CHARLES SCHWAB CORPORATION
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 the
captions "Executive Compensation" (excluding all information under the
subcaption "Board Compensation Committee Report on Executive Compensation" and
"Performance Graph") and "Certain Transactions."
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 the
caption "Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under the
caption "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 set forth in
the Company's 1993 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
None filed during the last quarter of 1993.
- 15 -
18
THE CHARLES SCHWAB CORPORATION
(c) Exhibits
The exhibits listed below are filed as part of this annual report on
Form 10-K.
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
3.3 Restated Certificate of Incorporation, as amended as of December 1, 1988, of the Registrant,
filed as Exhibit 3.3 to the Registrant's Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
3.4 Amended and Restated By-Laws of the Registrant, as amended March 25, 1991, filed as
Exhibit 3.4 to the Registrant's Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
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. *
10.5 Employment Agreement dated as of March 31, 1987 among Registrant, Charles Schwab & Co., Inc.
and Charles R. Schwab. *
10.9 Executive Officer Stock Option Plan (1987) dated as of March 24, 1987, with form of
Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan (1987)) attached. *
10.17 Agreement of Lease dated May 18, 1983 between California Jones Company and Charles Schwab &
Co., Inc. (headquarters, San Francisco, California). *
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, 1988 and incorporated herein by reference.
10.55 Cash Subordination Agreements between Schwab Holdings, Inc. and Charles Schwab & Co., Inc.
with Assignments dated March 31, 1987 by Schwab Holdings, Inc., of all right, title, and interest
in Cash Subordination Agreements to Registrant, filed as Exhibit 4.20 to Registrant's Registration
Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
- 16 -
19
THE CHARLES SCHWAB CORPORATION
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
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.
10.63 Revolving Subordinated Loan Agreement as of September 29, 1988, between the Registrant and
Charles Schwab & Co., Inc., filed as Exhibit 10.63 to the Registrant's Form 10-K for the
year ended December 31, 1988 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, 1989 and incorporated herein by
reference.
10.73 1987 Stock Option Plan, as Amended and Restated, as of April 17, 1989, with Form of
Non-Qualified Stock Option Agreement (General Management Plan) attached, filed as
Exhibit 4.1 to Registrant's Registration Statement No. 33-21582 on Form S-8 and
incorporated herein by reference.
10.82 ESOP Loan Agreement, effective as of April 26, 1990, between the Registrant and The
Charles Schwab Profit Sharing and Employee Stock Ownership Plan and Trust, filed as
Exhibit 10.82 to the Registrant's Form 10-Q for the quarter ended March 31, 1990 and
incorporated herein by reference.
10.83 First Amendment to Revolving Subordinated Loan Agreement, as of April 18, 1990,
between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.83 to the
Registrant's Form 10-Q for the quarter ended March 31, 1990 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, 1990 and incorporated
herein by reference.
10.90 Amendment to the ESOP Loan Agreement effective as of April 26, 1990, dated December 14,
1990, between the Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.90 to the Registrant's Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
10.97 Stock Purchase Agreement dated June 4, 1991, among the Registrant, Leonard Mayer,
Herbert Schweitzer, the Mayer & Schweitzer Trust and Mayer & Schweitzer, Inc. (M&S),
with respect to the acquisition of all of the capital stock of M&S by the Registrant,
filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated July 15, 1991
and incorporated herein by reference.
10.98 Credit Agreement dated as of August 30, 1991, between the Registrant and the Banks listed
therein, filed as Exhibit 10.62 to the Registrant's Form 10-Q for the quarter ended
September 30, 1991 and incorporated herein by reference.
- 17 -
20
THE CHARLES SCHWAB CORPORATION
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
10.99 Second Amendment to Revolving Subordinated Loan Agreement, as of November 1, 1991,
between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.99 to the
Registrant's Form 10-K for the year ended December 31, 1991 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,
1991 and incorporated herein by reference.
10.102 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective January 1,
1992, dated December 12, 1991, filed as Exhibit 10.102 to the Registrant's Form 10-K
for the year ended December 31, 1991 and incorporated herein by reference.
10.111 Credit Agreement dated as of March 31, 1992, between the Registrant and Certain
Commercial Lending Institutions, as the Lenders, and Continental Bank, N.A., as
the Agent for the Lenders, filed as Exhibit 10.111 to the Registrant's Form 10-Q for
the quarter ended March 31, 1992 and incorporated herein by reference.
10.113 Schwab One Services Agreement dated April 17, 1992 between Charles Schwab & Co.,
Inc. and Provident National Bank, filed as Exhibit 10.113 to the Registrant's Form
10-Q for the quarter ended March 31, 1992 and incorporated herein by reference.
10.114 First Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective May 8, 1992, dated June 30, 1992, filed as Exhibit 10.114
to the Registrant's Form 10-Q for the quarter ended June 30, 1992 and incorporated
herein by reference.
10.115 Second Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective July 1, 1992, dated June 30, 1992, filed as Exhibit 10.115
to the Registrant's Form 10-Q for the quarter ended June 30, 1992 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, 1992
and incorporated herein by reference.
10.118 Credit Agreement dated as of August 28, 1992, between Registrant and the banks listed
therein, filed as Exhibit 10.118 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
10.119 First Amendment to Credit Agreement dated as of August 28, 1992, between Registrant
and the banks listed therein, filed as Exhibit 10.119 to the Registrant's Form 10-K
for the year ended December 31, 1992 and incorporated herein by reference.
- 18 -
21
THE CHARLES SCHWAB CORPORATION
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
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, 1992 and
incorporated herein by reference.
10.121 Construction Agreement dated July 21, 1992 between Carlson Design/Construct Corp. (West),
DBA Carlson Design/Construction Corp. and Mayer & Schweitzer, Inc. for Schwab Data
Center, Phoenix, Arizona, a 105,000 square foot two-story facility, filed as Exhibit
10.121 to the Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference.
10.126 First Amendment dated June 30, 1993 to the Credit Agreement dated August 28, 1992,
between Registrant and the banks listed therein, filed as Exhibit 10.126 to the
Registrant's Form 10-Q for the quarter ended June 30, 1993 and incorporated herein
by reference.
10.127 Second Amendment dated June 30, 1993 to the Credit Agreement dated August 30, 1991
as amended by the First Amendment dated August 28, 1992, between Registrant and the
banks listed therein, filed as Exhibit 10.127 to the Registrant's Form 10-Q for the
quarter ended June 30, 1993 and incorporated herein by reference.
10.130 Annual Executive Bonus Plan dated as of January 1, 1994.
10.131 1992 Stock Incentive Plan, as Amended and Restated, as of January 1, 1994
(Supersedes Exhibit 10.112 to Registrant's Form 10-Q for the quarter ended March 31,
1992).
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended, effective
January 1, 1994 (Supersedes Exhibit 10.96 to Registrant's Form 10-Q for the quarter
ended June 30, 1991).
10.133 The Charles Schwab Corporation Deferred Compensation Plan, dated March 24, 1994,
effective July 1994.
10.134 Annual Executive Individual Performance Plan dated as of January 1, 1994.
10.135 Third Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan, effective January 1, 1993, dated December 29, 1993.
10.136 Fourth Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective January 31, 1994, dated March 22, 1994.
11.1 Computation of Earnings per Common Equivalent Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1993 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.
- 19 -
22
THE CHARLES SCHWAB CORPORATION
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as
amended and declared effective on September 22, 1987.
- 20 -
23
THE CHARLES SCHWAB CORPORATION
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 30, 1994.
THE CHARLES SCHWAB CORPORATION
(Registrant)
By: CHARLES R. SCHWAB /s/
-----------------------------
Charles R. Schwab
Chairman
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 30, 1994.
Signature Title
--------- -----
CHARLES R. SCHWAB /s/ Chairman, Chief Executive Officer
- --------------------- and Director
Charles R. Schwab (principal executive officer)
LAWRENCE J. STUPSKI /s/ Vice Chairman and Director
- -----------------------
Lawrence J. Stupski
DAVID S. POTTRUCK /s/ President, Chief Operating Officer
- --------------------- and Director
David S. Pottruck
A. JOHN GAMBS /s/ Executive Vice President - Finance,
- ----------------- and Chief Financial Officer
A. John Gambs (principal financial and accounting
officer)
NANCY H. BECHTLE /s/ Director
- --------------------
Nancy H. Bechtle
C. PRESTON BUTCHER /s/ Director
- ----------------------
C. Preston Butcher
DONALD G. FISHER /s/ Director
- --------------------
Donald G. Fisher
ANTHONY M. FRANK /s/ Director
- --------------------
Anthony M. Frank
JAMES R. HARVEY /s/ Director
- -------------------
James R. Harvey
STEPHEN T. MCLIN /s/ Director
- --------------------
Stephen T. McLin
ROGER O. WALTHER /s/ Director
- --------------------
Roger O. Walther
- 21 -
24
THE CHARLES SCHWAB CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
----
Independent Auditors' Report F-2
SCHEDULE III - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
SCHEDULE VIII - Valuation and Qualifying Accounts F-6
SCHEDULE IX - Short-Term Borrowings F-7
SCHEDULE X - Supplemental Income Statement Information F-8
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 1993 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
25
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 (the Company) and subsidiaries as of December 31, 1993 and 1992,
and for each of the three years in the period ended December 31, 1993, and have
issued our report thereon dated February 17, 1994 (February 25, 1994 as to
Subsequent Event note); such consolidated financial statements and report are
included in your 1993 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
the Company and subsidiaries appearing on pages F-3 through F-8. 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.
DELOITTE & TOUCHE
San Francisco, California
February 17, 1994
(February 25, 1994 as to Subsequent Event note)
F-2
26
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(In thousands, except share data)
December 31,
----------------------
1993 1992
-------- --------
ASSETS
Receivable from subsidiary $ 49,831 $ 7,848
Subordinated receivable from subsidiary 132,728 154,228
Investment in subsidiaries, at equity 384,043 251,043
Other assets 2,512 797
-------- --------
TOTAL $569,114 $413,916
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 4,941 $ 4,380
Long-term borrowings 185,000 35,000
Subordinated borrowings 115,728
-------- --------
Total liabilities 189,941 155,108
-------- --------
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value
per share; 59,486,680 shares in 1993 and 58,761,013 shares in 1992* 595 392
Additional paid-in capital 161,052 141,946
Retained earnings 253,692 147,168
Treasury stock - 1,649,478 shares in 1993 and 2,086,315 shares in 1992, at cost* (23,153) (26,444)
Note receivable from Profit Sharing Plan (13,013) (4,254)
-------- --------
Stockholders' equity 379,173 258,808
-------- --------
TOTAL $569,114 $413,916
======== ========
* Reflects the 1993 three-for-two common stock split.
See Notes to Consolidated Financial Statements in the Company's 1993 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of long-term and subordinated
borrowings and contingent liabilities.
F-3
27
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands)
Year Ended December 31,
-----------------------------------
1993 1992 1991
--------- -------- --------
Interest revenue $ 14,952 $ 12,235 $ 12,554
Interest expense (13,258) (13,570) (12,088)
------- ------- --------
NET INTEREST INCOME (EXPENSE) 1,694 (1,335) 466
Other expenses (2,159) (2,132) (1,354)
------ ------ --------
LOSS BEFORE INCOME TAX BENEFIT, EQUITY IN EARNINGS OF
SUBSIDIARIES AND EXTRAORDINARY CHARGE (465) (3,467) (888)
Income tax benefit 472 1,254 355
------ ------ --------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES
AND EXTRAORDINARY CHARGE 7 (2,213) (533)
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 86,821 48,063 22,796
Dividends paid by subsidiaries 37,540 35,378 27,205
------- ------- --------
Total 124,361 83,441 50,001
INCOME BEFORE EXTRAORDINARY CHARGE 124,368 81,228 49,468
Extraordinary charge - early retirement of debt (6,700)
------- ------- --------
NET INCOME 117,668 81,228 49,468
Dividends on common stock (10,946) (8,411) (4,864)
Transfer of par value on stock issued
in three-for-two stock dividend (198) (131)
Stock options and warrants exercised 1,413 (16,333)
RETAINED EARNINGS:
At beginning of year 147,168 72,938 44,798
-------- -------- --------
AT END OF YEAR $253,692 $147,168 $ 72,938
======== ======== ========
F-4
28
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $117,668 $ 81,228 $ 49,468
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (86,821) (48,063) (22,796)
Extraordinary charge for early retirement of debt 11,205
Change in accrued expenses 4,312 4,095 1,638
Change in other assets (1,715) (239) 590
------ ------ -------
Net cash provided by operating activities 44,649 37,021 28,900
------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in net investment in subsidiaries (46,179) (5,295) (12,603)
Decrease (increase) in receivable from subsidiary (41,983) (2,520) 5,220
Collection on subordinated loans to subsidiary 26,500 10,000 12,500
Collection on note receivable from Profit Sharing Plan 6,241 3,925 1,821
Subordinated loans to subsidiary (5,000) (48,500) (12,500)
------- ------- -------
Net cash used by investing activities (60,421) (42,390) (5,562)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 150,000 35,000
Repayment of subordinated borrowings (126,933)
Dividends paid (10,946) (8,411) (4,864)
Purchase of treasury stock (23,227) (6,205)
Payment for surrendered contingent payment rights (15,951)
Exercise of warrants on common stock 1,861
Other 3,651 2,007 1,821
-------- ------ --------
Net cash provided (used) by financing activities 15,772 5,369 (23,338)
-------- ------ --------
CHANGE IN CASH AND EQUIVALENTS ---- ---- ----
CASH AND EQUIVALENTS AT BEGINNING OF YEAR ---- ---- ----
-------- ------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ ---- $ ---- $ ----
======= ====== =======
Prior years' financial statements have been reclassified to conform to the
1993 presentation.
See Notes to the Consolidated Financial Statements in the Company's 1993
Annual Report to Stockholders, which are incorporated herein by reference to
Exhibit No. 13.1 of this report, for a discussion of additional cash flow
information.
F-5
29
SCHEDULE VIII
THE CHARLES SCHWAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at --------------------- Balance at
Beginning Charged End of
Description of Year to Expense Other(1) Written off Year
----------- ---------- ---------- -------- ----------- ----------
FOR THE YEAR ENDED
DECEMBER 31, 1993:
Allowance for doubtful accounts $3,449 $ 336 $ 19 $(1,575) $2,229
====== ====== ==== ======= ======
FOR THE YEAR ENDED
DECEMBER 31, 1992:
Allowance for doubtful accounts $2,769 $1,270 $(75) $ (515) $3,449
====== ====== ==== ======= ======
FOR THE YEAR ENDED
DECEMBER 31, 1991:
Allowance for doubtful accounts $2,357 $ 190 $584 $ (362) $2,769
====== ====== ==== ======= ======
(1) Primarily represents collections of previously written off accounts.
Amounts for 1993, 1992 and 1991 include a $57, a $123 and a $65
reduction, respectively, to the allowance recorded in connection with
CSC's 1989 acquisition of Rose & Company Investment Brokers, Inc.
F-6
30
SCHEDULE IX
THE CHARLES SCHWAB CORPORATION
SHORT-TERM BORROWINGS
(In thousands)
Maximum Average Weighted
Weighted Amount Amount Average
Balance at Average Outstanding Outstanding Interest
End of Interest During the During the Rate During
Description of Year Rate Year Year (2) the Year (3)
----------- --------- -------- ----------- ----------- ------------
FOR THE YEAR ENDED
DECEMBER 31, 1993:
Bank loans (1) --- N/A $ 65,000 $18,520 3.7%
======= === ======== ======= ===
FOR THE YEAR ENDED
DECEMBER 31, 1992:
Bank loans (1) --- N/A $ 89,000 $24,357 4.3%
======= === ======== ======= ===
FOR THE YEAR ENDED
DECEMBER 31, 1991:
Bank loans (1) $20,000 5.4% $108,000 $28,518 6.2%
======= === ======== ======= ===
(1) Bank loans are under lines of credit, are payable on demand, and may
be collateralized by customer securities.
(2) Represents the weighted average daily balances outstanding for days on
which there were borrowings - 25 days in 1993, 42 days in 1992 and 41
days in 1991.
(3) Weighted average interest rate computed by dividing the daily interest
expense by the daily amounts outstanding.
F-7
31
SCHEDULE X
THE CHARLES SCHWAB CORPORATION
SUPPLEMENTAL INCOME STATEMENT INFORMATION
(In thousands)
Year Ended December 31,
-----------------------------------
1993 1992 1991
------- ------- -------
Advertising $44,563 $37,843 $28,011
Amortization of intangibles 13,783 17,577 27,922
Items not shown have been omitted because they do not exceed 1% of total
revenues.
F-8