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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, 1997 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.
Pacific Exchange, Inc.
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 12, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $8,112,875,618. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant, and certain investment companies managed
by Charles Schwab Investment Management, Inc. were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 12, 1998 was
267,742,421* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1997 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 11, 1998 by reference to portions of that document.
* Reflects the September 1997 three-for-two common stock split.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
Part I
Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 9
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 9
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 10
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 10
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 11
Part III
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 11
Item 11. Executive Compensation ------------------------------------------------------------------------------- 14
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 14
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 14
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 14
Exhibit Index ---------------------------------------------------------------------------------- 15
Signatures ------------------------------------------------------------------------------------- 21
Index to Financial Statement Schedules --------------------------------------------------------- F-1
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. As used herein, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Mayer & Schweitzer, Inc.
(M&S), a subsidiary acquired in 1991, is a market maker in Nasdaq and other
securities that provides trade execution services to broker-dealers and
institutional customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and Charles Schwab Europe
(formerly known as ShareLink). CSIM, incorporated in 1989, acts as the
investment adviser for Schwab's proprietary mutual funds. The Company refers to
certain funds for which CSIM is the investment adviser as the
SchwabFunds-Registered Trademark-. CSTC, incorporated in 1992, provides custody
services for independent investment managers and serves as trustee for employee
benefit plans, primarily 401(k) plans. Charles Schwab Europe, acquired in 1995
to expand the Company's international operations, is a retail discount
securities brokerage firm located in the United Kingdom.
New developments in the Company's business during 1997 include the
continued expansion of products and services tailored to meet customers' varying
investment and financial needs. During 1997, Schwab announced alliances with
three investment banking firms to provide certain of its customers initial and
secondary public stock offerings managed by these firms. Additionally, the
Company began to offer access to futures and commodities trading to certain of
its most active customers. The Company is also enhancing the ways it helps
investors develop and evaluate their investment choices. In 1997, the Company
introduced a number of new Internet-based investment services, including the
Asset Allocation Toolkit-TM- for portfolio allocation guidance, and the Mutual
Fund OneSource-Registered Trademark- Online and Market Buzz-TM- sites for
research and information. The Company also broadened its multi-channel delivery
systems to make investing more accessible to more people. During 1997, Schwab
introduced a speech recognition telephone trading service that enables customers
to trade any of the funds in the Mutual Fund Marketplace-Registered Trademark-
using vocal commands.
During 1997, the Company's Board of Directors declared a three-for-two
common stock split, distributed September 1997, effected in the form of a stock
dividend. Share and per share information throughout this report have been
restated. The Board increased the quarterly cash dividend 20% to $.04 per share
in 1997.
(b) Financial Information About Industry Segments. The Company operates in
a single industry segment: securities brokerage and related financial services.
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1997. As of December
31, 1997, approximately 28% of Schwab's total customer accounts were located in
California. The next highest geographic concentrations of total customer
accounts were approximately 8% in Florida, 7% in New York and 6% in Texas.
(c) Narrative Description of Business. The Company's strategy is to attract
and retain customer assets by focusing on a number of areas within the financial
services industry -- retail brokerage, mutual funds, support services for
independent investment managers, equity securities market-making and 401(k)
defined contribution plans. To pursue its strategy and its objective of
long-term profitable growth, the Company plans to continue to leverage its
competitive advantages. These advantages include a nationally recognized brand,
a broad range of products and services, multi-channel delivery systems and an
ongoing investment in technology.
The Company's primary focus is serving retail investors, directly or
through independent investment managers, who want access to a broad selection of
products and services, as well as investment news and information, tailored to
meet their financial needs. The Company, through Schwab, serves over 4.8 million
active customer accounts(a). Customer assets totaled $353.7 billion at December
31, 1997.
The Company, through Schwab and M&S, engages in market-making activities
in exchange-listed, Nasdaq and other equity securities. Regulatory changes
and changes in industry customs and practices are significantly impacting
these market-making activities. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Company's 1997
Annual Report to Stockholders, which is incorporated herein by reference
to Exhibit No. 13.1 of this report, and "Regulation" below.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Such fluctuations
are affected by many national and international economic and political factors
that cannot be predicted, including broad trends in business and finance, the
availability of credit and capital, legislation and regulation affecting the
United States and international business and financial communities, currency
values, and the level and volatility of interest rates.
- --------
(a) Accounts with balances or activity within the preceding twelve months.
===================================================================================================================================
Sources of Revenues
(Dollar amounts in thousands)
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Type of Revenue Amount Percent Amount Percent Amount Percent
--------------------------- --------------------------- ---------------------------
Commissions
Listed securities $ 527,321 22.9% $ 423,232 22.9% $ 356,069 25.1%
Nasdaq 465,137 20.2% 393,882 21.3% 283,024 19.9%
Options 103,372 4.5% 66,210 3.5% 53,333 3.8%
Mutual funds 78,193 3.5% 70,805 3.8% 58,470 4.1%
-----------------------------------------------------------------------------------------------------------------------------
Commissions 1,174,023 51.1% 954,129 51.5% 750,896 52.9%
-----------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees 427,673 18.6% 311,067 16.8% 218,784 15.4%
Interest revenue
Margin loans to customers 489,197 21.3% 339,433 18.3% 264,025 18.6%
Investments, customer-related 380,443 16.5% 316,760 17.1% 283,031 19.9%
Other 30,395 1.4% 24,667 1.4% 21,064 1.6%
Interest expense (546,483) (23.8%) (425,872) (23.0%) (357,223) (25.2%)
-----------------------------------------------------------------------------------------------------------------------------
Interest revenue, net of
interest expense 353,552 15.4% 254,988 13.8% 210,897 14.9%
-----------------------------------------------------------------------------------------------------------------------------
Principal transactions 257,985 11.2% 256,902 13.9% 191,392 13.5%
Other 85,517 3.7% 73,836 4.0% 47,934 3.3%
-----------------------------------------------------------------------------------------------------------------------------
Total $2,298,750 100.0% $1,850,922 100.0% $1,419,903 100.0%
=============================================================================================================================
This table should be read in connection with the Company's
consolidated financial statements and notes in the Company's
1997 Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
===================================================================================================================================
Shifts in customer investment preferences or in customer usage of Schwab's
multi-channel delivery systems also could reduce trading revenues, which include
commission and principal transaction revenues. Since trading revenues continue
to represent a majority of the Company's revenues, the Company may experience
significant variations in revenues from period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors, overtime hours,
professional services, and advertising and market development are adjustable
over the short term to help the Company achieve its financial objectives.
Additionally, developmental spending (including branch openings, product and
service rollouts, and technology enhancements) is discretionary and can be
altered in response to market conditions. However, a significant portion of the
Company's expenses such as salaries and wages, occupancy and equipment, and
depreciation and amortization do not vary directly, at least in the short term,
with fluctuations in revenues or securities trading volumes. Also, the Company
views its developmental spending as essential for future growth and therefore
tries to avoid major adjustments in such spending unless faced with a sustained
slowdown in customer trading activity. Given the nature of the Company's
revenues and expenses, and the economic and competitive factors discussed in
this report, the Company's earnings and common stock price may be subject to
significant volatility from period to period. The Company's results for any
period are not necessarily indicative of results for a future period.
The table above sets forth on a comparative basis the Company's revenues
for the three years ended December 31, 1997.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including full-commission brokerage firms, discount
brokerage firms, mutual fund companies and banks. Certain of these competitors
have significantly greater financial resources and offer a wider range of
services and financial products than the Company, particularly given the
continued consolidation within the financial services industry. In addition, the
recent expansion and customer acceptance of conducting financial transactions
online has attracted competition from software development companies and
providers of online services. In 1997, price competition continued to intensify
in the area of online investing as competitors sought to gain market share in
this rapidly growing area. The Company experienced declines in its average
commission per revenue trade as the proportion of its customers using electronic
brokerage channels, which provide discounts from the Company's standard
commission rates, has increased. As the Company focuses on further enhancements
to its electronic service offering, average commission per revenue trade is
expected to continue to decline. The Company primarily competes on the basis of
quality of customer service, breadth of products and services offered at prices
that management believes represent superior value, accessibility to the Company
through its multi-channel delivery systems, and technological innovation and
expertise.
Most discount brokerage firms and online-only financial services providers
charge commissions lower than Schwab. Full-commission brokerage firms also offer
discounted commissions to selected retail brokerage 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. Such competition may negatively impact the Company's
customer asset growth, revenue growth and profit margin.
Advertising and Marketing Programs
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. The Company's
advertising and market development expense was $130 million in 1997, compared to
$84 million in 1996 and $53 million in 1995. Expenditures for these programs
helped Schwab open 1,164,000 new accounts in 1997, compared to 985,000 in 1996
and 698,000 in 1995. New customer accounts represent a significant portion of
the growth in customer assets, which the Company believes is critical to growth
in revenues. Accounts opened during 1997 generated 17% of Schwab's commission
revenues during the year, compared to 16% in 1996 and 13% in 1995.
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
periodically on radio and independent television stations. Schwab also engages
extensively in targeted direct mail advertising through monthly statement
"inserts" and special mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers both a broad range of products and services tailored to
meet customers' varying investment and financial needs, as well as access to
extensive investment news and information.
Accounts and Features. The Company offers the purchase and sale of
securities which include exchange-listed, Nasdaq and other equity securities,
options, mutual funds, unit investment trusts, variable annuities and fixed
income investments, including United States Treasuries, zero-coupon bonds,
listed and OTC corporate bonds, municipal bonds, GNMAs and CDs. In 1997, the
Company began to offer certain of its customers initial and secondary public
stock offerings, and access to futures and commodities trading. Customers
approved for margin transactions may borrow a portion of the price of certain
securities purchased through Schwab, or may sell securities short. Customers
must have specific approval to trade options; as of December 31, 1997, 258,000
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, on a weekly basis, into certain
SchwabFunds-Registered Trademark- money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One-Registered Trademark- brokerage account. A customer may access
available funds in his or her Schwab One account either with a personal check or
a VISA-Registered Trademark- debit card. When a Schwab One customer is approved
for margin trading, the checks and debit card also provide access to margin cash
available. For cash balances awaiting investment, Schwab pays interest to Schwab
One customers. Alternatively, qualifying Schwab One customers seeking tax-exempt
income may elect to have cash balances swept into state-specific municipal
tax-exempt SchwabFunds money market funds or a tax-exempt municipal trust (for
Florida taxpayers only).
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three
SchwabFunds money market funds. During 1997, active IRAs increased 20% to
1,604,000 accounts and customer assets in all IRAs increased 35% to $88.2
billion. Schwab also acts as custodian and broker for Keogh accounts.
Customer Financing. Customers' securities transactions are conducted on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually three business days after the trade is executed. However, for purchases
of certain types of securities, such as certain mutual fund shares, a customer
must have a cash or money market fund balance in his or her account sufficient
to pay for the trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers may
sell securities short in a margin account subject to minimum equity and
applicable margin requirements and the availability of such securities to be
borrowed and delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During 1997, Schwab's outstanding margin loans to customers
averaged $6.4 billion.
In permitting a customer to engage in transactions, Schwab faces credit
risk if the customer fails to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 of the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by Schwab
at interest costs lower than Schwab's costs of borrowing from alternative
sources, Schwab's cost of funds is reduced and its net income is enhanced. Such
interest savings contribute substantially to Schwab's profitability and, if a
significant reduction of customer cash balances were to occur, Schwab's
borrowings from other sources may have to increase and such profitability would
decline. To the extent Schwab's customers elect to have cash balances in their
brokerage accounts swept into certain SchwabFunds money market funds, the cash
balances available to Schwab for investments or for financing margin loans are
reduced. However, Schwab receives mutual fund service fees from such funds based
on the daily average invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's 1997 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" below.
Mutual Funds. At December 31, 1997, Schwab's Mutual Fund
OneSource-Registered Trademark- service enabled customers to trade 825 mutual
funds in 121 fund families without incurring transaction fees. The service
allows investors to access multiple mutual fund companies, avoid brokerage
transaction fees, and achieve investment diversity among fund families. In
addition, investors' record keeping and investment monitoring are simplified
through one consolidated statement. Fees received by Schwab for providing
services, including record keeping and shareholder services, from the Mutual
Fund OneSource program are based upon daily balances of customer assets invested
in the participating funds through Schwab and are paid by the funds and/or fund
sponsors. Customer assets held by Schwab that have been purchased through the
Mutual Fund OneSource-Registered Trademark- service, excluding Schwab's
proprietary funds, totaled $56.6 billion at the end of 1997.
Schwab's Mutual Fund Marketplace-Registered Trademark- (including Mutual
Fund OneSource) provides customers with the ability to invest in nearly 1,400
mutual funds in 219 fund families sponsored by third parties. Customer assets
invested in the Mutual Fund Marketplace, excluding the Mutual Fund OneSource
service, totaled $48.0 billion at the end of 1997. Schwab charges a transaction
fee on trades placed in the funds included in the Mutual Fund Marketplace
(except on trades through the Mutual Fund OneSource service). These fees are
recorded as commission revenues. Commissions from customer transactions in
mutual fund shares comprised approximately 7% of Schwab's total commission
revenues during the last three years.
Schwab's proprietary funds, collectively referred to as the
SchwabFunds-Registered Trademark-, include money market funds, equity index
funds, bond funds, asset allocation funds, and funds that primarily invest in
stock, bond and money market funds. Qualifying Schwab customers may elect to
have cash balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds were
$55.8 billion at the end of 1997. Fees received by the Company from the
SchwabFunds, for providing transfer agent services, shareholder services,
administration and investment management, are based upon daily balances of
customer assets invested in these funds.
Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade
execution services in Nasdaq and other securities to broker-dealers, including
Schwab, and institutional customers. As a market maker in Nasdaq and other
securities, M&S generally executes customer trades as principal. While
substantially all Nasdaq security trades originated by the customers of Schwab
are directed to M&S, the majority of M&S' trading volume comes from parties
other than Schwab.
Schwab has specialist operations on the Pacific Exchange and the Boston
Stock Exchange to make markets in exchange-listed securities. The majority of
trades originated by the customers of Schwab in exchange-listed securities for
which Schwab makes a market are directed to these operations. At December 31,
1997, Schwab had 14 specialists on the Pacific Exchange and 3 specialists on the
Boston Stock Exchange that collectively made markets in 900 and 100 securities,
respectively.
In the normal course of their market making in exchange-listed, Nasdaq and
other securities, Schwab and M&S maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
M&S' ownership of securities, short inventory positions represent obligations of
Schwab and M&S to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, long or short inventory positions may result in gains
or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Market Risk" in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
Services for Independent Investment Managers. To attract the business of
accounts managed by independent investment managers, Schwab has a dedicated
business unit which includes experienced registered representatives assigned to
individual managers. Independent investment managers participating in this
program who custody customer accounts at Schwab may use SchwabLink-Registered
Trademark- and the SchwabLink Web-TM- site for investment managers. SchwabLink
is a computer-based information network which enables investment managers to
access information about their customers' accounts directly from Schwab's
computer databases and to enter their customers' trades online. The SchwabLink
Web site enables investment managers to use the Internet to communicate directly
with Schwab service teams, as well as receive news and information. During 1997,
Schwab customer assets held in accounts managed by over 5,300 active independent
investment managers increased $32.9 billion, or 45%, to a total of $105.8
billion. Independent investment managers and other professional investors
generated approximately 12% of Schwab's total commission revenues during the
last three years.
Retirement Plan Services. Schwab serves company 401(k) plans directly
through a dedicated sales force, as well as indirectly through alliances with
national and regional third-party administrators. Schwab offers SchwabPlan-TM-,
a comprehensive 401(k) retirement plan, which enables employers to offer a wide
range of investment options as well as employee education to their 401(k)
retirement plan participants. During 1997, Schwab continued to develop its
retirement plan services business, with customer assets in corporate 401(k) and
other plans growing $4.9 billion, or 48%, to $15.1 billion.
Multi-Channel Delivery Systems
The Company differentiates itself with multi-channel delivery systems which
allow customers to choose how they prefer to do business with the Company. In
addition to its branch office network, the Company maintains four regional
customer telephone service centers as well as electronic brokerage channels.
Branch Office Network. At December 31, 1997, Schwab operated 272 domestic
branch offices in 47 states, as well as a branch in each of the Commonwealth of
Puerto Rico and the United Kingdom. In addition, in 1997, the Company opened new
offices in Hong Kong and the Cayman Islands. The Company's office network plays
a key role in building its business. With the customer service support of
regional customer telephone service centers and electronic brokerage channels,
branch personnel are focusing a significant portion of their time on business
development. Customers can use branch offices to open accounts, deliver and
receive checks and securities, obtain market information, place orders, and
obtain related customer services in person, yet most branch activities are
conducted by telephone and mail.
The Company is enhancing the ways in which it may help investors by using
the branch office network to assist investors in developing asset allocation
strategies and evaluating their investment choices. Branch staff also refer
investors who desire additional guidance to independent investment managers
through the Schwab AdvisorSource-TM- service.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle customer trading and service calls twenty-four hours-a-day,
seven days-a-week. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows the branch office network to be maintained at lower staffing
levels and to focus on business development.
The Company's customer service approach is to use teams led by registered
representatives in the service centers, who work closely with branch office
network personnel. Additionally, certain teams at these centers provide
specialized services to active and affluent investors. Each registered
representative has immediate access to the customer account and market-related
information necessary to respond to customer inquiries. For most customer
orders, registered representatives can enter the order and confirm the
transaction immediately. As a result of this approach, the departure of a
registered representative generally does not result in a loss of customers for
the Company.
Electronic Brokerage Channels. Customers are able to obtain financial
information and execute trades on an automated basis through the Company's
electronic brokerage channels that provide both online and automated telephonic
access. These channels are designed to provide added convenience for customers
and minimize Schwab's costs of responding to and processing routine customer
transactions. To assist customers in using online channels, the Company
maintains two online customer support centers that operate both during and after
normal market hours.
Online channels include PC-based services such as SchwabLink-Registered
Trademark-, and the Charles Schwab Web Site-TM- (formerly known as
SchwabNOW!-TM-) -- an information and trading service on the Internet. The
Company's online channels handled 37% of total trades in 1997. Automated
telephonic channels include TeleBroker-Registered Trademark- -- Schwab's
touch-tone telephone trading service, and VoiceBroker-TM- -- Schwab's voice
recognition quote service. Schwab's automated telephonic channels handled 73% of
total customer calls received in 1997. Trades placed through electronic
brokerage channels provide discounts from the Company's standard commission
rates.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its multi-channel delivery systems, as well as other
applications such as clearing functions, account administration, record keeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered United States securities exchanges, M&S, the National
Securities Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds, such as security price information, as well as internal
malfunctions, such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains 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 computer operations if its
central computer site were to become inaccessible. To reduce the exposure to
system failures caused by external
factors, including earthquakes, the Company's primary data center is located in
Phoenix.
Many existing computer programs use only two digits to identify a specific
year and therefore may not accurately recognize the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Due to the Company's dependence on
computer technology to operate its business, and the dependence of the financial
services industry on computer technology, the nature and impact of Year 2000
processing failures on the Company's business could be material. The Company is
currently modifying its computer systems in order to enable its systems to
process data and transactions incorporating year 2000 dates without material
errors or interruptions. See also "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Year 2000" in the Company's
1997 Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
customer fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab takes the
risk of the other party's failure to settle the trade. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" note in the Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Employees
As of December 31, 1997, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 12,700 full-time employees.
Regulation
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The Securities and Exchange
Commission (SEC) is the Federal agency charged with administration of the
Federal securities laws. Schwab and M&S are registered as broker-dealers with
the SEC. Schwab and CSIM are registered as investment advisers with the SEC.
Additionally, Schwab is regulated by the Commodities Futures Trading Commission
(CFTC) with respect to its introduced futures and commodities trading
activities.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers (NASD) and the national securities exchanges such as the New
York Stock Exchange (NYSE), which has been designated by the SEC as Schwab's
primary regulator with respect to its securities activities. The NASD has been
designated by the SEC as M&S' primary regulator with respect to its securities
activities. During 1997, the Chicago Board Options Exchange (CBOE) was Schwab's
designated primary regulator with respect to options trading activities; the
NYSE has been designated as such for 1998 and 1999. The National Futures
Association has been designated by the CFTC as Schwab's primary regulator with
respect to its introduced futures and commodities trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC or
CFTC) governing the industry and conduct periodic examinations of
broker-dealers. Securities firms are also subject to regulation by state
securities authorities in the states in which they do business. Schwab was
registered as a broker-dealer in 50 states, the District of Columbia and Puerto
Rico as of December 31, 1997. M&S was registered as a broker-dealer in 32 states
and the District of Columbia as of December 31, 1997.
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. 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,
CFTC, self-regulatory organizations and state securities authorities may conduct
civil or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or
expulsion of a broker-dealer or an investment adviser, its officers, or
employees. Schwab and M&S have been the subject of such administrative
proceedings.
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which have significantly altered the manner
in which orders related to both Nasdaq and listed securities are handled. These
rules were implemented in phases between January 20, 1997 and October 13, 1997.
Additionally, in June 1997, most major United States securities markets,
including Nasdaq and the NYSE, began quoting and trading securities in
increments of one-sixteenth dollar per share instead of one-eighth dollar per
share for most securities, and these markets are currently considering further
changes to reduce the increments by which securities are priced. Mainly as a
result of these regulatory changes and changes in industry customs and
practices, average revenue per principal transaction declined during 1997 as
compared to 1996. Since the change to trading securities in increments of
one-sixteenth dollar per share was not implemented until June 1997 and the Order
Handling Rules were not fully implemented until October 1997, the Company
expects M&S' average revenue per principal transaction for 1998 to be materially
less than the average during substantially all of 1997. Recent and future
regulatory changes, changes in industry customs and practices, and changes in
trading systems are expected to continue to result in declines in average
revenue per principal transaction, and are expected to have a material adverse
impact on M&S' revenues and profit margin. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Revenues --
Principal Transactions" and "Commitments and Contingent Liabilities" note in the
Notes to Consolidated Financial Statements in the Company's 1997 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
As registered broker-dealers and NASD member organizations, Schwab and M&S
are required by Federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of between-investment cash balances. SIPC is funded through assessments
on registered broker-dealers. In addition, in 1997, Schwab purchased from a
private surety company additional account protection of up to $99.5 million per
customer, as defined, for customer securities positions only. Stocks, bonds,
mutual funds and money market funds are considered securities and are protected
on a share basis for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
Schwab is also authorized by the Municipal Securities Rulemaking Board to
conduct transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the CBOE govern the
amount of margin customers must provide and maintain in writing uncovered
options.
As a California state-chartered trust company, CSTC is primarily regulated
by the California State Banking Department. Since it provides employee benefit
plan trust services, CSTC is also required to comply with the Employee
Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to
oversight by both the Internal Revenue Service and Department of Labor. CSTC is
required under ERISA to maintain a fidelity bond for the protection of employee
benefit trusts for which it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority (SFA) in the United Kingdom,
and engages in business development activities on behalf of Schwab.
Charles Schwab Europe is registered as a broker-dealer with the SFA in the
United Kingdom.
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 and is
designed to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 of the Securities Exchange Act
of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than 15 consecutive
business days; NYSE Rule 326 also prohibits the expansion of business if net
capital is less than 5% of aggregate debit items for more than 15 consecutive
business days. The provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings during
the following six months) would result in a reduction of a firm's net capital to
the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital Resources
- -- Liquidity" in the Company's 1997 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1997, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $156 million and had total regulatory net capital
of $823 million. At December 31, 1997, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $667 million, $512 million and $434 million,
respectively.
At December 31, 1997, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital of
$5 million. At December 31, 1997, the amount in excess of its minimum required
net capital was $4 million.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. In 1997, Schwab entered into a lease for 396,000 square
feet of office space located at 211 Main Street in San Francisco, California.
The lease expires in 2018 and includes two ten-year extension options at then
current market rates. In addition to these locations, Schwab also leases space
in other buildings for its San Francisco operations aggregating 755,000
additional square feet at year-end 1997. M&S' headquarters are located in leased
office space in Jersey City, New Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception.
The Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
330,000 and 164,000 square feet, respectively. The Company leases the service
centers located in Orlando and Denver, with 217,000 and 163,000 square feet,
respectively.
The Company owns its primary data center facility located in Phoenix with
105,000 square feet.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is set forth
under the caption "Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of
Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the ticker symbol SCH. The number of common stockholders of record as of
March 12, 1998 was 6,667.
The other information required to be furnished pursuant to this item is set
forth under the caption "Quarterly Financial Information (Unaudited)" in the
Company's 1997 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is set forth
under the caption "Selected Financial and Operating Data" in the Company's 1997
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Company's 1997 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1997 and
1996 are summarized as follows (dollars in millions):
Three Months Ended
December 31,
1997 1996
---- ----
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 6,353 $ 6,544
Average interest rate 5.42% 5.33%
Margin loans to customers:
Average balance outstanding $ 7,702 $ 4,812
Average interest rate 7.74% 7.55%
Average yield on interest-earning assets 6.69% 6.27%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $ 11,180 $ 9,137
Average interest rate 4.63% 4.42%
Other interest-bearing sources:
Average balance outstanding $ 1,217 $ 926
Average interest rate 4.43% 4.24%
Average noninterest-bearing portion $ 1,658 $ 1,293
Average interest rate on funding sources 4.07% 3.90%
Summary:
Average yield on interest-earning assets 6.69% 6.27%
Average interest rate on funding sources 4.07% 3.90%
- -----------------------------------------------------------------
Average net interest margin 2.62% 2.37%
=================================================================
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1996 to the fourth quarter of 1997 was primarily due to higher levels
of average earning assets.
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk
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 -- Market Risk" in the Company's 1997 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 8. Financial Statements and
Supplementary Data
The information required to be furnished pursuant to this item is set forth
in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1997 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of
the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the SEC pursuant to Regulation 14A within 120 days after
December 31, 1997 (the Proxy Statement) under the captions "The Board of
Directors" and "Principal Stockholders." Information regarding Lawrence J.
Stupski has been omitted from the Proxy Statement, pursuant to Instruction 3 to
Item 401(a) of Regulation S-K, due to his retirement as Vice Chairman and
Director effective January 1998 and May 1998, respectively.
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2001, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
==============================================================================================================================
Executive Officers of the Registrant
Name Age Title
---- --- -----
Charles R. Schwab 60 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 49 President, Co-Chief Executive Officer,
Chief Operating Officer, and Director
Timothy F. McCarthy 46 President and Chief Operating Officer, Charles Schwab
& Co., Inc.
Karen W. Chang 49 Enterprise President - General Investor Services
John Philip Coghlan 46 Enterprise President - Retirement Plan Services
Linnet F. Deily 52 Enterprise President - Services for Investment Managers
Lon Gorman 49 Enterprise President - Capital Markets and Trading
Daniel O. Leemon 44 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 43 Executive Vice President and Chief Information Officer
Susanne D. Lyons 40 Enterprise President - Retail Investor Specialized Services
Gideon Sasson 42 Enterprise President - Electronic Brokerage
Steven L. Scheid 44 Executive Vice President and Chief Financial Officer
Tom Decker Seip 48 Enterprise President - Mutual Funds and International
Luis E. Valencia 53 Executive Vice President and Chief Administrative Officer
==============================================================================================================================
Mr. Schwab has been Co-Chief Executive Officer of the Company since January
1, 1998, and Chairman and a director of the Company since its incorporation in
1986. Mr. Schwab was Chief Executive Officer of the Company from 1986 to 1997.
Mr. Schwab was a founder of Schwab in 1971 and has been its Chairman since 1978.
Mr. Schwab is currently a director of The Gap, Inc., Transamerica Corporation,
Siebel Systems, Inc., AirTouch Communications, Inc. and a trustee of The Charles
Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab
Annuity Portfolios, all registered investment companies.
Mr. Pottruck has been Co-Chief Executive Officer of the Company since
January 1, 1998, Chief Operating Officer and a director of the Company since
1994, and President of the Company since 1992. Mr. Pottruck has been Chief
Executive Officer of Schwab since 1992 and was President of Schwab from 1988 to
1997. Mr. Pottruck joined Schwab in 1984. Mr. Pottruck was named a director of
Decibel Instruments, Inc., McKesson Corporation and Preview Travel, Inc. in
1997.
Mr. McCarthy has been President and Chief Operating Officer of Schwab and
First Executive Vice President of the Company since September 1997. Mr. McCarthy
was Executive Vice President - Financial Products and International Group of the
Company and Schwab from 1996 to 1997, and was Executive Vice President - Mutual
Funds of the Company and Schwab and Chief Executive Officer of CSIM from 1995 to
1997. Before joining Schwab in 1995, Mr. McCarthy was Chief Executive Officer of
Jardine Fleming Unit Trusts Ltd., a mutual fund company, from 1994 to 1995. From
1987 to 1994, Mr. McCarthy held various executive positions with Fidelity
Investments, including President of Fidelity Investments Advisor Group,
President of National Financial Institutional Services and Executive Director of
Fidelity Brokerage Group.
Ms. Chang has been Enterprise President - General Investor Services of
Schwab and Executive Vice President of the Company since October 1997. Ms. Chang
was Executive Vice President - Retail Branch Network of the Company and Schwab
from 1996 to 1997 and Senior Vice President - Retail Branch Network of the
Company and Schwab from
1994 to 1996. Prior to joining Schwab in 1994, Ms. Chang was Senior Marketing
Vice President of American Express Company from 1989 to 1994.
Mr. Coghlan has been Enterprise President - Retirement Plan Services of
Schwab since October 1997 and Executive Vice President of the Company since
1992. Mr. Coghlan was Executive Vice President of Schwab and General Manager of
Schwab Institutional from 1992 to 1997. Mr. Coghlan joined Schwab in 1986,
became Vice President in 1988 and became Senior Vice President in 1990.
Ms. Deily has been Enterprise President - Services for Investment Managers
of Schwab and Executive Vice President of the Company since October 1997. Ms.
Deily was Executive Vice President and General Manager - Services for Investment
Managers of the Company and Schwab from 1996 to 1997. Before joining Schwab in
1996, Ms. Deily was Chairman, President and Chief Executive Officer of First
Interstate Bank of Texas from 1991 to 1996.
Mr. Gorman has been Enterprise President - Capital Markets and Trading of
Schwab and Executive Vice President of the Company since October 1997. Mr.
Gorman was Executive Vice President - Capital Markets and Trading of the Company
and Schwab from 1996 to 1997. Before joining Schwab in 1996, Mr. Gorman was a
Managing Director of Credit Suisse First Boston Corporation from 1988 to 1996.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon
held various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
Ms. Lepore has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 1993. Ms. Lepore joined Schwab in 1983 and
became Senior Vice President in 1989.
Ms. Lyons has been Enterprise President - Retail Investor Specialized
Services of Schwab and Executive Vice President of the Company since October
1997. Ms. Lyons was Executive Vice President - Retail Marketing of the Company
and Schwab from 1996 to 1997 and Senior Vice President - Active Trader of the
Company and Schwab from 1994 to 1996. Ms. Lyons was Senior Vice President -
Retail Service Delivery of the Company and Schwab from 1993 to 1994 and Senior
Vice President - Retail Marketing of the Company and Schwab from 1992 to 1993.
Ms. Lyons joined Schwab in 1992.
Mr. Sasson has been Enterprise President - Electronic Brokerage of Schwab
and Executive Vice President of the Company since November 1997. Mr. Sasson was
Senior Vice President - Electronic Brokerage of the Company and Schwab from 1995
to 1997. Before joining Schwab in 1995, Mr. Sasson was Vice President -
Information Services of International Business Machines Corporation in 1995. Mr.
Sasson was Vice President, Systems Engineering of FYI Online, a joint venture of
MCI Communications Corporation and Equifax, Inc., from 1992 to 1995.
Mr. Scheid has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since 1996. Before joining Schwab in 1996, Mr. Scheid was
Executive Vice President of Finance of First Interstate Bancorp from 1994 to
1996 and was Principal Financial Officer from 1995 to 1996. From 1990 to 1994,
Mr. Scheid was Chief Financial Officer of First Interstate Bank of Texas.
Mr. Seip has been Enterprise President - Mutual Funds and International of
Schwab and Executive Vice President of the Company since October 1997, and Chief
Executive Officer of CSIM since December 1997. Mr. Seip was Executive Vice
President - Retail Brokerage of the Company and Schwab from 1994 to 1997. Mr.
Seip was President of CSIM from 1992 to 1994 and Chief Operating Officer of CSIM
from 1991 to 1994. From 1992 to 1994, Mr. Seip was Executive Vice President -
Mutual Funds and Fixed Income Products of the Company and Schwab. Mr. Seip
joined Schwab in 1983.
Mr. Valencia has been Executive Vice President and Chief Administrative
Officer of the Company and Schwab since 1996. From 1994 to 1996, Mr. Valencia
was Executive Vice President - Human Resources of the Company and Schwab. Before
joining Schwab in 1994, Mr. Valencia served as a Managing Director of Commercial
Credit Company, a subsidiary of Travelers Group Inc. engaged in consumer finance
for Travelers Group Inc., from 1993 to 1994. From 1975 to 1993, Mr. Valencia
held various positions with Citicorp, including President and Chief Executive
Officer of Transaction Technology, a subsidiary of Citicorp, from 1990 to 1993.
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 "Director Compensation," "Executive Compensation,"
"Employment and Severance Agreements," "Executive Compensation Table,"
"Option Grants," "Options Exercised" and "Certain Transactions."
Item 12. Security Ownership of Certain Bene-
ficial 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 Related
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 1997 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
On December 24, 1997, the Registrant filed a Current Report on Form 8-K
relating to (i) fourth quarter and year-end expected earnings and (ii)
announcement of the settlement of certain class-action litigation.
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
3.7 Third Restated Certificate of Incorporation, as amended on May 6, 1996,
of the Registrant, filed as Exhibit 3.7 to the Registrant's Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
3.8 Second Restated Bylaws, as amended on July 17, 1996, of the Registrant,
filed as Exhibit 3.8 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any instrument
with respect to long-term debt for which securities authorized thereunder exceed
10% of the total assets of the Registrant and its subsidiaries on a consolidated
basis. Copies of instruments with respect to long-term debt of lesser amounts
will be provided to the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former
shareholders of Schwab Holdings, Inc. *
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab & Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated February 21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta Systems,
Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush Street
Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant and
certain members of the Board of Directors of Registrant, filed as Exhibit 10.34
to the Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.57 Registration Rights and Stock Restriction Agreement, dated as of March
31, 1987, between the Registrant and the holders of the Common Stock, filed as
Exhibit 4.23 to Registrant's Registration Statement No. 33-16192 on Form S-1 and
incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant, filed as
Exhibit 10.72 to the Registrant's Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25, 1990, filed
as Exhibit 10.87 to the Registrant's Form 10-Q for the quarter ended September
30, 1995 and incorporated herein by reference.
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, effective January 1, 1992, dated
December 20, 1991, filed as Exhibit 10.101 to the Registrant's Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992, dated June 30,
1992, filed as Exhibit 10.116 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock Ownership
Plan and Trust. +
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended,
effective January 1, 1994, filed as Exhibit 10.132 to Registrant's Form 10-K for
the year ended December 31, 1993 and incorporated herein by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee Directors,
filed as Exhibit 4.4 to the Registrant's Registration Statement No. 33-47842 on
Form S-8 and incorporated herein by reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and incorporated
herein by reference. +
10.143 Form of Nonstatutory Stock Option Agreement, filed as Exhibit 10.143 to
the Registrant's Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit 10.144 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994 and incorporated
herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995, filed as Exhibit 10.146 to the Registrant's Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference. +
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995 (formerly the
Annual Executive Bonus Plan), filed as Exhibit 10.147 to the Registrant's Form
10-K for the year ended December 31, 1994 and incorporated herein by reference.+
10.149 Employment Agreement dated as of March 31, 1995 between the Registrant
and Charles R. Schwab, filed as Exhibit 10.149 to the Registrant's Form 10-K for
the year ended December 31, 1994 and incorporated herein by reference. +
10.152 The Charles Schwab Profit Sharing and Employee Stock Ownership Plan,
amended July 6, 1995, effective January 1, 1995 and April 1, 1995, filed as
Exhibit 10.152 in the Registrant's Form 10-Q for the quarter ended June 30, 1995
and incorporated herein by reference. +
10.155 Forms of Restricted Share Award Agreements, incorporating performance
vesting provisions and/or supplemental cash payment provisions, filed as Exhibit
10.155 in the Registrant's Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by letter
agreement dated September 21, 1995 and by Second Amendment to Agreement of Sale
dated September 22, 1995, between American Express Company and Charles Schwab &
Co., Inc., regarding American Express Western Regional Operations Center located
at 2423 Lincoln Drive, Phoenix, Arizona, filed as Exhibit 10.156 in the
Registrant's Form 10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference.
10.157 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
effective January 1, 1996, filed as Exhibit 10.157 to the Registrant's Form 10-K
for the year ended December 31, 1995 and incorporated herein by reference. +
10.158 Credit Agreement dated June 28, 1996 between the Registrant and the
banks listed therein, filed as Exhibit 10.158 to the Registrant's Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
10.159 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended September 17, 1996, with form of Non-Qualified Stock Option
Agreement (Executive Officer Stock Option Plan (1987)) attached, filed as
Exhibit 10.159 to the Registrant's Form 10-Q for the quarter ended September 30,
1996 and incorporated herein by reference. +
10.160 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
September 17, 1996, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached (supersedes Exhibit 10.73), filed as Exhibit 10.160 to
the Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.161 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended
September 17, 1996 (supersedes Exhibit 10.141), filed as Exhibit 10.161 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference. +
10.162 The Charles Schwab Corporation Deferred Compensation Plan, as amended
September 17, 1996, filed as Exhibit 10.162 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co. and
Charles Schwab & Co., Inc. dated October 8, 1996, filed as Exhibit 10.163 to the
Registrant's Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between Post-
Montgomery Associates and Charles Schwab & Co., Inc. dated October 4, 1996,
filed as Exhibit 10.164 to the Registrant's Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan,
restated to include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan
(1987)) attached, (supersedes Exhibit 10.159) filed as Exhibit 10.166 to the
Registrant's Form 10-Q for the quarter ended March 31, 1997 and incorporated
herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of Non-Qualified Stock
Option Agreement attached, (supersedes Exhibit 10.160) filed as Exhibit 10.167
to the Registrant's Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference. +
10.168 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 13, 1996 (supersedes Exhibit 10.152) filed as Exhibit
10.168 to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996, dated May
8, 1996 filed as Exhibit 10.169 to the Registrant's Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference. +
10.170 The Charles Schwab Corporation 1992 Stock Incentive Plan Restated as of
May 12, 1997 (supersedes Exhibit 10.161) filed as Exhibit 10.170 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.171 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8) filed as Exhibit
10.171 to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.172 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.143) filed as
Exhibit 10.172 to the Registrant's Form 10-Q for the quarter ended June 30, 1997
and incorporated herein by reference. +
10.173 Form of Nonstatutory Stock Option and Performance Unit Agreement of The
Charles Schwab Corporation 1992 Stock Incentive Plan filed as Exhibit 10.173 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.174 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.144) filed as
Exhibit 10.174 to the Registrant's Form 10-Q for the quarter ended June 30, 1997
and incorporated herein by reference. +
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified Stock
Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the Registrant's
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form of
Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as Exhibit 10.179
to the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit 10.180 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and incorporated
herein by reference. +
10.181 Commercial office lease of 211 Main Street between Main Plaza, LLC and
Charles Schwab & Co., Inc. dated August 8, 1997 filed as Exhibit 10.181 to the
Registrant's Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference.
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147) filed as
Exhibit 10.182 to the Registrant's Form 10-Q for the quarter ended September 30,
1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's Form 10-Q
for the quarter ended September 30, 1997 and incorporated herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached (supersedes Exhibit 10.160). +
10.187 The Charles Schwab Corporation 1992 Stock Incentive Plan (Restated to
include Amendments through October 22, 1997) (supersedes Exhibit 10.170 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997). +
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock Option
Agreement (Executive Officer Stock Option Plan (1987) attached (supersedes
Exhibit 10.159). +
10.189 Annual Executive Individual Performance Plan as amended January 1,
1998. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171). +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172). +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of The
Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes Exhibit
10.173). +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174). +
10.195 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 1, 1997 (supersedes Exhibit 10.168). +
11.1 Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1997 Annual Report to
Stockholders, which have been incorporated herein by reference. Except for such
portions, such annual report is not deemed to be "filed" herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
27.2 Restated Financial Data Schedule (electronic only).
27.3 Restated Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's
Registration Statement No. 33-16192 on Form S-1, as amended and declared
effective on September 22, 1987.
+ Management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1998.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ CHARLES R. SCHWAB
-------------------------
Charles R. Schwab
Chairman, Co-Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 27, 1998.
Signature Title
--------- -----
/s/ CHARLES R. SCHWAB Chairman, Co-Chief Executive Officer
- ----------------------- and Director
Charles R. Schwab (principal executive officer)
/s/ DAVID S. POTTRUCK Co-Chief Executive Officer,
- ------------------------ Chief Operating Officer, President and Director
David S. Pottruck (principal executive officer)
/s/ STEVEN L. SCHEID Executive Vice President
- ------------------------ and Chief Financial Officer
Steven L. Scheid (principal financial and accounting officer)
/s/ NANCY H. BECHTLE Director
- ------------------------
Nancy H. Bechtle
/s/ C. PRESTON BUTCHER Director
- ------------------------
C. Preston Butcher
/s/ DONALD G. FISHER Director
- ------------------------
Donald G. Fisher
/s/ ANTHONY M. FRANK Director
- ------------------------
Anthony M. Frank
/s/ FRANK C. HERRINGER Director
- ------------------------
Frank C. Herringer
/s/ STEPHEN T. McLIN Director
- ------------------------
Stephen T. McLin
/s/ GEORGE P. SHULTZ Director
- ------------------------
George P. Shultz
/s/ LAWRENCE J. STUPSKI Director
- ------------------------
Lawrence J. Stupski
/s/ ROGER O. WALTHER Director
- ------------------------
Roger O. Walther
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Statements F-6
Schedule II - Valuation and Qualifying Accounts F-7
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1997 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, and have
issued our report thereon dated February 23, 1998; such consolidated financial
statements and report are included in your 1997 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the financial
statement schedules of the Company appearing on pages F-3 through F-7. 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 LLP
San Francisco, California
February 23, 1998
F-2
=================================================================================================================================
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
December 31,
1997 1996
---- ----
Assets
Cash and cash equivalents $ 79,802 $ 74,785
Advances to subsidiaries 350,606 250,276
Investments in subsidiaries, at equity 1,083,122 820,289
Other assets 4,618 5,004
------------------------------------------------------------------------------------------------------------------------
Total $ 1,518,148 $ 1,150,354
========================================================================================================================
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 12,031 $ 17,799
Borrowings 361,000 278,000
------------------------------------------------------------------------------------------------------------------------
Total liabilities 373,031 295,799
Stockholders' equity 1,145,117 854,555
------------------------------------------------------------------------------------------------------------------------
Total $ 1,518,148 $ 1,150,354
========================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
F-3
=================================================================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
Interest revenue $ 30,699 $ 26,287 $ 18,879
Interest expense (20,546) (19,091) (13,886)
-------------------------------------------------------------------------------------------------------------------------
Net interest revenue 10,153 7,196 4,993
Other revenues 544 268 1,032
Other income (expenses) 4,423 (3,400) (2,984)
-------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 15,120 4,064 3,041
Income tax expense 5,692 1,568 1,235
-------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 9,428 2,496 1,806
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 199,869 154,922 134,418
Dividends paid by subsidiaries 60,980 76,385 36,380
-------------------------------------------------------------------------------------------------------------------------
Total 260,849 231,307 170,798
Net income $ 270,277 $ 233,803 $ 172,604
=========================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
F-4
=================================================================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income $ 270,277 $ 233,803 $ 172,604
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (199,869) (154,922) (134,418)
Change in other assets 279 (157) (50)
Change in accrued expenses and other liabilities (4,122) (7,805) 4,455
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 66,565 70,919 42,591
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Advances to subsidiaries (51,939) (8,554) (25,042)
Increase in net investment in subsidiaries (50,614) (10,132) (16,206)
Cash payments for businesses acquired (1,200) (4,709) (63,696)
Other (1,720)
------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (103,753) (23,395) (106,664)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 111,000 64,000 70,000
Repayment of borrowings (28,000) (26,000)
Dividends paid (37,091) (31,495) (24,249)
Purchase of treasury stock (18,234) (28,171) (17,345)
Proceeds from stock options exercised and other 14,530 7,729 12,972
------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 42,205 (13,937) 41,378
------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,017 33,587 (22,695)
Cash and cash equivalents at beginning of year 74,785 41,198 63,893
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 79,802 $ 74,785 $ 41,198
==================================================================================================================
See Notes to Condensed Financial Statements.
=================================================================================================================================
F-5
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
1. Introduction and basis of presentation
The condensed financial statements of The Charles Schwab Corporation (the
Parent Company) should be read in conjunction with the consolidated
financial statements of The Charles Schwab Corporation and subsidiaries
(the Company) and notes thereto found in the Company's 1997 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No.
13.1 of this report.
2. Supplemental cash flow information
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
Year ended December 31,
1997 1996 1995
---- ---- ----
Income taxes paid (received) $ 2,608 $ (48) $ (182)
========= ========= =========
Interest paid:
Borrowings $ 18,773 $ 16,887 $ 11,101
Other 364 339 183
--------- --------- ---------
Total interest paid $ 19,137 $ 17,226 $ 11,284
========= ========= =========
3. Common stock split
The Company's Board of Directors declared a three-for-two common stock
split, distributed September 1997, effected in the form of a stock
dividend.
F-6
=================================================================================================================================
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
Additions
Balance at ------------------------ Balance at
Beginning Charged End
Description of Year to Expense Other Written off of Year
----------- ------- ---------- ----- ----------- -------
For the year ended
December 31, 1997:
Allowance for doubtful accounts $ 5,518 $ 3,896 $ 195 $(1,892) $ 7,717
=======================================================================
For the year ended
December 31, 1996:
Allowance for doubtful accounts $ 3,700 $ 2,651 $ 99 $ (932) $ 5,518
=======================================================================
For the year ended
December 31, 1995:
Allowance for doubtful accounts $ 3,204 $ 1,349 $ 272 $(1,125) $ 3,700
=======================================================================
=================================================================================================================================
F-7