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, 1999 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
120 Kearny Street, San Francisco, CA 94108
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock - $.01 par value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 6, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $30,973,147,178. For purposes of this
information, the outstanding shares of Common Stock owned by directors and
executive officers of the registrant, and certain investment companies managed
by Charles Schwab Investment Management, Inc. were deemed to be shares of the
voting stock held by affiliates.
The number of shares of Common Stock outstanding as of March 6, 2000 was
837,201,644* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1999 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 3, 2000 by reference to portions of that document.
* Restated for the July 1999 two-for-one common stock split.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
Part I
Item 1. Business --------------------------------------------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------------------------------------------- 11
Item 3. Legal Proceedings ------------------------------------------------------------------------------------ 11
Item 4. Submission of Matters to a Vote of Security Holders -------------------------------------------------- 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -------------------------------- 12
Item 6. Selected Financial Data ------------------------------------------------------------------------------ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------- 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------- 13
Item 8. Financial Statements and Supplementary Data ---------------------------------------------------------- 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ----------------- 13
Part III
Item 10. Directors and Executive Officers of the Registrant --------------------------------------------------- 13
Item 11. Executive Compensation ------------------------------------------------------------------------------- 16
Item 12. Security Ownership of Certain Beneficial Owners and Management --------------------------------------- 16
Item 13. Certain Relationships and Related Transactions ------------------------------------------------------- 16
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -------------------------------------- 17
Exhibit Index ---------------------------------------------------------------------------------- 18
Signatures ------------------------------------------------------------------------------------- 24
Index to Financial Statement Schedules --------------------------------------------------------- F-1
FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K, including the
information incorporated by reference, contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may"
and other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. These forward-looking statements,
which reflect management's beliefs, objectives and expectations as of the date
hereof, are necessarily estimates based on the best judgment of our senior
management. These statements relate to, among other things, the impact on the
Company's results of operations of the reduced pricing on equity online trades
for certain customers, the impact on the Company's results of operations of the
fee adjustments related to minimum account balances, the ability of the Company
to realize the expected benefits of acquisitions, the Company's potential status
under the Bank Holding Company Act, the ability to pursue the Company's strategy
to attract and retain customer assets, the impact on the Company's results of
operations of the Internet trade pricing for independent investment managers,
the availability of the Company's information systems, the effects of increased
competition, and the declines in average commission per revenue trade and
average revenue per share traded. Achievement of the expressed beliefs,
objectives and expectations is subject to certain risks and uncertainties that
could cause actual results to differ materially from those beliefs, objectives
and expectations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K or, in the case of documents incorporated by reference, as
of the date of those documents.
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. In this report, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Schwab Capital Markets L.P.
(SCM) (prior to March 1, 2000, this subsidiary was known as Mayer & Schweitzer,
Inc.), a subsidiary acquired in 1991, is a market maker in Nasdaq and other
securities that provides trade execution services primarily to broker-dealers
and institutional customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and Charles Schwab Europe
(CSE). CSIM, incorporated in 1989, acts as the investment advisor for Schwab's
proprietary mutual funds. The Company refers to certain funds for which CSIM is
the investment advisor as the SchwabFunds(R). CSTC, incorporated in 1992, serves
as trustee for employee benefit plans, primarily 401(k) plans. CSE, acquired in
1995 to expand the Company's international operations, is a retail securities
brokerage firm located in the United Kingdom.
The Company continues to enhance the ways it helps investors develop,
evaluate and access their investment choices. In 1999, Schwab introduced a
number of new Internet-based investment services, including Schwab Signature
Services(TM), which provides enhanced personal and online services for customers
with higher asset balances or trading volumes with Schwab, and Velocity(TM), an
online trading system which provides enhanced trade information and order
execution for certain of Schwab's customers who trade frequently. Also in 1999,
Schwab introduced MyResearch(TM) report, which enables customers to design their
own research reports, and MySchwab(TM), which allows users to customize a
personal Schwab home page with content provided by Excite@Home. In addition,
Schwab introduced SchwabAlerts(TM), which delivers investment and market
activity news to customers via both wireless and regular e-mail, and
eConfirms(TM), which delivers trade confirmations electronically. Further,
Schwab enabled customers to open a new account, update contact information, sign
up for the Schwab MoneyLink(R) service and request a check through automated
Web-based processes.
There were several new developments in the Company's business during 1999.
The Company and several major financial services firms formed a new electronic
communications network (ECN), REDIBook ECN LLC, which utilizes technology
developed by Spear, Leeds & Kellogg LP. Participation in this ECN has enabled
Schwab to launch an extended-hours trading session for certain Nasdaq and
selected exchange-listed stocks. Also in 1999, the Company entered into an
agreement with TD Waterhouse Group, Inc., Ameritrade Holding Corporation, KPCB
Holdings, Inc., Trident Capital Management, LLC and Benchmark Capital Partners
to form Epoch Partners, Inc., a new online investment bank that intends to focus
on information technology and Internet companies. This new company plans to
commence operations in 2000. In addition, a precedent-setting no-action letter
from the Securities and Exchange Commission (SEC) will enable Schwab to be the
first brokerage firm to provide individual investors with access to Web-based
presentations by companies in the process of going public. Other new
developments during 1999 include the formation of alliances with Financial
Engines, Inc. and mPower.com, Inc. to provide participants in SchwabPlan(R), a
bundled 401(k) offering, with access to online investment guidance services; and
with OffRoad Capital to provide certain customers with access to private equity
investment opportunities.
The Company moved to expand its international presence through several
transactions during 1999, including entering into a joint venture agreement with
The Tokio Marine and Fire Insurance Co., Limited (TMI) and certain of its
related companies (collectively, the TMI Group). The Company and each member of
the TMI Group are shareholders in a Japanese corporation, Charles Schwab Tokio
Marine Securities Co., Ltd. (CSTMS), in which the Company has a 50% equity
interest. CSTMS, whose business is expected to commence in the first half of
2000, will initially provide retail brokerage and investment services in U.S.
dollar-denominated securities to residents of Japan. CSTMS is currently expected
to offer Japanese Yen-denominated securities later in 2000. Also in 1999, the
Company completed the acquisitions of Canadian-based Priority Brokerage Inc. and
Porthmeor Securities Inc. These two companies were combined to create Charles
Schwab Canada, Co. (CS Canada), a subsidiary of CSC. Additionally in 1999, the
Company signed a definitive agreement to form a joint venture with ecorp Limited
to provide financial services to Australian and New Zealand investors. This
transaction closed in February 2000. Further, during 1999 CSE extended online
and telephonic services to Swiss investors.
In February 2000, the Company announced a plan to provide customers who
meet certain online equity trading criteria with reduced pricing. This price
reduction is designed to enhance the Company's competitive position with
actively trading investors. Also in February 2000, the Company announced a plan
to increase fees related to minimum account balances (effective April 1, 2000).
This fee adjustment is designed to more effectively align account fees with the
expanded and improved services currently available to Schwab customers. See also
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Revenues -- Commissions and Other Revenues" in the Company's 1999
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
During 1999, CSC's Board of Directors declared a two-for-one common stock
split, distributed July 1999, effected in the form of a 100% stock dividend.
Share and per share information throughout this report have been restated.
Subsequent Events
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust), a leading wealth management
firm serving affluent individuals and families. This transaction is intended to
combine the Company's experience in technology, operations, advertising and
distribution with U.S. Trust's highly personalized service model, research
capabilities, trust and estate services, money management skills and reputation
in wealth management services. Management believes that, upon the consummation
of this transaction, the combined organization can create a comprehensive,
integrated, value-priced, wealth management offering for affluent households,
including both individual investors and customers of independent investment
managers.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, Inc. (CyBerCorp), a closely-held electronic
trading technology and brokerage firm providing Internet-based services to
highly active, online investors. The Company intends to utilize CyBerCorp's
order entry, routing and management technology to attract and retain actively
trading individual investors. The Company expects that the technology will also
benefit Schwab's independent investment advisors' customers and other
institutional and international investors. This acquisition closed on March 1,
2000.
See also both "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Subsequent Events" and note "16 -
Subsequent Events" in the Notes to Consolidated Financial Statements in the
Company's 1999 Annual Report to Stockholders, which are incorporated herein by
reference to Exhibit No. 13.1 of this report.
(b) Financial Information About Segments. The Company provides financial
services to individuals, institutional customers and broker-dealers through
three segments -- Individual Investor, Institutional Investor and Capital
Markets. The Individual Investor segment includes the Company's domestic and
international retail operations. The Institutional Investor segment provides
custodial, trading and support services to independent investment managers, and
serves company 401(k) plan sponsors and third-party administrators. The Capital
Markets segment provides trade execution services in Nasdaq, exchange-listed and
other securities primarily to broker-dealers and institutional customers. The
Company's mutual fund services are considered a product and not a segment.
Mutual fund service fees are included in both the Individual Investor and
Institutional Investor segments. For financial information by segment and
geographic area, and for revenues by major customer for the three years ended
December 31, 1999, see note "14 - Segment Information" in the Notes to
Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
(c) Narrative Description of Business. The Company's primary focus is
serving retail investors in the U.S., either directly or through independent
investment managers, who want access to a broad selection of products and
services, as well as investment news and information, tailored to meet their
financial needs. The Company, through Schwab, serves 6.6 million active customer
accounts(a). Customer assets in these accounts totaled $725.2 billion at
December 31, 1999.
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry -- retail brokerage,
mutual funds, support services for independent investment managers, 401(k)
defined contribution plans and equity securities market-making. To pursue its
strategy and its objective of long-term profitable growth, the Company plans to
continue to leverage its competitive advantages. These advantages include a
nationally recognized brand, a broad range of products and services,
multi-channel delivery systems and an ongoing investment in technology. While
the Company's business continues to be predominantly conducted in the U.S., in
1999 the Company continued to selectively expand its international presence.
The table below shows the Company's revenues on a comparative basis for the
three years ended December 31, 1999.
- ----------------
(a) Accounts with balances or activity within the preceding eight months.
Sources of Revenue
(Dollar amounts in thousands)
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Amount Percent Amount Percent Amount Percent
------------------------- ------------------------- -------------------------
Revenues
Commissions
Nasdaq $ 977,851 25% $ 604,712 22% $ 465,137 20%
Exchange-listed securities 606,039 15% 485,343 18% 527,321 23%
Options 174,542 4% 122,409 5% 103,372 5%
Mutual funds 104,874 3% 96,919 3% 78,193 3%
- -----------------------------------------------------------------------------------------------------------------------------
Commissions 1,863,306 47% 1,309,383 48% 1,174,023 51%
- -----------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees
SchwabFunds(R) 507,149 13% 372,870 14% 283,280 13%
Mutual Fund OneSource(R) 229,237 6% 174,980 6% 135,040 6%
Other 13,755 11,391 9,353
- -----------------------------------------------------------------------------------------------------------------------------
Mutual fund service fees 750,141 19% 559,241 20% 427,673 19%
- -----------------------------------------------------------------------------------------------------------------------------
Interest revenue
Margin loans to customers 982,683 25% 670,965 24% 489,197 21%
Investments, customer-related 404,003 10% 400,453 15% 376,243 16%
Other 84,394 2% 56,080 2% 34,595 2%
Interest expense (768,403) (19%) (651,881) (24%) (546,483) (24%)
- -----------------------------------------------------------------------------------------------------------------------------
Interest revenue, net of
interest expense 702,677 18% 475,617 17% 353,552 15%
- -----------------------------------------------------------------------------------------------------------------------------
Principal transactions
Nasdaq 411,366 10% 231,336 8% 221,427 9%
Other 89,130 3% 55,418 2% 36,558 2%
- -----------------------------------------------------------------------------------------------------------------------------
Principal transactions 500,496 13% 286,754 10% 257,985 11%
- -----------------------------------------------------------------------------------------------------------------------------
Other 128,202 3% 105,226 5% 85,517 4%
- -----------------------------------------------------------------------------------------------------------------------------
Total $3,944,822 100% $2,736,221 100% $2,298,750 100%
=============================================================================================================================
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report. Certain prior years' revenues and expenses have been reclassified
to conform to the 1999 presentation.
Advertising and Marketing Programs
The Company's nationwide advertising and marketing programs support its
strategy by continually reinforcing the strengths and key attributes of Schwab's
full-service offering. By maintaining a consistent level of visibility in the
marketplace, the Company seeks to establish a leading and lasting financial
services brand in a focused and cost-effective manner. The Company's advertising
and market development expense was $242 million in 1999, compared to $155
million in 1998 and $130 million in 1997. Expenditures for these programs helped
Schwab attract $106.9 billion in net new customer assets in 1999, compared to
$79.1 billion in 1998 and $68.9 billion in 1997. New accounts opened totaled
1,481,000 in 1999, compared to 1,380,000 in 1998 and 1,164,000 in 1997. Customer
assets from new accounts represented approximately 50% of net new customer
assets in each of the three years ended December 31, 1999.
The Company primarily uses a combination of network, cable and local
television, print media, national and local radio, and athletic event
sponsorship in its advertising to investors. Schwab also engages extensively in
targeted direct mail advertising through monthly statement "inserts" and special
mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
Products and Services
The Company offers a broad range of products and services to meet
customers' varying investment and financial needs, including help and advice and
access to investment research, news and information.
Services for Retail Investors. Retail investors, through the Individual
Investor segment or indirectly through the Institutional Investor segment, have
access to the accounts, help and advice, investment education, research and
analysis tools, financing and mutual funds described below.
Accounts and Features. The Company offers the purchase and sale of
securities which include Nasdaq, exchange-listed and other equity securities,
options, mutual funds, unit investment trusts, variable annuities and fixed
income investments, including U.S. Treasuries, zero-coupon bonds,
exchange-listed and over-the-counter corporate bonds, municipal bonds,
Government National Mortgage Association securities and certificates of deposit.
The Company also offers certain of its customers initial and secondary public
stock offerings, debt underwritings, 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, 1999, 324,000 accounts had such approval. To write uncovered options,
customers must go through an additional approval process and must maintain a
significantly higher level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept, on a weekly basis, into certain taxable or
state-specific municipal tax-exempt SchwabFunds(R) money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One(R) brokerage account. A customer may access available funds in his or
her Schwab One account either with a personal check or a VISA(R) debit card, in
addition to the Schwab MoneyLink(R) and Schwab BillPay(TM) services offered with
all brokerage accounts. When a Schwab One customer is approved for margin
trading, the checks and debit card also provide access to margin cash available.
For cash balances awaiting investment, Schwab pays interest to Schwab One
customers. Alternatively, qualifying Schwab One customers seeking tax-exempt
income may elect to have cash balances swept daily into state-specific municipal
tax-exempt SchwabFunds money market funds.
Schwab offers the Signature Services(TM) program to customers that either
have $100,000 in assets at Schwab or make at least 12 revenue trades per year.
This program provides such benefits as access to a dedicated team of registered
representatives, free research, and other services. Within the program,
customers have access to three additional levels of services that are based on
asset and trading levels. As part of the Signature Services program, Schwab
introduced the Schwab Access(TM) account. Designed to complement the Schwab One
account, Schwab Access is an account allowing customers to conduct everyday
payment activities at Schwab via the Internet. The Schwab Access account
features include online bill payment, unlimited checking, Gold VISA debit card,
returned check copies, unlimited money transfers within Schwab accounts and
no-fee ATM access. Cash balances in a Schwab Access account are swept daily into
a SchwabFunds money market fund.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of three
SchwabFunds money market funds. During 1999, active IRAs increased 19% to
2,500,000 accounts and customer assets in all IRAs increased 45% to $168.6
billion. Schwab also acts as custodian and broker for Keogh accounts.
Help and Advice. The Company's approach to advice is based on long-term
investment strategies and guidance on portfolio diversification and asset
allocation. The Company strives to demystify investing by educating and
assisting customers in the development of investment plans. This approach is
designed to be offered consistently across all of the Company's delivery
channels and provides customers with a wide selection of choices for their
investment needs. Schwab's registered representatives can assist investors in
developing asset allocation strategies and evaluating their investment choices,
and refer investors who desire additional guidance to independent investment
managers through the Schwab AdvisorSource(TM) service. In 1999, Schwab expanded
the AdvisorSource referral services program to include financial planners and
certified public accountants. Schwab also introduced customized portfolio
guidance through Schwab investment specialists and a range of new Web-based
planning and investment evaluation tools.
Investment Education, Research and Analysis Tools. Schwab provides
investors with investment education, research and analysis tools. In 1999,
Schwab introduced WebShops(TM), the first in a series of educational workshops,
designed to help investors increase their skills in using Schwab's online
services. Schwab provides various Internet-based research and analysis tools
including: The Analyst Center(TM), which connects customers to proprietary and
third-party investment research, guidance and decision-making tools; the
Positions Monitor(TM), which tracks customers' mutual fund and equity holdings'
historical performance; the Mutual Fund Performance Profile(TM), which allows
customers to analyze the performance of their entire mutual fund portfolio; and
the Stock Screener(TM), which allows customers to search over 9,000 equities
using their own criteria.
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 1999, Schwab's outstanding margin loans to customers
averaged $13.2 billion.
In permitting a customer to engage in transactions, Schwab faces credit
risk if the customer fails to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 under the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by Schwab
at interest costs lower than Schwab's costs of borrowing from alternative
sources, Schwab's cost of funds is reduced and its net income is enhanced. Such
interest savings contribute substantially to Schwab's profitability and, if a
significant reduction of customer cash balances were to occur, Schwab's
borrowings from other sources may have to increase and such profitability would
decline. To the extent Schwab's customers elect to have cash balances in their
brokerage accounts swept into certain SchwabFunds(R) money market funds, the
cash balances available to Schwab for investments or for financing margin loans
are reduced. However, Schwab receives mutual fund service fees from such funds
based upon average daily invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Management" in the Company's 1999 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
Mutual Funds. Schwab's Mutual Fund Marketplace(R) provides customers with
the ability to invest in over 1,900 third-party mutual funds from 316 fund
families. Within the Mutual Fund Marketplace, Schwab's Mutual Fund OneSource(R)
service enables customers to trade 1,143 mutual funds from 208 fund families
without incurring transaction fees.
Schwab's Mutual Fund OneSource service allows investors to access multiple
mutual fund companies, avoid brokerage transaction fees, and achieve investment
diversity among fund families. In addition, investors' recordkeeping and
investment monitoring are simplified through one consolidated statement. Fees
received by Schwab for providing services, including recordkeeping and
shareholder services, from the Mutual Fund OneSource program are based upon the
daily balances of customer assets invested in the participating funds through
Schwab and are paid by the funds and/or fund sponsors. Customer assets held by
Schwab that have been purchased through the Mutual Fund OneSource service,
excluding SchwabFunds, totaled $102.3 billion at the end of 1999.
Customer assets invested in Schwab's Mutual Fund Marketplace, excluding the
Mutual Fund OneSource service, totaled $74.3 billion at the end of 1999. 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 6% of total commission revenues in
1999 and 7% in both 1998 and 1997.
In addition to the third-party funds available through the Mutual Fund
Marketplace, Schwab offers a family of proprietary funds, referred to as the
SchwabFunds. SchwabFunds include money market funds, equity index funds, bond
funds, asset allocation funds, and funds that primarily invest in stock, bond
and money market funds. Qualifying Schwab customers may elect to have cash
balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds were
$107.9 billion at the end of 1999. Fees received by the Company from the
SchwabFunds, for providing transfer agent services, shareholder services,
administration and investment management, are based upon the daily balances of
customer assets invested in these funds.
Services for Independent Investment Managers. The Company provides
custodial, trading and support services to independent investment managers
through the Institutional Investor segment. To attract the business of accounts
managed by these managers, Schwab has a dedicated business unit which includes
experienced registered representatives assigned to individual managers.
Independent investment managers participating in this program who custody
customer accounts at Schwab may use SchwabLink(R), the SchwabLink Web(TM) site,
and the Managed Account Connection(TM). SchwabLink is a computer-based
information network which enables investment managers to access information
about their customers' accounts directly from Schwab's computer systems and to
enter their customers' trades online. The SchwabLink Web site enables investment
managers to use the Internet to communicate directly with Schwab service teams,
as well as receive news and information. The Managed Account Connection enables
investment managers to provide their clients with personalized equity portfolio
management by a variety of institutional asset managers. In 1999, Schwab
launched the Signature Services Alliance(TM), which provides enhanced
personalized services to customers of investment managers, including access to a
dedicated team of representatives and a new Schwab Institutional Web site(TM).
During 1999, Schwab customer assets held in accounts managed by approximately
5,800 active independent investment managers increased $66.7 billion, or 46%, to
a total of $213.1 billion. Independent investment managers generated 11% of
total commission revenues in 1999 and 12% in both 1998 and 1997.
In November 1999, the Company began to provide independent investment
managers with flat-fee pricing for Internet trades. This price reduction is
designed to enhance the Company's competitive position and to align the pricing
of Internet trades for independent investment managers with that offered to most
of the Company's individual customers. See also "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Revenues --
Commissions" in the Company's 1999 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Retirement Plan Services. The Company provides 401(k) recordkeeping and
other retirement plan services through the Institutional Investor segment.
Schwab serves company 401(k) plans directly through a dedicated sales force, as
well as indirectly through alliances with national and regional third-party
administrators. In the direct channel, SchwabPlan(R) is the Company's
comprehensive 401(k) retirement plan, which offers plan sponsors a wide array of
investment options, participant education and servicing, trustee services, and
participant-level recordkeeping. During 1999, Schwab continued to develop its
retirement plan services business, with customer assets in corporate retirement
plans growing $8.6 billion, or 44%, to $28.3 billion.
Market-Making Activities. Market-making activities in Nasdaq,
exchange-listed and other securities are conducted through the Capital Markets
segment. SCM provides trade execution services in Nasdaq and other securities
primarily to broker-dealers, including Schwab, and institutional customers. As a
market maker in Nasdaq and other securities, SCM generally executes customer
trades as principal. While substantially all Nasdaq security trades originated
by the customers of Schwab are directed to SCM, a substantial portion of SCM's
trading volume comes from parties other than Schwab.
Schwab has specialist operations on the Pacific Exchange, the Boston Stock
Exchange and the Cincinnati 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, 1999, Schwab had six specialists on the Pacific
Exchange, three specialists on the Boston Stock Exchange and six specialists on
the Cincinnati Stock Exchange that made markets in 400, 100 and 100 securities,
respectively.
In the normal course of their market making in Nasdaq, exchange-listed and
other securities, Schwab and SCM maintain inventories in such securities on both
a long and short basis. While long inventory positions represent Schwab's and
SCM's ownership of securities, short inventory positions represent obligations
of Schwab and SCM to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, long or short inventory positions may result in gains
or losses as market values of such securities fluctuate.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Management" in the Company's 1999 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
Multi-Channel Delivery Systems
The Company's multi-channel delivery systems allow customers to choose how
they prefer to do business with the Company. In addition to its branch office
network, the Company maintains four regional customer telephone service centers,
two online customer support centers as well as automated telephonic and online
channels, primarily serving retail investors through the Individual Investor and
Institutional Investor segments.
Branch Office Network. At December 31, 1999, Schwab operated 340 domestic
branch offices in 48 states, as well as branches in the Commonwealth of Puerto
Rico and the U.S. Virgin Islands. In addition, the Company has offices in
Canada, the Cayman Islands, Hong Kong and the United Kingdom. The Company's
branch office network plays a key role in building its business. With the
customer service support of regional customer telephone service centers and
automated telephonic and online channels, branch personnel are focusing a
significant portion of their time on business development. Customers can use
branch offices to open accounts, deliver and receive checks and securities,
obtain market information, place orders, and obtain related customer services in
person, yet most of these activities are conducted by telephone and mail. Branch
offices also provide investors with access to the Internet.
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 customers of the Schwab Signature Services(TM) program.
Each registered representative has immediate access to the customer account and
market-related information necessary to respond to customer inquiries. For most
customer orders, registered representatives can enter the order and confirm the
transaction immediately. As a result of this approach, the departure of a
registered representative generally does not result in a loss of customers for
the Company.
Automated Telephonic and Online Channels. Customers are able to obtain
financial information and execute trades on an automated basis through the
Company's automated telephonic and online channels. These channels are designed
to provide added convenience for customers and minimize Schwab's costs of
responding to and processing routine customer transactions. To assist customers
in using online channels, the Company maintains two online customer support
centers that operate both during and after normal market hours.
Automated telephonic channels include TeleBroker(R) -- Schwab's touch-tone
telephone quote and trading service, and VoiceBroker(TM) -- Schwab's voice
recognition quote and trading service. Schwab's automated telephonic channels
handled over 70% of total customer calls received in 1999. Online channels
include the Charles Schwab Web Site(TM) -- an information and trading service on
the Internet for individual investors, and PC-based services such as
SchwabLink(R) for independent investment managers and Velocity(TM) for certain
of Schwab's customers who trade frequently. The Company continues to stress the
importance of Clicks and Mortar(TM) access -- blending the power of the Internet
with personal service to create a full-service customer experience. The
Company's online channels handled 68% of total trades in 1999. Schwab provides
every retail customer access to all delivery channels and flat-fee pricing for
Internet trades.
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, recordkeeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered U.S. securities exchanges, SCM, the National Securities
Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations.
External events, such as an earthquake or power failure, loss of external
information feeds such as security price information, as well as internal
malfunctions such as those that could occur during the implementation of system
modifications, could render part or all of such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains backup and recovery functions. These include logging of all critical
files intraday, duplication and storage of all critical data outside of its
central computer site every twenty-four hours, and maintenance of facilities for
backup and communications. They also include the maintenance and periodic
testing of a disaster recovery plan that management believes would permit Schwab
to recommence essential computer operations if its central computer site were to
become inaccessible. To minimize business interruptions, the Company has two
data centers intended, in part, to further improve the recovery of business
processing in the event of an emergency. In 1999, the Company announced a joint
effort with IBM to implement new systems technology intended to help the
Company's computers share their workload more efficiently. Additionally in 1999,
the Company's investment in systems capacity, which totaled $126 million,
expanded the Company's Web server, mainframe and data storage capacity by 765%,
225% and 190%, respectively.
Year 2000 Century Change. The Company's mission critical systems operated
throughout the Year 2000 century change without material errors or interruptions
when processing data and transactions incorporating year 2000 dates, and the
Company did not encounter any material problems with any of its mission critical
vendor-supplied systems, services or products. Mission critical systems,
services and products means those systems, services and products critical to the
ongoing operation of the business. For a discussion on the Company's compliance
costs regarding the Year 2000 issue, see "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Year 2000 Century Change" in
the Company's 1999 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
customer fails to meet his or her obligations to Schwab. In addition, for
transactions that do not settle through a clearing corporation, Schwab takes the
risk of the other party's failure to settle the trade. See note "13 - Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to Consolidated
Financial Statements in the Company's 1999 Annual Report to Stockholders, which
are incorporated herein by reference to Exhibit No. 13.1 of this report.
Employees
As of December 31, 1999, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 18,100 full-time employees.
Risk Management
The Company's business and activities expose it to different types of
risks. Proper identification, assessment and management of these risks are
essential to the success and financial soundness of the Company. For a
discussion on the Company's principal risks and some of the policies and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition -- Risk
Management" in the Company's 1999 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Information Systems," "Competition" and "Regulation" in this report.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including traditional brokerage firms (particularly
firms that have started providing online trading services), discount brokerage
firms, online brokerage firms, mutual fund companies and banks. Certain of these
competitors have greater financial resources than the Company. The consolidation
trend in the financial services industry is likely to increase in light of the
new financial modernization legislation that becomes effective in March 2000.
This new legislation allows banks, securities firms and insurance companies more
flexibility to affiliate under one holding company. These holding companies can
engage in activities and acquire companies engaged in activities that are
financial in nature. The expansion and customer acceptance of conducting
financial transactions online has also attracted competition from providers of
online services, software development companies and other providers of financial
services. Finally, the growth of online trading has led to the creation of new
ECNs and new exchanges, and is causing major existing markets to consider
converting to for-profit status, all of which may intensify competition. The
Company experienced declines in its average commission per revenue trade in 1998
mainly due to the Company's integration of its online and traditional brokerage
services and reduction of the price of online trades for most of its customers,
resulting in an increase in the proportion of trades placed through its online
channels. The Company's average commission per revenue trade declined again in
1999 due to the continued increase in the proportion of trades placed through
its online channels. As the Company focuses on further enhancements to its
electronic service offering and online trades increase, average commission per
revenue trade is expected to continue to decline.
Many brokerage firms employ substantial funds in advertising and direct
solicitation of customers to increase their market share of commission dollars
and other securities-related income. Most discount brokerage firms and online
brokerage firms charge commissions lower than Schwab. Traditional brokerage
firms also offer discounted commissions to selected retail brokerage customers.
In addition, some traditional brokerage firms offer discounted or free online
trades, usually as part of a fee-based account. Such competition may negatively
impact the Company's customer asset growth, revenue growth and profit margin.
Management continues to believe that the key to sustaining the Company's
competitive advantages will be its ability to combine people and technology in
ways that provide investors with the access, information, guidance, advice and
control they expect -- as well as superior service -- all at a lower cost than
traditional providers of financial services. Accordingly, the Company expects to
remain in direct competition with traditional, online and discount brokerage
firms, banks and other providers of financial products and services.
Regulation
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. Schwab and SCM are
registered as broker-dealers with the SEC. Schwab and CSIM are registered as
investment advisors with the SEC. Additionally, Schwab is regulated by the
Commodities Futures Trading Commission (CFTC) with respect to its introduced
futures and commodities trading activities.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers, Inc. (NASD) and the national securities exchanges such as
the New York Stock Exchange (NYSE), which has been designated by the SEC as
Schwab's primary regulator with respect to its securities activities. The NASD
has been designated by the SEC as SCM's primary regulator with respect to its
securities activities. The Chicago Board Options Exchange has been designated as
Schwab's primary regulator with respect to its options trading activities for
2000 and 2001. The NYSE was designated as Schwab's primary regulator with
respect to its options trading activities for 1998 and 1999. The National
Futures Association (NFA) has been designated by the CFTC as Schwab's primary
regulator with respect to its futures and commodities trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC or
CFTC) governing the industry and conduct periodic examinations of
broker-dealers. Securities firms are also subject to regulation by state
securities authorities in the states in which they do business. In addition to
its membership in the NYSE, Schwab is also a member of most other major U.S.
securities exchanges and is consequently subject to their rules and regulations.
Schwab was registered as a broker-dealer in fifty states, the District of
Columbia and Puerto Rico as of December 31, 1999. SCM was registered as a
broker-dealer in thirty-two states and the District of Columbia as of December
31, 1999.
The principal purpose of regulations and discipline of broker-dealers and
investment advisors is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisors. The regulations to which broker-dealers and investment
advisors are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms,
recordkeeping and reporting, fee arrangements, disclosure to clients, and the
conduct of directors, officers and employees. As registered investment advisors,
Schwab and CSIM are subject to the requirements of the Investment Advisers Act
of 1940 and the regulations thereunder, which impose, among other things,
various recordkeeping, reporting, and disclosure requirements and impose
limitations on fees and principal transactions between an advisor and its
clients. The state securities law requirements applicable to registered
investment advisors are in certain cases more comprehensive than those imposed
under the federal securities laws.
Additional legislation, changes in rules promulgated by the SEC, other
federal and state regulatory authorities and self-regulatory organizations, or
changes in the interpretation or enforcement of existing laws and rules may
directly affect the method of operation and profitability of broker-dealers and
investment advisors. The profitability of broker-dealers and investment advisors
could also be affected by rules and regulations which impact the business and
financial communities in general, including changes to the laws governing
taxation, antitrust regulation and electronic commerce. The SEC, CFTC,
self-regulatory organizations and state securities authorities may conduct civil
or administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
advisor, its officers, or employees. Schwab and SCM have been the subject of
such administrative proceedings.
Certain SEC rules and rule amendments, known as the Order Handling Rules,
have significantly altered the manner in which orders for both Nasdaq and
exchange-listed securities are handled. These rules were implemented in phases
between January 20, 1997 and October 13, 1997. Additionally, in June 1997, most
major U.S. securities markets, including Nasdaq and the NYSE, began quoting and
trading most securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share. Mainly as a result of these regulatory changes
and changes in industry practices, SCM's average revenue per share traded
declined from 3.3(cent) in 1997 to 2.5(cent) in 1998. However, SCM's average
revenue per share traded increased to 2.8(cent) in 1999. An increase in the
market price volatility of technology stocks in 1999 contributed to SCM's higher
average revenue per share traded. The major U.S. securities markets have
announced that they intend to begin quoting and trading securities in decimal
increments. The SEC continues to discuss with the self-regulatory organizations
a viable decimal pricing implementation date. This change is likely to cause
decreases in average revenue per share traded, will only affect the Capital
Markets segment and, based on management's expectations, will not have a
material impact on that segment's revenues. See also "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Revenues --
Principal Transactions" in the Company's 1999 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 SCM
are required by federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of cash balances. SIPC is funded through assessments on registered
broker-dealers. In addition, Schwab purchased from a private surety company
additional account protection for customers, as defined, of up to the net equity
value for customer securities in each account, of which $900,000 is available
for claims of cash balances. Stocks, bonds, mutual funds and money market funds
are considered securities for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
Schwab is authorized by the Municipal Securities Rulemaking Board to
conduct transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and SCM is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board Options
Exchange govern the amount of margin customers must provide and maintain in
writing uncovered options.
As a California state-chartered trust company, CSTC is primarily regulated
by the State of California Department of Financial Institutions. Since it
provides employee benefit plan trust services, CSTC is also required to comply
with the Employee Retirement Income Security Act of 1974 (ERISA) and,
consequently, is subject to oversight by both the Internal Revenue Service and
Department of Labor. CSTC is required under ERISA to maintain a fidelity bond
for the protection of employee benefit trusts for which it serves as trustee.
The Company's business is also subject to regulation by various non-U.S.
governments, securities exchanges and regulatory bodies, particularly in those
countries where it has acquired subsidiaries. Such regulation may directly
affect the method of operation and profitability of the Company's foreign
operations.
CSE is registered as a broker-dealer with the Securities and Futures
Authority in the United Kingdom.
Charles Schwab, Hong Kong, Ltd. (CSHK) and Charles Schwab Hong Kong
Securities Limited (CSHKS) are subsidiaries of CSC. CSHK is registered as a
securities dealer and commodity trading advisor with the Securities and Futures
Commission in Hong Kong (SFC). CSHKS is registered as a securities dealer with
the SFC and also as an Exchange Participant of The Stock Exchange of Hong Kong
Limited; however, CSHKS has not yet commenced operations.
CS Canada is a broker-dealer in Canada and is regulated under the laws of
the Canadian provinces by securities commissions and by the Investment Dealers
Association of Canada. CS Canada is also a member of the Toronto and Winnipeg
Stock Exchanges and is subject to their rules and regulations.
CSTMS is a securities firm licensed and regulated by the Japanese Ministry
of Finance; however, CSTMS has not yet commenced operations.
Potential Bank Holding Company Act Requirements
Upon consummation of the transaction with U.S. Trust, the Company expects
to become a financial holding company, subject to Federal Reserve supervision,
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust's shareholder approval. If such regulatory and shareholder approvals are
obtained, the Company will be required to limit its business to financial
services. It may be required to maintain capital at certain levels which could
affect its ability to pay dividends. Under certain circumstances, the Company
may be required to provide additional capital to its subsidiaries, and such
subsidiaries may be prohibited from paying dividends. Additionally, Federal
Reserve Board approval will be required for certain changes in control of CSC.
Net Capital Requirements
As registered broker-dealers, Schwab and SCM are subject to the Uniform Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934 (the Net
Capital Rule), which has also been adopted through incorporation by reference in
NYSE Rule 325. The CFTC and NFA also impose net capital requirements. Schwab is
a member firm of the NYSE, the NASD and the NFA, and SCM is a member firm of the
NASD. The Net Capital Rule specifies minimum net capital requirements that are
intended to ensure the general financial soundness and liquidity of
broker-dealers. Failure to maintain the required net capital may subject a firm
to suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to twenty business days.
Schwab and SCM have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 under the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than fifteen
consecutive business days; NYSE Rule 326 also prohibits the expansion of
business if net capital is less than 5% of aggregate debit items for more than
fifteen consecutive business days. The provisions of NYSE Rule 326 also become
operative if capital withdrawals (including scheduled maturities of subordinated
borrowings during the following six months) would result in a reduction of a
firm's net capital to the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
SCM's operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See also "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and Capital
Resources -- Liquidity" in the Company's 1999 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
At December 31, 1999, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $345 million and had total net capital of $1,766
million. At December 31, 1999, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $1,421 million, $1,076 million and $903 million,
respectively. Aggregate debit balances as of December 29, 1999 were used to
calculate Schwab's minimum required net capital at December 31, 1999, in
accordance with applicable regulations.
At December 31, 1999, SCM was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total net capital of $13
million. At December 31, 1999, the amount in excess of its minimum required net
capital was $12 million.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at then
current market rates. Schwab also has a lease for 398,000 square feet of office
space located at 211 Main Street in San Francisco, California. The lease expires
in 2018 and includes two ten-year extension options at then current market
rates. In addition to these locations, Schwab leases space in other buildings
for its San Francisco operations, including its principal executive offices at
120 Kearny Street, aggregating 1,103,000 additional square feet. SCM's
headquarters are located in leased office space in Jersey City, New Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception. In
addition, the Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
288,000 and 164,000 square feet, respectively. The Company also leases an
additional 148,000 square feet as part of its Phoenix service center. The
Company leases the service centers located in Denver and Orlando, with 328,000
and 226,000 square feet, respectively.
The Company owns its two primary data center facilities located in Phoenix
totaling 147,000 square feet.
While the corporate headquarters and data centers support all of the
Company's segments, the branch offices and service centers primarily support the
Individual Investor and Institutional Investor segments and SCM's headquarters
supports the Capital Markets segment.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is included
in note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1999 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1999.
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 6, 2000 was 9,996. The closing market price per share on that date was
$47.69.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 1999
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is included
in "Selected Financial and Operating Data" in the Company's 1999 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition" in the Company's 1999 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 1999 and
1998 are summarized as follows (dollars in millions):
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
1999 1998
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $14,982 $ 9,048
Average interest rate 7.83% 7.54%
Investments:
Average balance outstanding $ 8,415 $ 8,895
Average interest rate 5.01% 4.95%
Average yield on interest-earning assets 6.82% 6.25%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $18,701 $14,586
Average interest rate 4.29% 4.13%
Other interest-bearing sources:
Average balance outstanding $ 1,497 $ 1,305
Average interest rate 4.25% 3.75%
Average noninterest-bearing portion $ 3,199 $ 2,052
Average interest rate on funding sources 3.70% 3.63%
Summary:
Average yield on interest-earning assets 6.82% 6.25%
Average interest rate on funding sources 3.70% 3.63%
- --------------------------------------------------------------------------------
Average net interest margin 3.12% 2.62%
================================================================================
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1998 to the fourth quarter of 1999 was primarily due to higher levels
of margin loans to customers, partially offset by higher average customer cash
balances.
Equipment, office facilities and property are detailed below (in
thousands):
- --------------------------------------------------------------------------------
December 31,
1999 1998
- --------------------------------------------------------------------------------
Land $ 14,674 $ 14,674
Buildings 95,725 90,626
Leasehold improvements 210,557 155,428
Furniture and equipment 135,096 105,168
Telecommunications equipment 126,778 100,994
Information technology equipment and software 532,652 373,226
Construction in progress 56,934 7,696
- --------------------------------------------------------------------------------
Subtotal 1,172,416 847,812
Accumulated depreciation and amortization 574,655 451,649
- --------------------------------------------------------------------------------
Total $ 597,761 $396,163
================================================================================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required to be furnished pursuant to this item is included
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Risk Management -- Market Risk" in the Company's 1999 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report.
Item 8. Financial Statements and Supplementary Data
The information required to be furnished pursuant to this item is included
in the Consolidated Financial Statements and "Quarterly Financial Information
(Unaudited)" in the Company's 1999 Annual Report to Stockholders, which are
incorporated herein by reference to Exhibit No. 13.1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the SEC pursuant to Regulation 14A by April 29, 2000 (the Proxy
Statement) under "The Board of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2004, 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 62 Chairman, Co-Chief Executive Officer, and Director
David S. Pottruck 51 President, Co-Chief Executive Officer, and Director
Karen W. Chang 51 Enterprise President - Retail Business Development and Branch Network
John Philip Coghlan 48 Vice Chairman and Enterprise President - Services for Investment Managers
and Retirement Plan Services
Linnet F. Deily 54 Vice Chairman and President - Retail Group
Christopher V. Dodds 40 Executive Vice President and Chief Financial Officer
Carrie E. Dwyer 48 Executive Vice President, General Counsel and Corporate Secretary
Lon Gorman 51 Vice Chairman and Enterprise President - Capital Markets and Trading
Daniel O. Leemon 46 Executive Vice President and Chief Strategy Officer
Dawn Gould Lepore 45 Vice Chairman, Executive Vice President and Chief Information Officer
Susanne D. Lyons 42 Executive Vice President and Chief Marketing Officer
John P. McGonigle 44 Executive Vice President - Mutual Funds
George A. Rich 52 Executive Vice President - Human Resources
Robert H. Rosseau 51 Executive Vice President and Enterprise President - International
Gideon Sasson 44 Enterprise President - Electronic Brokerage
Elizabeth Gibson Sawi 47 Executive Vice President and Chief Administrative Officer
Steven L. Scheid 46 Vice Chairman and Enterprise President - Financial Products and Services
===========================================================================================================================
Mr. Schwab has been Co-Chief Executive Officer of the Company since 1998,
and Chairman and a director of the Company since its incorporation in 1986. Mr.
Schwab was Chief Executive Officer of the Company from 1986 to 1997. Mr. Schwab
was a founder of Schwab in 1971 and has been its Chairman since 1978. Mr. Schwab
is currently a director of The Gap, Inc.; Siebel Systems, Inc., a company that
provides support for software systems; and Vodafone AirTouch Plc. Mr. Schwab is
also a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust and Schwab Annuity Portfolios, all registered investment
companies. In 1999, Mr. Schwab was named a director of AudioBase, Inc., a
company that provides music and voice to Internet publishers, advertisers and
marketers.
Mr. Pottruck has been Co-Chief Executive Officer of the Company since 1998,
director of the Company since 1994, and President of the Company since 1992. Mr.
Pottruck was Chief Operating Officer of the Company from 1994 to 1998. Mr.
Pottruck has been Chief Executive Officer of Schwab since 1992 and President of
Schwab since 1988 (except for the period September 1997 to April 1998). Mr.
Pottruck joined Schwab in 1984. Mr. Pottruck is currently a director of Intel
Corporation, a maker of microcomputer components and related products; and
Preview Travel, Inc., an online travel services provider; and serves on the
Federal Advisory Commission on Electronic Commerce. In 1999, Mr. Pottruck was
elected to the Board of Governors of the National Association of Securities
Dealers, Inc. Additionally, Mr. Pottruck was named a director of Epoch Partners,
Inc. in 1999 and DoveBid, Inc., an auctioneer and capital asset sale advisor, in
January 2000.
Ms. Chang has been Enterprise President - Retail Business Development and
Branch Network of Schwab and Executive Vice President of the Company since 1997.
Ms. Chang was Executive Vice President - Retail Branch Network of the Company
and Schwab from 1996 to 1997 and Senior Vice President - Retail Branch Network
of the Company and Schwab from 1994 to 1996. Ms. Chang joined Schwab in 1994.
Mr. Coghlan has been Vice Chairman of the Company and Schwab since July
1999, Enterprise President - Services for Investment Managers of Schwab since
1998, Enterprise President - Retirement Plan Services of Schwab since 1997 and
Executive Vice President of the Company since 1992. Mr. Coghlan was Executive
Vice President of Schwab and General Manager of Schwab Institutional from 1992
to 1997. Mr. Coghlan joined Schwab in 1986.
Ms. Deily has been Vice Chairman of the Company and Schwab since July 1999,
President - Retail Group of Schwab since 1998 and Executive Vice President of
the Company since 1997. Ms. Deily was Enterprise President - Services for
Investment Managers of Schwab from 1997 to 1998 and Executive Vice President and
General Manager-Services for Investment Managers of the Company and Schwab from
1996 to 1997. Before joining Schwab in 1996, Ms. Deily was Chairman, President
and Chief Executive Officer of First Interstate Bank of Texas from 1991 to 1996.
Mr. Dodds has been Chief Financial Officer of the Company and Schwab since
July 1999 and Executive Vice President of the Company and Schwab since 1998. Mr.
Dodds was Corporate Controller of Schwab from 1997 to March 1999 and Corporate
Treasurer of Schwab from 1993 to 1997. Mr. Dodds joined Schwab in 1986.
Ms. Dwyer has been General Counsel and Corporate Secretary of the Company
and Schwab since 1997 and Executive Vice President of the Company and Schwab
since 1996. Before joining Schwab in 1996, Ms. Dwyer was Senior Counselor to the
Chairman of the U.S. Securities and Exchange Commission from 1993 to 1996.
Mr. Gorman has been Vice Chairman of the Company and Schwab since July
1999, Enterprise President - Capital Markets and Trading of Schwab and Executive
Vice President of the Company since 1997. Mr. Gorman was Executive Vice
President - Capital Markets and Trading of the Company and Schwab from 1996 to
1997. Before joining Schwab in 1996, Mr. Gorman was a Managing Director of
Credit Suisse First Boston Corporation from 1988 to 1996. Mr. Gorman is
currently a director of the Securities Industry Association. Additionally, Mr.
Gorman was named a director of REDIBook ECN LLC in 1999 and CyBerCorp, Inc. in
March 2000.
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 Vice Chairman of the Company and Schwab since July 1999
and Executive Vice President of the Company and Chief Information Officer of the
Company and Schwab since 1993. Ms. Lepore was Executive Vice President of Schwab
from 1993 to July 1999. Ms. Lepore joined Schwab in 1983. Ms. Lepore was named a
director of eBay Inc. in January 2000 and currently serves as a director of the
Times Mirror Company.
Ms. Lyons has been Chief Marketing Officer of Schwab since January 2000 and
Executive Vice President of the Company since 1997. Ms. Lyons was Enterprise
President - Retail Client Services of Schwab from 1997 to January 2000,
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 joined Schwab in 1992.
Mr. McGonigle has been Executive Vice President of the Company and
Executive Vice President - Mutual Funds of Schwab since April 1999. Mr.
McGonigle was Executive Vice President - Third-Party Funds of Schwab from 1998
to March 1999, Senior Vice President - Third-Party Funds of Schwab from 1996 to
1998, and Senior Vice President of Fund Relations of Schwab from 1994 to 1996.
Mr. McGonigle joined Schwab in 1989.
Mr. Rich has been Executive Vice President of the Company and Executive
Vice President - Human Resources of Schwab since 1998. Before joining Schwab in
1998, Mr. Rich was Senior Vice President of Williams-Sonoma, Inc. from 1995 to
1998. Mr. Rich was Vice President - Human Resources of Kenetech Corporation, a
company that develops and operates independent power projects, from 1994 to
1995. Mr. Rich is currently on the San Francisco Committee on Jobs and is a
Director to the Advisory Board of Pacific Crest Outward Bound School.
Mr. Rosseau has been Executive Vice President and Enterprise President -
International of the Company and Schwab since February 2000. Prior to joining
Schwab, Mr. Rosseau was Chief Executive Officer of ETC Services, Inc. from 1998
to February 2000. Mr. Rosseau was President and Chief Executive Officer of
Deluxe Electronic Payment Systems, Inc. from 1996 to 1998 and Senior Vice
President of Deluxe Corporation from 1996 to 1998. Mr. Rosseau was Chairman of
Diners Club International Ltd., and President and Chief Executive Officer of
Diners Club North America and Europe from 1991 to 1996. Mr. Rosseau previously
served as Senior Vice President - Retail Service Delivery of Schwab from 1987 to
1988.
Mr. Sasson has been Enterprise President - Electronic Brokerage of Schwab
and Executive Vice President of the Company since 1997. Mr. Sasson was Senior
Vice President - Electronic Brokerage of the Company and Schwab from 1995 to
1997. Before joining Schwab in 1995, Mr. Sasson was Vice President - Information
Services of International Business Machines Corporation in 1995. Mr. Sasson was
Vice President, Systems Engineering of FYI Online, a joint venture of MCI
Communications Corporation and Equifax, Inc., from 1992 to 1995.
Ms. Sawi has been Executive Vice President and Chief Administrative Officer
of the Company and Schwab since August 1999. Ms. Sawi returned to Schwab
full-time in August 1999 after a fifteen-month sabbatical during which she
worked for Schwab part-time on several projects. Prior to her sabbatical, Ms.
Sawi was Executive Vice President - Electronic Brokerage of the Company and
Schwab from 1995 to 1997, Executive Vice President - Mutual Funds of the Company
and Schwab, and President of CSIM from 1994 to 1995. Ms. Sawi joined Schwab in
1982.
Mr. Scheid has been Vice Chairman of the Company and Schwab since July
1999, Executive Vice President of the Company since 1996 and Enterprise
President - Financial Products and Services of Schwab since 1998. Mr. Scheid was
Executive Vice President of Schwab and Chief Financial Officer of the Company
and Schwab from 1996 to July 1999. Before joining Schwab in 1996, Mr. Scheid was
Executive Vice President of Finance of First Interstate Bancorp from 1994 to
1996 and was Principal Financial Officer from 1995 to 1996.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Director
Compensation," "Summary Compensation Table," "Option Grants," "Options
Exercised," "Compensation Committee Report," "Certain Transactions," and
"Appendix A -- Description of Employment and Severance Agreements."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Principal
Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under "Certain
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are included in
the Company's 1999 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of January 12, 2000, by and
among The Charles Schwab Corporation, Patriot Merger Corporation and
U.S. Trust Corporation, filed as Exhibit 2.1 to the Registrant's Form
8-K dated January 12, 2000 and incorporated herein by reference.
3.7 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.
3.9 Second Restated Bylaws, as amended on September 22, 1998, of the
Registrant (supersedes Exhibit 3.8) filed as Exhibit 3.9 to the
Registrant's Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference.
3.10 Fourth Restated Certificate of Incorporation, effective July 30, 1999,
of the Registrant, which includes amendments through May 20, 1999
(supersedes Exhibit 3.7), filed as Exhibit 3.10 to the Registrant's
Form 10-Q for the quarter ended September 30, 1999 and incorporated
herein by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. Copies of instruments
with respect to long-term debt of lesser amounts will be provided to
the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.20 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. *
10.57 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.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for
the quarter ended September 30, 1995 and incorporated herein by
reference. +
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan, effective January 1, 1992,
dated December 20, 1991, filed as Exhibit 10.101 to the Registrant's
Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference. +
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective July 1, 1992,
dated June 30, 1992, filed as Exhibit 10.116 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the Registrant's
Form 10-K for the year ended December 31, 1997 and incorporated herein
by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab. +
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. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co. and
Charles Schwab & Co., Inc. dated October 8, 1996, filed as Exhibit
10.163 to the Registrant's Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between
Post-Montgomery Associates and Charles Schwab & Co., Inc. dated
October 4, 1996, filed as Exhibit 10.164 to the Registrant's Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.166 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, restated to include amendments through February 26, 1997, with
form of Non-Qualified Stock Option Agreement (Executive Officer Stock
Option Plan (1987)) attached, (supersedes Exhibit 10.159) filed as
Exhibit 10.166 to the Registrant's Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference. +
10.167 The Charles Schwab Corporation 1987 Stock Option Plan, restated to
include amendments through February 26, 1997, with form of
Non-Qualified Stock Option Agreement attached, (supersedes Exhibit
10.160) filed as Exhibit 10.167 to the Registrant's Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996,
dated May 8, 1996 filed as Exhibit 10.169 to the Registrant's Form
10-Q for the quarter ended June 30, 1997 and incorporated herein by
reference. +
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive Plan
(supersedes Exhibit 10.155) filed as Exhibit 10.175 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified
Stock Option Agreement in Exhibit 10.167) filed as Exhibit 10.176 to
the Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.177 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.177 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.178 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan filed as Exhibit 10.178 to the
Registrant's Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference. +
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes Form
of Non-Qualified Stock Option Agreement in Exhibit 10.166) filed as
Exhibit 10.179 to the Registrant's Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference. +
10.180 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan filed as Exhibit
10.180 to the Registrant's Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference. +
10.181 Commercial office lease of 211 Main Street between Main Plaza, LLC and
Charles Schwab & Co., Inc. dated August 8, 1997 filed as Exhibit
10.181 to the Registrant's Form 10-Q for the quarter ended September
30, 1997 and incorporated herein by reference.
10.182 The Charles Schwab Corporation Corporate Executive Bonus Plan, amended
and restated, effective January 1, 1996 (supersedes Exhibit 10.147)
filed as Exhibit 10.182 to the Registrant's Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference. +
10.185 The Charles Schwab Corporation Senior Executive Severance Policy,
effective December 7, 1995 filed as Exhibit 10.185 to the Registrant's
Form 10-Q for the quarter ended September 30, 1997 and incorporated
herein by reference. +
10.186 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
October 22, 1997, with form of Non-Qualified Stock Option Agreement
(General Management Plan) attached (supersedes Exhibit 10.160) filed
as Exhibit 10.186 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.188 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended October 22, 1997, with form of Non-Qualified Stock
Option Agreement (Executive Officer Stock Option Plan (1987))
attached, (supersedes Exhibit 10.159) filed as Exhibit 10.188 to the
Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.189 Annual Executive Individual Performance Plan restated and amended
January 1, 1998 (supersedes Exhibit 10.146) filed as Exhibit 10.189 to
the Registrant's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference. +
10.190 The Charles Schwab Corporation Employee Stock Incentive Plan dated
October 22, 1997 filed as Exhibit 10.190 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.191 Form of Restricted Shares Award Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.171)
filed as Exhibit 10.191 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.192 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.172)
filed as Exhibit 10.192 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.193 Form of Nonstatutory Stock Option and Performance Unit Agreement of
The Charles Schwab Corporation 1992 Stock Incentive Plan (supersedes
Exhibit 10.173) filed as Exhibit 10.193 to the Registrant's Form 10-K
for the year ended December 31, 1997 and incorporated herein by
reference. +
10.194 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.174)
filed as Exhibit 10.194 to the Registrant's Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference. +
10.195 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, as
amended through December 1, 1997 (supersedes Exhibit 10.168) filed as
Exhibit 10.195 to the Registrant's Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference. +
10.197 Credit Agreement (364-Day Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.198 Credit Agreement (3-Year Commitment), between the Registrant and each
of the banks listed therein, dated as of June 26, 1998 (supersedes
Exhibit 10.196), filed as Exhibit 10.2 to the Registrant's Current
Report on Form 8-K dated July 17, 1998 and incorporated herein by
reference.
10.199 The Charles Schwab Corporation Deferred Compensation Plan, as amended
through July 24, 1998 (supersedes Exhibit 10.162), filed as Exhibit
10.199 to the Registrant's Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference. +
10.200 Form of Indemnification Agreement entered into between Registrant and
members of the Board of Directors of Registrant (supersedes exhibit
10.34), filed as Exhibit 10.200 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
10.201 Seventh Amendment to the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan (Amendments 1 through 6 of the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan are incorporated
under Exhibit 10.195, filed with the Registrant's Form 10-K for the
fiscal year ended December 31, 1997), filed as Exhibit 10.201 to the
Registrant's Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference. +
10.202 Fourth Amendment to the Trust Agreement for the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan effective January 1,
1998, filed as Exhibit 10.202 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference. +
10.203 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include Amendments through March 20, 1998 (supersedes Exhibit
10.187), filed as Exhibit 10.203 to the Registrant's Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference. +
10.204 The Charles Schwab Corporation Deferred Compensation Plan, as amended
through January 20, 1999 (supersedes Exhibit 10.199), filed as Exhibit
10.204 to the Registrant's Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference. +
10.205 Eighth Amendment to The SchwabPlan Retirement Savings and Investment
Plan (formerly the Charles Schwab Profit Sharing and Employee Stock
Ownership Plan), filed as Exhibit 10.205 to the Registrant's Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference. +
10.206 Credit Agreement (364-Day Commitment) dated June 25, 1999 between the
Registrant and the financial institutions listed therein (supersedes
Exhibit 10.197), filed as Exhibit 10.206 to the Registrant's Form 10-Q
for the quarter ended June 30, 1999 and incorporated herein by
reference.
10.207 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated to
include Amendments through May 17, 1999 (supersedes Exhibit 10.203),
filed as Exhibit 10.207 to the Registrant's Form 10-Q for the quarter
ended September 30, 1999 and incorporated herein by reference. +
10.208 The Charles Schwab Corporation 1992 Stock Incentive Plan, restated
to include amendments through December 15, 1999 (supersedes Exhibit
10.207). +
10.209 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, restated to include amendments through October 28, 1999
(supersedes Exhibit 10.204). +
10.210 The SchwabPlan Retirement Savings and Investment Plan, restated to
include amendments through December 22, 1999 (supersedes Exhibits
10.195, 10.201 and 10.205). +
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1999 Annual Report to
Stockholders, which have been incorporated herein by reference. Except
for such portions, such annual report is not deemed to be "filed"
herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's
Registration Statement No. 33-16192 on Form S-1, as amended and declared
effective on September 22, 1987.
+ Management contract or compensatory plan.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 2000.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ Charles R. Schwab
----------------------------
Charles R. Schwab
Chairman, Co-Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 2000.
Signature / Title Signature / Title
----------------- -----------------
/s/ Charles R. Schwab /s/ David S. Pottruck
- ----------------------------- ------------------------------
Charles R. Schwab, David S. Pottruck,
Chairman, Co-Chief Executive Officer President, Co-Chief Executive Officer
and Director and Director
(principal executive officer) (principal executive officer)
/s/ Christopher V. Dodds
- -----------------------------
Christopher V. Dodds,
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
/s/ Nancy H. Bechtle /s/ C. Preston Butcher
- ----------------------------- ------------------------------
Nancy H. Bechtle, Director C. Preston Butcher, Director
/s/ Donald G. Fisher /s/ Anthony M. Frank
- ----------------------------- ------------------------------
Donald G. Fisher, Director Anthony M. Frank, Director
/s/ Frank C. Herringer /s/ Stephen T. McLin
- ----------------------------- -------------------------------
Frank C. Herringer, Director Stephen T. McLin, Director
/s/ Condoleezza Rice /s/ Arun Sarin
- ----------------------------- -------------------------------
Condoleezza Rice, Director Arun Sarin, Director
/s/ George P. Shultz /s/ Roger O. Walther
- ----------------------------- -------------------------------
George P. Shultz, Director Roger O. Walther, Director
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Information F-6
Schedule II - Valuation and Qualifying Accounts F-7
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1999 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, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated February 16, 2000 (which report expresses an
unqualified opinion and includes an explanatory paragraph related to an
accounting change to conform with Statement of Position 98-1); such consolidated
financial statements and report are included in your 1999 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of the Company listed in the Index at F-1.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
San Francisco, California
February 16, 2000
F-2
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
December 31,
1999 1998
---- ----
Assets
Cash and cash equivalents $ 232,398 $ 180,025
Advances to subsidiaries 985,318 460,848
Investments in subsidiaries, at equity 1,800,031 1,223,417
Other assets 31,157 8,683
- ------------------------------------------------------------------------------------------------------------------------
Total $3,048,904 $1,872,973
========================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 200,008
Accrued expenses and other liabilities 119,961 $ 93,351
Borrowings 455,000 351,000
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 774,969 444,351
Stockholders' equity 2,273,935 1,428,622
- ------------------------------------------------------------------------------------------------------------------------
Total $3,048,904 $1,872,973
========================================================================================================================
See Notes to Condensed Financial Information.
F-3
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Interest revenue $ 71,428 $ 42,780 $ 30,699
Interest expense (28,398) (25,429) (20,546)
- ------------------------------------------------------------------------------------------------------------------------
Net interest revenue 43,030 17,351 10,153
Other revenues 151 409 544
Other income (expenses) (25,392) (12,104) 4,423
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and equity
in earnings of subsidiaries 17,789 5,656 15,120
Income tax expense 6,885 2,092 5,692
- ------------------------------------------------------------------------------------------------------------------------
Income before equity in earnings of subsidiaries 10,904 3,564 9,428
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 434,698 56,913 199,869
Dividends paid by subsidiaries 143,275 287,985 60,980
- ------------------------------------------------------------------------------------------------------------------------
Total 577,973 344,898 260,849
Net income $588,877 $348,462 $270,277
========================================================================================================================
See Notes to Condensed Financial Information.
F-4
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Cash flows from operating activities
Net income $ 588,877 $ 348,462 $ 270,277
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (434,698) (56,913) (199,869)
Change in other assets (10,995) (3,932) 279
Change in drafts payable 200,008
Change in accrued expenses and other liabilities 29,030 13,753 (4,122)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 372,222 301,370 66,565
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Increase in net advances to subsidiaries (286,393) (26,465) (51,939)
Increase in investments in subsidiaries (129,533) (800) (50,614)
Cash payments for businesses acquired, net of cash received (5,657) (1,400) (1,200)
Cash payments for investments in businesses (11,854)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (433,437) (28,665) (103,753)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 144,000 30,000 111,000
Repayment of borrowings (40,000) (40,000) (28,000)
Dividends paid (45,502) (43,068) (37,091)
Purchase of treasury stock (150,180) (18,234)
Proceeds from stock options exercised and other 55,090 30,766 14,530
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 113,588 (172,482) 42,205
- ------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 52,373 100,223 5,017
Cash and cash equivalents at beginning of year 180,025 79,802 74,785
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 232,398 $ 180,025 $ 79,802
==================================================================================================================
See Notes to Condensed Financial Information.
F-5
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
1. Introduction and basis of presentation
The condensed financial information of The Charles Schwab Corporation (the
Parent Company) should be read in conjunction with the consolidated
financial statements of The Charles Schwab Corporation and subsidiaries
(the Company) and notes thereto found in the Company's 1999 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No.
13.1 of this report.
2. Supplemental cash flow information
During 1998, the Parent Company recorded a non-cash capital contribution of
$69 million to its subsidiary, Charles Schwab & Co., Inc. (Schwab), through
the assumption of indebtedness.
Certain information affecting the cash flows of the Parent Company follows
(in thousands):
Year ended December 31,
1999 1998 1997
-------------------------------
Income taxes paid $11,264 $ 5,539 $ 2,608
======= ======= =======
Interest paid:
Borrowings $25,290 $24,113 $18,773
Other 162 306 364
------- ------- -------
Total interest paid $25,452 $24,419 $19,137
======= ======= =======
3. Common stock split
The Parent Company's Board of Directors declared a two-for-one common stock
split, distributed July 1999, effected in the form of a 100% stock
dividend.
4. Related party transactions
The Parent Company provides subordinated revolving credit facilities to its
subsidiaries, Schwab, Schwab Capital Markets L.P. (SCM) (formerly known as
Mayer & Schweitzer, Inc.) and Charles Schwab Europe (CSE).
Schwab had a $1,400 million subordinated revolving credit facility maturing
in September 2001, of which $905 million was outstanding at December 31,
1999. This credit facility was $450 million at the end of 1998, of which
$405 million was outstanding at December 31, 1998. At year end 1999, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from
the Parent Company maturing in 2001. The outstanding balance of these term
loans was also $25 million at year end 1998.
SCM had a $35 million subordinated lending arrangement maturing in 2001,
which was not used in 1999 or 1998. SCM also had a $25 million short-term
credit facility established in 1999, which was not used at December 31,
1999.
CSE had a (pound)20 million, equivalent to $32 million, subordinated
lending arrangement with the Parent Company. At December 31, 1999, CSE had
outstanding (pound)18 million under these arrangements, equivalent to $29
million, with (pound)5 million maturing in 2001 and (pound)13 million
maturing in 2003. This lending arrangement was (pound)5 million, equivalent
to $8 million, at the end of 1998, all of which was outstanding at December
31, 1998.
Interest earned by the Parent Company from these subordinated lending
arrangements totaled $60 million in 1999, $37 million in 1998 and $26
million in 1997.
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, 1999:
Allowance for doubtful accounts $7,575 $15,848 $917 $(12,988) $11,352
==========================================================================
For the year ended
December 31, 1998:
Allowance for doubtful accounts $7,717 $ 4,752 $231 $ (5,125) $ 7,575
==========================================================================
For the year ended
December 31, 1997:
Allowance for doubtful accounts $5,518 $ 3,896 $195 $ (1,892) $ 7,717
==========================================================================
* Represents collections of previously written-off accounts.
F-7