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, 2003 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. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of June 30, 2003, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $10,833,353,578. 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 1, 2004 was
1,362,562,545.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and III of this Form 10-K incorporate certain information contained
in the registrant's 2003 Annual Report to Stockholders by reference to portions
of that document. Part III of this Form 10-K incorporates certain information
contained in the registrant's definitive proxy statement for its annual meeting
of stockholders to be held May 17, 2004 by reference to portions of that
document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2003
---------------------------------------
TABLE OF CONTENTS
Part I
Item 1. Business --------------------------------------------------------- 1
Item 2. Properties ------------------------------------------------------- 8
Item 3. Legal Proceedings ------------------------------------------------ 9
Item 4. Submission of Matters to a Vote of Security Holders -------------- 9
Item 4A. Executive Officers of the Registrant ----------------------------- 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters --------------------------------------------------------- 9
Item 6. Selected Financial Data ------------------------------------------ 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations --------------------------------------- 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ------ 9
Item 8. Financial Statements and Supplementary Data --------------------- 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure --------------------------------------- 9
Item 9A. Controls and Procedures ----------------------------------------- 9
Part III
Item 10. Directors and Executive Officers of the Registrant -------------- 10
Item 11. Executive Compensation ------------------------------------------ 13
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters -------------------------------- 13
Item 13. Certain Relationships and Related Transactions ------------------ 13
Item 14. Principal Accountant Fees and Services -------------------------- 13
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ------------------------------------------------------- 13
Exhibit Index ------------------------------------------------- 14
Signatures ---------------------------------------------------- 19
Index to Financial Statement Schedules ----------------------- F-1
FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K, including the
information incorporated by reference, contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may"
and other similar expressions. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. These forward-looking statements,
which reflect management's beliefs, objectives and expectations as of the date
hereof, are necessarily estimates based on the best judgment of our senior
management. These statements relate to, among other things, the Company's
ability to pursue its business strategy and the Company's ability to sustain and
improve its competitive position. Achievement of the expressed beliefs,
objectives and expectations is subject to certain risks and uncertainties that
could cause actual results to differ materially from those beliefs, objectives
and expectations. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K or, in the case of documents incorporated by reference, as
of the date of those documents.
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
(a) General Development of Business
The Charles Schwab Corporation (CSC, and with its subsidiaries collectively
referred to as the Company) was incorporated in 1986 and engages, through its
subsidiaries, in securities brokerage, banking, and related financial services.
Charles Schwab & Co., Inc. (Schwab) was incorporated in 1971 and is a securities
broker-dealer that entered the discount brokerage business in 1974. U.S. Trust
Corporation (USTC, and with its subsidiaries collectively referred to as
U.S. Trust), which merged with CSC in 2000, is a wealth management firm that
through its subsidiaries also provides fiduciary services and private banking
services. Charles Schwab Bank, N.A. (Schwab Bank), is a retail bank which
commenced operations in April 2003.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), Schwab Capital Markets L.P. (SCM), CyberTrader, Inc. (CyberTrader),
and The Charles Schwab Trust Company (CSTC). CSIM is the investment advisor for
Schwab's proprietary mutual funds. The Company refers to certain funds for which
CSIM is the investment advisor as the SchwabFunds(R). SCM is a market maker in
Nasdaq, exchange-listed, and other securities providing trade execution services
primarily to broker-dealers and institutional clients. CyberTrader, a subsidiary
acquired in 2000, is an electronic trading technology and brokerage firm
providing services to highly active, online traders. CSTC serves as trustee for
employee benefit plans, primarily 401(k) plans.
Available Information
On the Company's Internet website, www.aboutschwab.com, the Company posts
the following filings as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission
(SEC): the Company's annual report on Form 10-K, the Company's quarterly reports
on Form 10-Q, the Company's current reports on Form 8-K, and any amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. All such filings on the Company's website are
available free of charge.
Subsequent Event
On February 10, 2004, the Company announced Schwab Personal Choice, its
suite of investing and advice services for individual investors. Schwab Personal
Choice(TM) consists of eight different offers that range from low-priced,
technology-based active trading to highly customized wealth management delivered
by independent investment advisors (IAs), with a range of self-directed and
advised investing services in between. In combination with services from
U.S. Trust and CyberTrader, Schwab Personal Choice is designed to give investors
control over the level of trading technology, service and advice they utilize,
the level of professional involvement in their portfolio management they
receive, and how they pay for those services. In addition, Schwab Personal
Choice is designed so that clients are guided to appropriate service solutions
based primarily on their needs and preferences, rather than portfolio size or
trading frequency.
(b) Financial Information About Segments
The Company provides financial services to individuals, institutional
clients, and broker-dealers through four segments - Individual Investor,
Institutional Investor, Capital Markets, and U.S. Trust. The Individual Investor
segment includes the Company's retail brokerage and banking operations. The
Institutional Investor segment provides custodial, trading and support services
to IAs, serves company 401(k) plan sponsors and third-party administrators, and
supports company stock option plans. The Capital Markets segment provides trade
execution services in Nasdaq, exchange-listed, and other securities primarily to
broker-dealers, including Schwab, and institutional clients. The U.S. Trust
segment provides investment, wealth management, custody, fiduciary, and private
banking services to individual and institutional clients. For financial
information by segment for the three years ended December 31, 2003, see note "27
- - Segment Information" in the Notes to Consolidated Financial Statements in the
Company's 2003 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
(c) Narrative Description of Business
Business Strategy
The Company's primary strategy is to meet the financial services needs of
individual investors and independent IAs. To sustain and advance this core
franchise, the Company remains focused on improving service for these clients
and building stronger relationships with them. The Company provides investors
and IAs with products and services that are tailored to (a) support a full
spectrum of investment styles and life stages, and (b) utilize its scale in
trading, operations, distribution and marketing.
Given that product and service offerings are frequently replicable across
financial services firms, management believes that the Company's strategy is
differentiated much more by how it approaches client service than by what is
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actually offered. The Company's vision is to be the most useful and ethical
provider of financial services in the world. This goal is pursued by combining
people and technology in unique ways. People provide the client focus and
personal touch that serving investors requires - the attitudes, training, and
incentives of Company employees reinforce the "ethical" part of the vision.
Technology helps create services that are scaleable, consistent, and great value
for the money, enabling the delivery of highly useful and relevant offerings to
the broadest possible array of clients.
Management believes that its ability to combine people and technology is
key to improving its competitive position - other investment firms either offer
technology-based self-service investing, or relationship-based investing built
around individual brokers with inconsistent advice and high pricing. The Company
endeavors to offer a range of choices, which combine people and technology to
provide the best of personal touch, consistency, insight, and value. Actively
trading investors have access to information, guidance and technology through
both Schwab and CyberTrader. Investors with a longer-term focus who wish to
manage and administer their investments independently can access help and
guidance, as well as extensive investment research, news and information,
through Schwab's live and automated channels. Investors looking for ongoing
access to advice have the choice - depending on the degree and nature of the
investment insight, money management and wealth services they desire - of
working with Schwab investment consultants, independent IAs, or U.S. Trust's
client service officers. IAs can access custody, trading, technology and other
support services through Schwab's Services for Investment Managers unit. All
clients have access to a broad and growing array of banking and lending
services, mutual funds, individual equities and fixed income securities.
The Company is currently concentrating on three main avenues for growth:
Offering an increasing array of investing and financial services that are
designed to help clients achieve better outcomes and thereby establish and
reinforce long-lasting relationships. A growing selection of value-added
services can also help to increase the Company's scale and productivity and
maximize the value of its marketing and service investments. Current examples
include portfolio and financial planning for individual investors, succession
planning support for independent advisors, estate and wealth planning for high
net worth individuals, and trading strategy seminars for active traders.
Further broadening the product footprint by adding products that existing
clients may be utilizing elsewhere, which in turn enables the Company to
maximize relationship value - clients gain increased convenience, utility and
benefits while the firm gains enhanced revenues. Examples of products added or
expanded in recent years include options and futures trading for active traders,
banking services for long-term investors, specialized mutual funds for
independent advisors, and private banking for high net worth individuals.
Diversifying into businesses that leverage the Company's core, to
strengthen its ability to reach and serve core clients and to develop a more
varied revenue stream. For example, SCM's institutional equities trading
business brings together both retail and institutional order flow in a way that
supports high quality trade executions for all clients, as well as provides
institutional investors with research that can also be offered to certain IA and
individual clients. Schwab's Corporate Services unit serves the retirement plan
needs of corporations, levering the Company's technology, open-architecture
mutual fund offering and brand for the benefit of their employees, who, in turn,
can become Schwab clients in their own right.
For further discussion on the Company's business strategy, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Description of Business - Business Strategy" in the Company's 2003
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
The table below shows the Company's sources of revenues on a comparative
basis for the three years ended December 31, 2003.
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Sources of Revenues
(In millions)
Year Ended December 31,
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2003 2002 2001
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Amount Percent Amount Percent Amount Percent
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Revenues
Asset management and administration fees
Mutual fund service fees:
Proprietary funds (SchwabFunds(R),
Excelsior(R), and other) $ 883 22% $ 874 21% $ 818 19%
Mutual Fund OneSource(R) 283 7% 264 7% 282 7%
Other 50 1% 41 1% 42 1%
Asset management and related services 609 15% 570 14% 521 12%
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Asset management and administration fees 1,825 45% 1,749 43% 1,663 39%
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Commissions
Equity and other securities 1,002 25% 980 24% 1,119 26%
Mutual funds 110 3% 111 3% 96 2%
Options 95 2% 99 3% 114 3%
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Commissions 1,207 30% 1,190 30% 1,329 31%
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Net interest revenue
Margin loans to clients 347 8% 459 11% 832 19%
Investments, client-related 284 7% 337 8% 555 13%
Loans to banking clients 230 6% 236 6% 240 5%
Securities available for sale 74 2% 76 2% 79 2%
Other 35 1% 50 1% 115 3%
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Interest revenue 970 24% 1,158 28% 1,821 42%
Interest expense (241) (6%) (334) (8%) (910) (21%)
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Net interest revenue 729 18% 824 20% 911 21%
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Principal transactions
Fixed income securities 89 2% 92 2% 65 2%
Equity securities 79 2% 92 2% 190 4%
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Principal transactions 168 4% 184 4% 255 6%
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Other 158 3% 144 3% 134 3%
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Total revenues $4,087 100% $4,091 100% $4,292 100%
====================================================================================================================================
This table should be read in connection with the Company's consolidated financial statements and notes in the
Company's 2003 Annual Report to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report. Certain prior years' revenues and expenses have been reclassified to conform to the 2003 presentation.
Products and Services
The Company offers a broad range of products to address its clients'
varying investment and financial needs. Examples of these product offerings
include:
- - Brokerage - various asset management accounts including some with
check-writing features, individual retirement accounts, Keogh accounts, 529
college savings accounts, margin loans, and access to fixed income
securities, and equity and debt offerings;
- - Banking - first mortgages, home equity lines of credit, certificates of
deposit, demand deposit accounts, and private banking accounts; and
- - Mutual funds - third-party mutual funds through Mutual Fund Marketplace(R),
including no-load mutual funds through the Mutual Fund OneSource service,
and proprietary mutual funds from two fund families - SchwabFunds and
Excelsior Funds.
In addition, the Company offers a wide array of services designed to meet
the needs of independent, advised, and actively trading investors.
The Company's products and services are made available through its four
segments - Individual Investor, Institutional Investor, Capital Markets, and
U.S. Trust.
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Individual Investors
Clients of the Company, through the Individual Investor segment or
indirectly through the Institutional Investor segment, have access to the
services described below. Additionally, see "Subsequent Event" for a discussion
of Schwab Personal Choice(TM).
Independent Investors. For investors who make independent investment
decisions, the Company offers research, analytic tools, and access to fee-based
portfolio consultations and financial planning services. Clients looking for
more guidance have access to advanced research, trading and planning resources,
combined with professional advice from Schwab's investment specialists designed
to assist in developing an investment strategy and carrying out investment and
portfolio management decisions.
Schwab strives to demystify investing by educating and assisting clients in
the development of investment plans. Educational tools include workshops
designed to help investors increase their skills in using Schwab's online
services; interactive courses designed to help clients learn more about
investing principles and use of the online channel; and a centralized location
on schwab.com(TM) for educational information about investing. Schwab provides
various Internet-based research and analysis tools which are designed to help
clients achieve better investment outcomes.
Schwab Equity Ratings(TM) provide clients with an objective stock rating
system on more than 3,000 stocks, assigning each equity a single grade: A, B, C,
D, or F. Rated stocks are ranked and the number of 'buy consideration' ratings -
As and Bs - equals the number of 'sell consideration' ratings - Ds and Fs.
Advised Investors. The Company seeks to provide clients with customized
advice that is uncomplicated and not influenced by commissions on transactions.
The Company's approach to advice is based on long-term investment strategies and
guidance on portfolio diversification and asset allocation. This approach is
designed to be offered consistently across all of Schwab's delivery channels.
Schwab Private Client(TM) features a face-to-face advice relationship with
a designated Schwab consultant who offers individualized service, provides
ongoing investment strategy and execution, and acts as a liaison between clients
and a team of Schwab professionals.
The Schwab Advisor Network (The Network) is designed for investors who want
the assistance of an independent professional in managing their financial
affairs. The IAs in the Network provide investors with personalized portfolio
management, financial planning, and wealth management solutions. Through a
separate program, certain Schwab clients and potential clients who desire
personalized investment management, wealth management, trust, and private
banking services can receive referrals to U.S. Trust.
Actively Trading Investors. The Company strives to deliver information,
technology, service and pricing which meets the needs of active traders. For
highly active traders, CyberTrader offers integrated software-based trading
platforms, which utilize direct access and intelligent order routing technology,
and a streaming Web trading platform which includes real-time market data,
direct access technology, intelligent order routing, options trading, and
premium stock research. For active traders, Schwab also offers a desktop trading
software and trading technology tools with account management features, risk
management tools, multi-channel access, and dedicated personal support.
Banking Services. In addition to the banking services which U.S. Trust
offers its clients, the Company provides all of its clients with access to
selected banking services through Schwab Bank which complement its existing
asset and wealth management capabilities and help to facilitate the
consolidation of household financial assets at Schwab.
Global Dollar Services. The Company's international business serves both
foreign investors and non-English-speaking U.S. clients in U.S. dollar-based
securities. The Company has a presence in the United Kingdom and Hong Kong. In
the U.S., the Company serves Chinese-, Korean-, Vietnamese-, and
Spanish-speaking clients through a combination of designated branch offices and
Web-based and telephonic services.
Institutional Investors
Services for IAs. Schwab provides custodial, trading, technology, Web, and
other support services to IAs, whose services are integral to the Company's
advice offerings, through the Institutional Investor segment. To attract the
business of these advisors, Schwab has a dedicated business unit which includes
experienced registered representatives assigned to individual advisors.
IAs participating in this program who custody client accounts at Schwab may
use proprietary software which provides IAs with up-to-date client account
information, as well as mutual fund trading and management fee capabilities.
Participating IAs may also utilize the Schwab Institutional website, the core
platform for IAs to conduct daily business activities online with Schwab,
including trading, submitting client account information, and retrieving news
and market information; as well as a service which enables IAs to provide their
clients with personalized equity portfolio management by a variety of
institutional asset managers.
Corporate Services. The Company also serves individuals through their
workplace in a variety of ways. The Company provides 401(k) recordkeeping and
other retirement plan services directly through a dedicated sales force, as well
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as indirectly through alliances with third-party administrators. SchwabPlan(R),
the Company's 401(k) retirement plan product, offers plan sponsors a wide array
of investment options, participant education and servicing, trustee services,
and participant-level recordkeeping. In addition, the Company offers a
comprehensive bundled 401(k) plan designed specifically to meet the needs of
401(k) programs with between $2 million and $20 million in participant assets.
Participants in these plans have online, telephonic, or in-person access to
customized advice provided by a third party, including specific recommendations
about savings rates and the core investment fund choices available in a given
retirement plan.
Capital Markets
The Company provides its clients with quick and efficient access to the
securities markets by offering trade execution services in Nasdaq,
exchange-listed, and other securities through its market-maker operations.
Clients also have the ability to access extended-hours trading and analyze and
trade a variety of fixed income securities through Schwab's multi-channel
delivery systems. Additionally, the Company provides trade execution services
via its institutional equity trading team of over 170 professionals.
The Company provides trade execution capabilities through the Schwab
Liquidity Network(TM), a market-making system that pools the orders of the
Company's individual investor client base with those of broker-dealers and
institutional investment firms in a manner designed to offer greater
opportunities for the best possible price on most stock trades. Further, the
Company offers automated electronic execution for most Nasdaq stock trades of up
to 20,000 shares for retail orders.
In November 2003, the Company announced an agreement to acquire SoundView
Technology Group, Inc., a research-driven securities firm providing
institutional investors with fundamental research on companies in selected
growth-related industries. See note "29 - Subsequent Events" in the Company's
2003 Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Risk Management" in the Company's 2003 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" in this report.
U.S. Trust
U.S. Trust provides an array of financial services for affluent clients and
their families. These services include investment and wealth management, trust,
custody, financial and estate planning, and private banking. U.S. Trust provides
both individually managed balanced portfolios (i.e., portfolios that are
invested in several different asset classes with the overall goal of preserving
and enhancing those assets) and specialized investment management services to
clients with $2 million to $50 million in assets at U.S. Trust. U.S. Trust
offers Wealth Advisory Accounts, an investment advisory service that utilizes
the Excelsior(R) family of mutual funds, to clients that have over $250,000 in
assets at U.S. Trust. In addition to investment management services, U.S. Trust
provides specialized fiduciary, financial planning, enhanced master custody, and
philanthropic consulting services to clients that have over $50 million in
assets at U.S. Trust. U.S. Trust also offers private banking services to assist
in meeting the credit and liquidity requirements of its clients.
For institutional clients, including corporations, endowments, foundations,
and pension plans, U.S. Trust provides investment management, brokerage, and
special fiduciary services. Through these investment management services,
U.S. Trust offers a wide range of investment options, including balanced and
specialized domestic and international equity investments, structured
investments, alternative investments, fixed income securities, and short-term
cash management. Institutional clients can also utilize the Excelsior funds.
Additionally, U.S. Trust offers to its institutional clients investment,
consulting, and fiduciary services for employee stock ownership plans.
Mutual Fund Services
The Company provides mutual fund services primarily through the Individual
Investor, Institutional Investor, and U.S. Trust segments. Schwab's Mutual Fund
Marketplace(R) provides clients with the ability to invest in over 3,100 mutual
funds from a wide variety of fund companies. Within the Mutual Fund Marketplace,
Schwab's Mutual Fund OneSource(R) service offers clients access to over 1,700
no-load mutual funds from a variety of fund families without incurring
transaction fees. The Mutual Fund Marketplace also includes Schwab's mutual fund
clearing service, which provides mutual fund trading and clearing services to
broker-dealers.
Schwab's Mutual Fund OneSource service allows investors to access multiple
mutual fund companies, avoid brokerage transaction fees, and achieve investment
diversification among fund families. Fees received by Schwab for providing
services, including recordkeeping and shareholder services, from the Mutual Fund
OneSource program are based upon the daily balances of client assets invested in
the participating funds through Schwab and are paid by the funds and/or fund
sponsors.
Schwab charges a transaction fee on trades placed in non-Mutual Fund
OneSource funds included in the Mutual Fund Marketplace. These fees are recorded
as commission revenues. In addition to the third-party funds available through
the Mutual Fund Marketplace, Schwab offers a
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family of proprietary funds, referred to as the SchwabFunds(R), and U.S. Trust
offers the Excelsior(R) family of funds. Fees received by the Company from the
SchwabFunds and the Excelsior Funds, for providing shareholder services,
administration, investment management and other services, are based upon the net
asset value of the funds.
Client Financing and Clearing Services
Clients' securities transactions are conducted on either a cash or margin
basis. In an account authorized for margin trading, Schwab may lend a client a
portion of the market value of certain securities up to the limit established by
the Board of Governors of the Federal Reserve System (Federal Reserve Board),
which for most equity securities is initially 50%. These loans are
collateralized by the securities in the client's account. Short sales of
securities represent sales of borrowed securities and create an obligation for
the client to purchase the securities at a later date. Clients may sell
securities short in a margin account subject to minimum equity and applicable
margin requirements and the availability of such securities to be borrowed and
delivered. Interest on margin loans to clients provides an important source of
revenue to Schwab.
In permitting a client to engage in transactions, Schwab faces credit risk
if the client 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 client to deposit additional
securities or cash, or reduce positions, when necessary so that the amount of
the client's obligation is not greater than specified percentages of the cash
and market values of the securities in the account. As a matter of policy,
Schwab generally requires its clients to maintain higher percentages of
collateral values than the minimum percentages required under these regulations.
Schwab may use cash balances in client accounts to extend margin credit to
other clients. Pursuant to the requirements of Rule 15c3-3 under the Securities
Exchange Act of 1934 (Rule 15c3-3), the portion of such cash balances not used
to extend margin credit (increased or decreased by certain other client-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in cash or qualified securities,
as defined by Rule 15c3-3. See also "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Risk Management - Credit Risk"
in the Company's 2003 Annual Report to Stockholders, which is incorporated
herein by reference to Exhibit No. 13.1 of this report, and "Regulation" in this
report.
Schwab performs clearing services for all securities transactions in its
client accounts. Schwab is obligated to settle transactions with clearing
corporations, mutual funds and other financial institutions even if Schwab's
client or a counterparty fails to meet his or her obligations to Schwab. See
note "25 - Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk
or Market Risk" in the Notes to Consolidated Financial Statements in the
Company's 2003 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
Service Delivery
Consistent with its strategy of combining people and technology to provide
high-quality service, the Company's multi-channel delivery systems allow clients
to choose how they prefer to do business with the Company. In addition to its
network of 339 domestic branch offices in 48 states, as well as a branch in the
Commonwealth of Puerto Rico, Schwab maintains automated online and telephonic
channels, primarily serving retail investors through the Individual Investor and
Institutional Investor segments. Schwab also maintains four regional client
telephone service centers, located in Denver, Indianapolis, Orlando, and
Phoenix, which handle client trading, advice, and service calls. U.S. Trust
maintains 37 offices in 15 states serving clients through the U.S. Trust
segment.
While most client transactions are completed through the online channel,
the Company continues to stress the importance of blending the power of the
Internet with personal service to create a full-service client experience. The
Company's online channels handled 87% of total trades in 2003.
The Company's ongoing investment in technology is a key element in
expanding its product and service offerings, enhancing its delivery systems,
providing fast and consistent client service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in client
activity without a corresponding rise in staffing levels. The Company uses
technology to empower its clients to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
For a discussion on the Company's technology and operating risk and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition - Risk
Management - Technology and Operating Risk" in the Company's 2003 Annual Report
to Stockholders, which is incorporated herein by reference to Exhibit No. 13.1
of this report, and "Regulation" in this report.
Advertising and Brands
The Company maintains three distinct brands - Schwab, U.S. Trust, and
CyberTrader - by sustaining a consistent level
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of visibility in the marketplace. The Company's advertising and marketing
programs support its strategy by reinforcing the strengths and key attributes of
Schwab's full-service offering, U.S. Trust's wealth management services, and
CyberTrader's trading technology. The Company primarily uses a combination of
network, cable and local television, print media, direct mail, athletic event
sponsorship, and online channels in its advertising.
Employees
As of December 31, 2003, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 16,300 full-time employees.
Risk Management
The Company's business and activities expose it to different types of
risks. Proper identification, assessment, and management of these risks are
essential to the success and financial soundness of the Company. For a
discussion on the Company's principal risks and some of the policies and
procedures for risk identification, assessment and mitigation, see "Management's
Discussion and Analysis of Results of Operations and Financial Condition - Risk
Management" in the Company's 2003 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" in this report.
Business Environment
The Company's business, like that of other securities brokerage and related
financial services firms, is directly affected by the fluctuations in securities
trading volumes and price levels that occur in fundamentally cyclical financial
markets, by changes in government monetary policies that impact the growth of
bank loans and investments and the level of interest charged for loans and paid
on deposits and other funding sources, and by changes in the geopolitical
environment. The Company may experience significant variations in revenues from
period to period depending on changes in these factors and the overall business
environment. Given the nature of the Company's revenues, expenses and risk
profile, the Company's earnings and CSC's common stock price may be subject to
significant volatility from period to period. For a discussion of the business
environment faced by the Company in 2003, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Description of
Business - Overview" in the Company's 2003 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No.13.1 of this report.
Competition
The Company faces significant competition from companies seeking to attract
client financial assets, including traditional, discount and online brokerage
firms, mutual fund companies, banks, and asset management and wealth management
companies. For a discussion of competition, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Risk Management
- - Competition" in the Company's 2003 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Regulation
CSC is a financial holding company, which is a type of bank holding company
subject to supervision and regulation by the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended. CSC's depository institution
subsidiaries, including Schwab Bank and affiliates of U.S. Trust, are subject to
regulation under federal and state law, including supervision by federal and
state banking authorities. For a discussion of bank holding company
requirements, see note "23 - Regulatory Requirements" in the Notes to
Consolidated Financial Statements in the Company's 2003 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
The securities industry in the United States is subject to extensive
regulation under both federal and state laws.
- 7 -
Schwab, SCM, and CyberTrader are registered as broker-dealers with the SEC, the
fifty states, and the District of Columbia and Puerto Rico. 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 (SROs), namely the national securities exchanges.
Schwab is a member of most of the major national securities exchanges and is
consequently subject to their rules and regulations. The primary regulators of
Schwab, SCM, and CyberTrader include the New York Stock Exchange (NYSE), the
National Association of Securities Dealers (NASD), and the Municipal Securities
Rulemaking Board. 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. The Company's business is also subject to
oversight by regulatory bodies in other countries in which the Company operates.
The principal purpose of regulating broker-dealers and investment advisors
is the protection of clients and the securities markets. The regulations to
which broker-dealers and investment advisors are subject cover all aspects of
the securities business, including sales and trading practices, publication of
research, margin lending, uses and safekeeping of clients' funds and securities,
capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to
clients, fiduciary duties owed to advisory clients, and the conduct of
directors, officers and employees.
New legislation, rule changes, or changes in the interpretation or
enforcement of existing federal, state and SRO rules and regulations may
directly affect the operation and profitability of CSC and its financial
services affiliates. The profitability of CSC and its financial services
affiliates could also be affected by rules and regulations which impact the
business and financial communities generally, including changes to the laws
governing taxation, electronic commerce, and security of client data. CSC and
its financial services affiliates are subject to claims, lawsuits, regulatory
examinations and other proceedings in the ordinary course of business, which can
result in censure, fine, cease and desist orders, or suspension or expulsion of
such affiliate, its officers, or employees.
As registered broker-dealers, certain subsidiaries of CSC, including Schwab
and SCM, are subject to SEC Rule 15c3-1 (the Net Capital Rule) and related SRO
requirements. The CFTC and NFA also impose net capital requirements. The Net
Capital Rule specifies minimum capital requirements that are intended to ensure
the general financial soundness and liquidity of broker-dealers. Because CSC
itself is not a registered broker-dealer, it is not subject to the Net Capital
Rule. However, if Schwab or SCM failed to maintain specified levels of net
capital, such failure would constitute a default by CSC under certain debt
covenants.
The Net Capital Rule limits broker-dealers' ability to transfer capital to
parent companies and other affiliates. Compliance with the Net Capital Rule
could limit Schwab's or SCM's operations and their ability to repay subordinated
debt to CSC, which in turn could limit CSC's ability to repay debt, pay cash
dividends and purchase shares of its outstanding stock. See also "Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Liquidity and Capital Resources - Liquidity" and note "23 - Regulatory
Requirements" in the Notes to Consolidated Financial Statements in the Company's
2003 Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
Item 2. Properties
A summary of the Company's significant locations at December 31, 2003 is
presented in the following table. All locations are leased, except as noted
below. The square footage amounts (in thousands) are presented net of space that
has been subleased to third parties.
- --------------------------------------------------------------------------------
Square Footage
Location Leased Owned
- --------------------------------------------------------------------------------
Corporate office space:
San Francisco, CA (1) 1,570 364
Pleasanton, CA 416 8
New York, NY (2) 488 -
Jersey City, NJ (3) 442 -
Service centers:
Phoenix, AZ (4,5) 118 1,009
Denver, CO (4) 331 -
Orlando, FL (4) 298 -
Indianapolis, IN (4) - 164
Austin, TX (6) 207 -
- --------------------------------------------------------------------------------
(1) Includes Schwab headquarters.
(2) Includes U.S. Trust headquarters.
(3) Includes SCM headquarters.
(4) Includes a regional telephone service center.
(5) Includes two data centers and an administrative support center.
(6) The Company closed this service center in 2002.
Substantially all of the Company's branch offices are located in leased
premises. While the corporate headquarters and data centers support all of the
Company's segments, the offices and service centers primarily support the
Individual Investor, Institutional Investor, and U.S. Trust segments.
From 2001 to 2003, the Company initiated restructuring initiatives that
included a reduction in facilities. For a discussion of such initiatives, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Results of Operations" and note "3 -
- 8 -
Restructuring and Other Charges" in the Notes to Consolidated Financial
Statements in the Company's 2003 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit 13.1 of this report.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is included
in note "24 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 2003 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2003.
Item 4A. Executive Officers of the Registrant
Information relating to the executive officers of the Company is
incorporated by reference from Part III, Item 10 of this report.
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 Archipelago
Exchange, a facility of the Pacific Exchange, under the ticker symbol SCH. The
number of common stockholders of record as of March 1, 2004 was 12,358. The
closing market price per share on that date was $12.32.
The other information required to be furnished pursuant to this item is
included in "Quarterly Financial Information (Unaudited)" in the Company's 2003
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 2003 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 2003 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
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 2003 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 2003 Annual Report to Stockholders, which is
incorporated herein by reference to Exhibit No. 13.1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's
- 9 -
disclosure controls and procedures as of December 31, 2003. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded, as of December 31, 2003, that the Company's disclosure controls
and procedures were effective in recording, processing, summarizing, and
reporting the information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934, within the time periods
specified in the Securities and Exchange Commission's rules and forms. Such
evaluation did not identify any change in the Company's internal control over
financial reporting that occurred during the quarter ended December 31, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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, 2004 (the Proxy
Statement) under "The Board of Directors - Members of the Board of Directors,"
footnote 2 to "The Board of Directors - Board and Committee Meetings," and
"Section 16(a) Beneficial Ownership Reporting Compliance." The Company's Code of
Conduct and Business Ethics, applicable to directors and all employees,
including senior financial officers, is available on the Company's website at
www.aboutschwab.com/corpgov. If the Company makes any amendments to or grants
any waivers from its Code of Conduct and Business Ethics which are required to
be disclosed pursuant to the Securities Exchange Act of 1934, the Company will
make such disclosures on this website.
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers.
- 10 -
================================================================================
Executive Officers of the Registrant
Name Age Title
---- --- -----
Charles R. Schwab 66 Chairman and Director
David S. Pottruck 55 Chief Executive Officer and Director
William L. Atwell 53 Executive Vice President and President
- Client Sales and Service and Banking
Jody L. Bilney 42 Executive Vice President and Chief
Marketing Officer
Christopher V. Dodds 44 Executive Vice President and Chief
Financial Officer
Lon Gorman 55 Vice Chairman and President - Schwab
Institutional and Asset Management
Daniel O. Leemon 50 Executive Vice President and Chief
Strategy Officer
Dawn G. Lepore 49 Vice Chairman - Active Trader,
Technology, Operations, Administration
and Business Strategy
Mary S. McLeod 48 Executive Vice President - Human
Resources
Geoffrey J. Penney 58 Executive Vice President and Chief
Information Officer
Alan J. Weber 55 Executive Vice President of The Charles
Schwab Corporation, Chairman and Chief
Executive Officer of U.S. Trust
Corporation
================================================================================
Mr. Schwab has been Chairman and a director of the Company since its
incorporation in 1986. Mr. Schwab was Co-Chief Executive Officer of the Company
from 1998 to May 2003, and Chief Executive Officer of the Company from 1986 to
1997. Mr. Schwab was a founder of Schwab in 1971 and has been its Chairman since
1978. Mr. Schwab is currently a director of USTC and its principal subsidiary,
U.S. Trust NY; Gap, Inc. (until May 13, 2004 when Mr. Schwab's term on the Gap
board will expire); and Siebel Systems, Inc., a company that provides support
for software systems. Mr. Schwab is also a trustee of The Charles Schwab Family
of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity
Portfolios, all registered investment companies.
Mr. Pottruck has been Chief Executive Officer of the Company since May
2003, a director of the Company since 1994, and President of the Company since
1992. Mr. Pottruck was Co-Chief Executive Officer of the Company from 1998 to
May 2003, and Chief Operating Officer of the Company from 1994 to 1998.
Mr. Pottruck joined Schwab in 1984. Mr. Pottruck is currently a director of
USTC; U.S. Trust NY; and Intel Corporation, a maker of microcomputer components
and related products.
- 11 -
Mr. Atwell has been Executive Vice President and President - Client Sales
and Service and Banking since May 2003. He served as Executive Vice President -
Institutional, International and Banking of the Company and Schwab from June
2002 until May 2003 and Executive Vice President - International and Banking of
Schwab between February and May 2002. Mr. Atwell was Executive Vice President -
International of Schwab from 2000 to 2002. Prior to joining Schwab, Mr. Atwell
was Senior Vice President - National Sales and Delivery Network for CIGNA
Healthcare from 1996 to 2000. Mr. Atwell is currently a director of the
Securities Industry Association.
Ms. Bilney has been Executive Vice President and Chief Marketing Officer of
the Company and Schwab since 2002. Prior to joining Schwab, Ms. Bilney was
Senior Vice President - Brand Management and Marketing Communications from 2001
to 2002, President - Consumer Markets Group from 2000 to 2001, Vice President -
Consumer Markets Group from 1999 to 2000, and Vice President - General Manager,
Consumer Sales from 1997 to 1999 for Verizon Communications, a provider of
telecommunication services.
Mr. Dodds has been Chief Financial Officer of the Company and Schwab since
1999 and Executive Vice President of the Company and Schwab since 1998.
Mr. Dodds was Corporate Controller of Schwab from 1997 to 1999 and Corporate
Treasurer of Schwab from 1993 to 1997. Mr. Dodds joined Schwab in 1986.
Mr. Gorman has been Vice Chairman of the Company and Schwab since 1999,
President - Schwab Institutional and Asset Management since May 2003, President
- - Asset Management Products and Services from February 2002 until May 2003,
Enterprise President - Schwab Capital Markets of Schwab, and Executive Vice
President of the Company from 1997 to 1999. Mr. Gorman joined Schwab in 1996.
Mr. Gorman is currently a director of the Nasdaq Stock Market.
Mr. Leemon has been Executive Vice President and Chief Strategy Officer of
the Company and Schwab since 1995. Mr. Leemon joined Schwab in 1995. Mr. Leemon
is currently a director of The Corporate Executive Board, a provider of research
and quantitative analysis focusing on corporate strategy, operations, and
general management issues.
Ms. Lepore has been Vice Chairman - Active Trader, Technology, Operations,
Administration and Business Strategy since August 2003. She served as Vice
Chairman - Technology, Active Trader, Operations, and Administration of the
Company and Schwab from May 2003 until August 2003, Vice Chairman - Technology,
Operations and Administration of the Company and Schwab from July 2002 until May
2003, and Vice Chairman - Technology and Administration of the Company and
Schwab from 2001 to 2002. Ms. Lepore was Vice Chairman and Chief Information
Officer of the Company and Schwab from 1999 to 2001 and Executive Vice President
and Chief Information Officer of the Company and Schwab from 1993 to 1999.
Ms. Lepore joined Schwab in 1983. Ms. Lepore is currently a director of Wal-Mart
Stores, Inc., eBay Inc., and Catalyst, Inc.
Ms. McLeod has been Executive Vice President - Human Resources of the
Company and Schwab since 2001. Ms. McLeod was appointed to the Company's
Executive Committee effective January 1, 2003. Prior to joining Schwab,
Ms. McLeod was Vice President of Human Resources for the Global Sales
Organization of Cisco Systems from 2000 to 2001, Director of Human Resources for
Hallmark Cards from 1997 until 1998, and Senior Vice President of Human
Resources for Hallmark Cards from 1998 to 2000.
Mr. Penney has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 2001. Mr. Penney was appointed to the Company's
Executive Committee effective January 1, 2003. Mr. Penney was Executive Vice
President - Schwab Technology of Schwab from 1998 to 2001. Mr. Penney joined
Schwab in 1997 as Senior Vice President of Financial Products and International
Technology of Schwab. Mr. Penney is currently a director of Keynote Systems, an
internet performance management company.
Mr. Weber has been Executive Vice President of the Company, Chief Executive
Officer of USTC and U.S. Trust NY, and a director of USTC since 2002. Mr. Weber
was appointed Chairman of USTC as of January 31, 2003. Prior to joining USTC,
Mr. Weber was Vice Chairman and Chief Financial Officer for Aetna, Inc. from
1998 to 2001. Mr. Weber currently serves as Advisory Committee Chairman of
Computer Repair Systems, LLC.
- 12 -
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "The Board
of Directors - Compensation Committee Interlocks and Insider Participation," "-
Director Compensation," "Executive Compensation - Summary Compensation Table,"
"- Options Granted in 2003," "- Fiscal Year End Option Values," "- Long Term
Incentive Plan - Awards in 2003," "Certain Relationships and Related
Transactions," "Appendix B - Description of Charles R. Schwab's Employment and
License Agreements," and "Appendix C - Description of Lon Gorman's Employment
Agreement."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under "Principal
Stockholders," "Executive Compensation - Securities Authorized for Issuance
Under Equity Compensation Plans," and "- Material Features of Employee Stock
Incentive Plan."
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
Relationships and Related Transactions."
Item 14. Principal Accountant Fees and Services
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under
"Independent Auditors - Auditor Selection and Fees."
PART IV
Item 15. 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 2003 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
On October 21, 2003, the Registrant furnished a Current Report on Form 8-K
announcing under Item 12 - Results of Operations and Financial Condition, the
financial results for the quarter ended September 30, 2003.
- 13 -
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
- --------------------------------------------------------------------------------
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
1.3 The Charles Schwab Corporation Medium-Term Notes Distribution
Agreement filed as Exhibit 1.3 to the Registrant's Form 10-Q for the
quarter ended June 30, 2000 and incorporated herein by reference.
2.1 Agreement and Plan of Merger dated as of January 12, 2000, by and
among The Charles Schwab Corporation, Patriot Merger Corporation and
U.S. Trust Corporation, filed as Exhibit 2.1 to the Registrant's Form
8-K dated January 12, 2000 and incorporated herein by reference.
3.11 Fifth Restated Certificate of Incorporation, effective May 7, 2001, of
the Registrant (supersedes Exhibit 3.10), filed as Exhibit 3.11 to the
Registrant's Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference.
3.12 Third Restated Bylaws, as amended on May 9, 2003, of the Registrant
(supersedes Exhibit 3.9), filed as Exhibit 3.12 to the Registrant's
Form 10-Q for the quarter ended June 30, 2003 and incorporated herein
by reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. Copies of instruments
with respect to long-term debt of lesser amounts will be provided to
the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.57 Registration Rights and Stock Restriction Agreement, dated as of
March 31, 1987, between the Registrant and the holders of the Common
Stock, filed as Exhibit 4.23 to Registrant's Registration Statement
No. 33-16192 on Form S-1 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the
Registrant, filed as Exhibit 10.72 to the Registrant's Form 10-K for
the year ended December 31, 1999 and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
+
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, 2001 and incorporated herein
by reference. +
- 14 -
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, 2002 and incorporated herein by
reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.149 Employment Agreement dated as of March 31, 1995 between the Registrant
and Charles R. Schwab, filed as Exhibit 10.149 to the Registrant's
Form 10-K for the year ended December 31, 1999 and incorporated herein
by reference. +
10.169 Third Amendment to the Trust Agreement for the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan effective January 1, 1996,
dated May 8, 1996 filed as Exhibit 10.169 to the Registrant's Form
10-Q for the quarter ended June 30, 2002 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, 2002 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, 2002 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. +
10.215 The Charles Schwab Corporation Directors' Deferred Compensation Plan,
restated to include amendments through December 13, 2000 (supersedes
Exhibit 10.209), filed as Exhibit 10.215 to the Registrant's Form 10-K
for the year ended December 31, 2000 and incorporated herein by
reference. +
10.218 Executive Employment Agreement and Covenant Not To Compete for
Jeffrey S. Maurer, filed as Exhibit 10.218 to the Registrant's Form
10-Q for the quarter ended March 31, 2001 and incorporated herein by
reference. +
10.221 The SchwabPlan Retirement Savings and Investment Plan, restated and
amended as of April 1, 2001 (supersedes Exhibit 10.216), filed as
Exhibit 10.221 to the Registrant's Form 10-Q for the quarter ended
June 30, 2001 and incorporated herein by reference. +
- 15 -
10.226 The Charles Schwab Corporation Employee Stock Incentive Plan, restated
and amended as of September 20, 2001 (supersedes Exhibit 10.190),
filed as Exhibit 10.226 to the Registrant's Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference. +
10.227 Benefit Equalization Plan of U.S. Trust Corporation, filed as
Exhibit 10.227 to the Registrant's Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference. +
10.228 1990 Change in Control and Severance Policy for Top Tier Officers of
United States Trust Company of New York and Affiliated Companies,
filed as Exhibit 10.228 to the Registrant's Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference. +
10.231 1989 Stock Compensation Plan and Predecessor Plans of U.S. Trust
Corporation, filed as Exhibit 10.231 to the Registrant's Form 10-Q for
the quarter ended September 30, 2001 and incorporated herein by
reference. +
10.234 Executive Deferred Compensation Plan of U.S. Trust Corporation, as
amended and restated effective as of January 1, 2001 (supersedes
Exhibit 10.229), filed as Exhibit 10.234 to the Registrant's Form 10-K
for the year ended December 31, 2001 and incorporated herein by
reference. +
10.235 Executive Incentive Plan of U.S. Trust Corporation, as amended and
restated effective as of January 1, 2001 (supersedes Exhibit 10.230),
filed as Exhibit 10.235 to the Registrant's Form 10-K for the year
ended December 31, 2001 and incorporated herein by reference. +
10.236 U.S. Trust Corporation 401(k) Plan, as amended and restated effective
as of January 1, 2001 (supersedes Exhibit 10.233), filed as Exhibit
10.236 to the Registrant's Form 10-K for the year ended December 31,
2001 and incorporated herein by reference. +
10.237 U.S. Trust Corporation Employees' Retirement Plan, as amended and
restated effective as of January 1, 2001 (supersedes Exhibit 10.232),
filed as Exhibit 10.237 to the Registrant's Form 10-K for the year
ended December 31, 2001 and incorporated herein by reference. +
10.239 The Charles Schwab Corporation Annual Executive Individual Performance
Plan, restated to include amendments approved at the Annual Meeting of
Stockholders on May 13, 2002 (supersedes Exhibit 10.220), filed as
Exhibit 10.239 to the Registrant's Form 10-Q for the quarter ended
June 30, 2002 and incorporated herein by reference. +
10.240 The Charles Schwab Corporation Corporate Executive Bonus Plan,
restated to include amendments approved at the Annual Meeting of
Stockholders on May 13, 2002 (supersedes Exhibit 10.212), filed as
Exhibit 10.240 to the Registrant's Form 10-Q for the quarter ended
June 30, 2002 and incorporated herein by reference. +
- 16 -
10.241 Credit Agreement (364-Day Commitment) dated as of June 21, 2002
between the Registrant and the financial institutions listed therein
(supersedes Exhibit 10.238), filed as Exhibit 10.241 to the
Registrant's Form 10-Q for the quarter ended June 30, 2002 and
incorporated herein by reference.
10.242 The Charles Schwab Corporation 1987 Stock Option Plan, amended and
restated as of September 25, 2002, with form of Non-Qualified Stock
Option Agreement attached (supersedes Exhibit 10.222), filed as
Exhibit 10.242 to the Registrant's Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference. +
10.243 The Charles Schwab Corporation 1987 Executive Officer Stock Option
Plan, amended and restated as of September 25, 2002, with form of
Non-Qualified Stock Option Agreement attached (supersedes Exhibit
10.223), filed as Exhibit 10.243 to the Registrant's Form 10-Q for the
quarter ended September 30, 2002 and incorporated herein by reference.
+
10.244 The Charles Schwab Corporation 1992 Stock Incentive Plan, amended and
restated as of September 25, 2002 (supersedes Exhibit 10.224), filed
as Exhibit 10.244 to the Registrant's Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference. +
10.246 Executive Employment Agreement by and among The Charles Schwab
Corporation, Schwab Capital Markets L.P., and Lon Gorman, and
Supplemental Agreement thereto, filed as Exhibit 10.246 to the
Registrant's Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference. +
10.247 The Charles Schwab Severence Pay Plan, restated as of August 1, 2002,
filed as Exhibit 10.247 to the Registrant's Form 10-Q for the quarter
ended September 30, 2002 and incorporated herein by reference. +
10.248 The Charles Schwab Corporation 2001 Stock Incentive Plan, restated to
include amendments through October 23, 2002 (supersedes Exhibits
10.225 and 10.245), filed as Exhibit 10.248 to the Registrant's Form
10-K for the year ended December 31, 2002 and incorporated herein by
reference. +
10.250 Separation Agreement by and between Jeffrey S. Maurer and The Charles
Schwab Corporation, filed as Exhibit 10.250 to the Registrant's
Form 10-K for the year ended December 31, 2002 and incorporated herein
by reference. +
10.251 The Charles Schwab Corporation 2001 Stock Incentive Plan, restated to
include amendments through May 2003 (supersedes Exhibit 10.248), filed
as Exhibit 10.251 to the Registrant's Form 10-Q for the quarter ended
June 30, 2003 and incorporated herein by reference. +
10.252 The Charles Schwab Corporation Long-Term Incentive Plan, filed as
Exhibit 10.252 to the Registrant's Form 10-Q for the quarter ended
June 30, 2003 and incorporated herein by reference. +
- 17 -
10.253 Employment Agreement dated as of March 31, 2003 between the Registrant
and Charles R. Schwab (supersedes Exhibit 10.149), filed as Exhibit
10.253 to the Registrant's Form 10-Q for the quarter ended June 30,
2003 and incorporated herein by reference. +
10.254 The Charles Schwab Severance Pay Plan restated as of May 1, 2003
(supersedes Exhibit 10.247), filed as Exhibit 10.254 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference. +
10.255 Credit Agreement (364-Day Commitment) dated as of June 20, 2003
between the Registrant and the financial institutions listed therein
(supersedes Exhibit 10.241), filed as Exhibit 10.255 to the
Registrant's Form 10-Q for the quarter ended June 30, 2003 and
incorporated herein by reference.
10.256 Separation Agreement and General Release by and among The Charles
Schwab Corporation, Charles Schwab & Co., Inc., and John Philip
Coghlan dated July 25, 2003, filed as Exhibit 10.256 to the
Registrant's Form 10-Q for the quarter ended September 30, 2003 and
incorporated herein by reference. +
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 2003 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.
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted
Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002. **
32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of The Sarbanes-Oxley Act of 2002. **
* 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.
** Furnished as an exhibit to this annual report on Form 10-K.
+ Management contract or compensatory plan.
- 18 -
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 11, 2004.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ David S. Pottruck
-----------------------
David S. Pottruck
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 11, 2004.
Signature / Title Signature / Title
----------------- -----------------
/s/ Charles R. Schwab /s/ David S. Pottruck
- ------------------------- -------------------------
Charles R. Schwab, David S. Pottruck,
Chairman Chief Executive Officer
and Director
(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/ George P. Shultz /s/ Paula A. Sneed
- ------------------------- -------------------------
George P. Shultz, Director Paula A. Sneed, Director
/s/ Roger O. Walther /s/ Robert N. Wilson
- ------------------------- -------------------------
Roger O. Walther, Director Robert N. Wilson, Director
/s/ David B. Yoffie
- -------------------------
David B. Yoffie, Director
- 19 -
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income F-4
Condensed Statement of Cash Flows F-5
Notes to Condensed Financial Information F-6 - F-8
Schedule II - Valuation and Qualifying Accounts F-9
Combined Supplemental Financial Data for U.S. Trust Corporation
and Charles Schwab Bank, N.A. (Unaudited) F-10 - F-16
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 2003 Annual Report
to Stockholders, which is 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, 2003 and 2002, and
for each of the three years in the period ended December 31, 2003, and have
issued our report thereon dated February 23, 2004 (which report expresses an
unqualified opinion and includes an explanatory paragraph relating to an
accounting change); such consolidated financial statements and report are
included in your 2003 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules
(Schedules I and II) of the Company on pages F-3 through F-9. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
San Francisco, California
February 23, 2004
F-2
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In millions)
December 31, 2003 2002
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 764 $ 1,079
Securities owned - at market value 74 -
Advances to subsidiaries 333 339
Investments in subsidiaries, at equity 3,986 3,316
Other assets 95 105
- --------------------------------------------------------------------------------
Total $ 5,252 $ 4,839
================================================================================
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities $ 282 $ 212
Intercompany borrowings 24 24
Long-term debt 485 592
- --------------------------------------------------------------------------------
Total liabilities 791 828
Stockholders' equity 4,461 4,011
- --------------------------------------------------------------------------------
Total $ 5,252 $ 4,839
================================================================================
See Notes to Condensed Financial Information.
F-3
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Income
(In millions)
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Interest revenue $ 28 $ 41 $ 73
Interest expense (27) (41) (53)
- --------------------------------------------------------------------------------
Net interest revenue 1 - 20
Other revenues (losses) (2) (2) 12
Restructuring charges (25) (29) (30)
Other gains (expenses) (26) 5 7
- --------------------------------------------------------------------------------
Income (loss) before income tax benefit (expense)
and equity in earnings of subsidiaries (52) (26) 9
Income tax benefit (expense) 27 11 (1)
- --------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries (25) (15) 8
Equity in earnings of subsidiaries:
Equity in undistributed earnings / (distributions in
excess of earnings) of subsidiaries 18 (287) (501)
Dividends paid by subsidiaries 479 437 599
Equity in extraordinary item of subsidiary - 12 121
Equity in discontinued operations of subsidiary - (38) (28)
- --------------------------------------------------------------------------------
Total 497 124 191
- --------------------------------------------------------------------------------
Net income $472 $109 $199
================================================================================
See Notes to Condensed Financial Information.
F-4
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
(In millions)
Year Ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 472 $ 109 $ 199
Adjustments to reconcile net income to net cash
provided by operating activities:
Distributions in excess of earnings / (equity in
undistributed earnings) of subsidiaries (18) 287 501
Equity in extraordinary item of subsidiary - (12) (121)
Equity in discontinued operations of subsidiary - 38 28
Net gain on sale of an investment - - (26)
Other (7) 2 10
Net change in:
Other assets 9 (29) (6)
Drafts payable - (100) (100)
Accrued expenses and other liabilities 24 6 9
- --------------------------------------------------------------------------------
Net cash provided by operating activities 480 301 494
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale - - (6)
Proceeds from sales of securities available for sale - 11 -
Decrease in net advances to subsidiaries 39 40 384
Increase in investments in subsidiaries (643) (55) (111)
Cash payments for business combinations and
investments, net of cash received (25) (1) (13)
Proceeds from sale of an investment - - 49
- --------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (629) (5) 303
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from intercompany borrowings - 24 -
Repayment of long-term debt (100) (113) (39)
Dividends paid (68) (60) (61)
Purchase of treasury stock (32) (299) (368)
Proceeds from stock options exercised and other 34 34 30
- --------------------------------------------------------------------------------
Net cash used for financing activities (166) (414) (438)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (315) (118) 359
Cash and Cash Equivalents at Beginning of Year 1,079 1,197 838
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 764 $1,079 $1,197
================================================================================
See Notes to Condensed Financial Information.
F-5
SCHEDULE I
The Charles Schwab Corporation
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Notes to Condensed Financial Information
1. Introduction and Basis of Presentation
The condensed financial information of The Charles Schwab Corporation (CSC)
should be read in conjunction with the consolidated financial statements of
The Charles Schwab Corporation and its majority-owned subsidiaries
(collectively referred to as the Company) and notes thereto included in the
Company's 2003 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report.
2. Supplemental Cash Flow Information
Certain of CSC's subsidiaries have remitted (received) the tax benefits
(expenses) from stock options exercised and other stock-based compensation
of $(3) million in 2003, $4 million in 2002, and $37 million in 2001 to
CSC.
Certain information affecting the cash flows of CSC follows (in millions):
---------------------------------------------------------------------------
Year Ended December 31, 2003 2002 2001
---------------------------------------------------------------------------
Income taxes paid (refunded) $ (5) $ (21) $ 12
---------------------------------------------------------------------------
Interest paid:
Long-term debt $ 28 $ 49 $ 52
Other 1 1 2
---------------------------------------------------------------------------
Total interest paid $ 29 $ 50 $ 54
===========================================================================
Non-cash investing and financing activities:
Common stock and options issued for
purchases of businesses $ 4 $ 4 $ 71
---------------------------------------------------------------------------
3. Long-term Debt
Long-term debt consists of Senior Medium-Term Notes, Series A (Medium-Term
Notes). At December 31, 2003, CSC had $466 million aggregate principal
amount of Medium-Term Notes outstanding with maturities ranging from 2004
to 2010 and fixed interest rates ranging from 6.04% to 8.05%. At
December 31, 2003, the Medium-Term Notes carried a weighted-average
interest rate of 7.31%.
At December 31, 2002, CSC had $566 million aggregate principal amount of
Medium-Term Notes outstanding with maturities ranging from 2003 to 2010 and
fixed interest rates ranging from 6.04% to 8.05%. At December 31, 2002, the
Medium-Term Notes carried a weighted-average interest rate of 7.29%.
F-6
CSC uses interest rate swap agreements (Swaps) to effectively convert the
interest rate characteristics of a portion of its Medium-Term Notes from
fixed to variable. These Swaps are structured for CSC to receive a fixed
rate of interest and pay a variable rate of interest based on the
three-month LIBOR rate. The variable interest rates reset every three
months. Information on these Swaps is summarized in the following table:
---------------------------------------------------------------------------
December 31, 2003 2002
---------------------------------------------------------------------------
Notional principal amount (in millions) $ 293 $ 293
Weighted-average variable interest rate 3.62% 3.87%
Weighted-average fixed interest rate 7.57% 7.57%
Weighted-average maturity (in years) 5.3 6.3
---------------------------------------------------------------------------
These Swaps have been designated as fair value hedges under Statement of
Financial Accounting Standards No. 133 - Accounting for Derivative
Instruments and Hedging Activities, and are recorded on the condensed
balance sheet. Changes in fair value of the Swaps are completely offset by
changes in fair value of the hedged Medium-Term Notes. Therefore, there is
no effect on net income. At December 31, 2003 and 2002, CSC recorded a
derivative asset of $19 million and $26 million, respectively, for these
Swaps. Concurrently, the carrying value of the Medium-Term Notes was
increased by $19 million and $26 million at December 31, 2003 and 2002,
respectively.
Annual maturities on long-term debt outstanding at December 31, 2003 are as
follows (in millions):
---------------------------------------------------------------------------
2004 $ 81
2005 56
2006 68
2007 38
2008 15
Thereafter 208
---------------------------------------------------------------------------
Total maturities 466
Fair value adjustment (1) 19
---------------------------------------------------------------------------
Total $ 485
===========================================================================
(1) Represents the fair value adjustment related to hedged Medium-Term
Notes. See discussion above.
4. Related Party Transactions
At December 31, 2003, receivables from affiliates, which is included in
advances to subsidiaries, was $18 million. At December 31, 2003, payables
to affiliates, which is included in accrued expenses and other liabilities,
was $87 million and is payable on demand.
F-7
CSC provides subordinated revolving credit facilities and other lending
arrangements to certain of its subsidiaries, including Schwab, USTC, Schwab
Capital Markets L.P. (SCM), and Charles Schwab Bank, N.A (Schwab Bank). The
amount outstanding under these facilities and arrangements totaled
$315 million at December 31, 2003.
- Schwab has a $1.4 billion subordinated revolving credit facility
which is scheduled to expire in September 2004. The amount
outstanding under this facility was $220 million at both
December 31, 2003 and 2002.
- USTC has a $300 million short-term credit facility maturing in
December 2006. The amount outstanding under this facility was
$45 million and $35 million at December 31, 2003 and 2002,
respectively.
- SCM has a $150 million subordinated lending arrangement which is
scheduled to expire in August 2004. In addition, CSC provides SCM
with a $50 million short-term credit facility. The total amount
outstanding under these facilities was $50 million at both
December 31, 2003 and 2002.
- Schwab Bank has a $100 million short-term credit facility
maturing in December 2005. No funds were drawn under this
facility at December 31, 2003.
CSC also provides other lending arrangements to certain of its
subsidiaries. At December 31, 2003, the total amount provided under these
lending arrangements was $11 million, none of which was outstanding. At
December 31, 2002, these lending arrangements totaled $28 million, of which
$1 million was outstanding.
Interest earned by CSC from these subordinated revolving credit facilities
and other lending arrangements totaled $17 million in 2003, $20 million in
2002 and $42 million in 2001.
5. Commitments and Guarantees
In 2003, the Company adopted Financial Accounting Standards Board
Interpretation (FIN) No. 46 - Consolidation of Variable Interest Entities,
and consolidated a special purpose trust (Trust) that was formed in 2000 to
finance the acquisition and renovation of an office building and land, see
note "2 - Significant Accounting Policies" in the Notes to Consolidated
Financial Statements in the Company's 2003 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this
report. Upon adoption of FIN No. 46, the Company recorded the building and
land at a cost of $245 million; accumulated depreciation of $16 million; a
note payable of $235 million; and a net reduction of accrued expenses and
other liabilities of $7 million. Additionally, the Company has guaranteed
the debt of the Trust up to a maximum of $202 million. The lender does not
have recourse to any other assets of the Company.
CSC has provided certain indemnification agreements (i.e., protection
against damage or loss) to counterparties in connection with the
disposition of certain of the Company's assets. Such indemnifications
relate to employee terminations, ownership of intellectual property rights
(e.g., patents), accuracy of financial statements, compliance with laws and
regulations, and misrepresentations. At December 31, 2003, CSC had
indemnification agreements with various expiration dates and a maximum
potential liability of approximately $100 million. CSC does not believe
that any material loss related to such indemnifications is likely and
therefore no liability has been recognized.
F-8
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In millions)
Additions
Balance at --------------------- Balance at
Beginning Charged Written End
Description of Year to Expense Other (1) off of Year
- ----------- --------- ---------- --------- ------- ----------
For the year ended
December 31, 2003:
Allowance for doubtful
accounts of
brokerage clients (2) $ 4 $ 1 $ - $ (3) $ 2
=====================================================
For the year ended
December 31, 2002:
Allowance for doubtful
accounts of
brokerage clients (2) $ 5 $ 3 $ 1 $ (5) $ 4
=====================================================
For the year ended
December 31, 2001:
Allowance for doubtful
accounts of
brokerage clients (2) $11 $ 3 $ - $ (9) $ 5
=====================================================
(1) Represents collections of previously written-off accounts.
(2) Excludes banking-related valuation and qualifying accounts. See
"Supplemental Financial Data for U.S. Trust Corporation and Charles Schwab
Bank, N.A. (Unaudited) - Loans to Banking Clients and Related Allowance for
Credit Losses" in this report for such banking-related information.
F-9
The Charles Schwab Corporation
Combined Supplemental Financial Data for U.S. Trust Corporation
and Charles Schwab Bank, N.A. (Unaudited)
(Dollars in Millions)
The following supplemental financial data is presented in accordance with
the Securities Exchange Act of 1934, Industry Guide 3 - Statistical Disclosure
by Bank Holding Companies. The accompanying unaudited financial information
includes U.S. Trust Corporation (U.S. Trust) and Charles Schwab Bank, N.A.
(Schwab Bank), which are subsidiaries of The Charles Schwab Corporation.
U.S. Trust is a wealth management firm that also provides fiduciary and private
banking services. Schwab Bank is a retail bank which commenced operations in
April 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
1. Analysis of Change in Net Interest Revenue
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume
and rate, on a taxable equivalent basis, is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Due to Increase (Decrease) Due to
Change in: Change in:
-------------------------------- --------------------------------
Average Average Total Average Average Total
Volume Rate Volume Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-Earning assets:
Cash equivalents $ 1 $ (2) $ (1) $ (5) $ (4) $ (9)
Securities available for sale (1):
U.S. Treasury securities 1 (1) - 6 (5) 1
U.S. Government agencies and
collateralized mortgage obligations (2) 8 (9) (1) 4 (8) (4)
State and municipal obligations (1) - (1) 1 (1) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 8 (10) (2) 11 (14) (3)
Loans to banking clients (3) 45 (51) (6) 50 (54) (4)
Other interest-earning assets 7 - 7 1 (2) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 61 (63) (2) 57 (74) (17)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing sources of funds:
Interest-bearing banking deposits 21 (19) 2 25 (58) (33)
Short-term borrowings 5 (11) (6) 8 (13) (5)
Long-term debt (3) 1 (2) 4 ( 2) 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources on which interest is paid 23 (29) (6) 37 (73) (36)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest revenue-taxable equivalent basis $ 38 $ (34) $ 4 $ 20 $ (1) $ (19)
=================================================================================== =============================== ======
Tax equivalent adjustment (1) 1
Provision for credit loss - (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest revenue $ 3 $ 17
====================================================================================================================================
Changes that are not due solely to volume or rate have been allocated to rate.
(1) The average balance and average rate for securities available for sale have been calculated using their amortized cost.
(2) Includes collateralized mortgage obligations securities issued by agencies including GNMA, FNMA and FHLMC.
(3) Includes average principal balances of non-accrual and reduced rate loans.
F-10
2. Three-year Net Interest Revenue (Tax Equivalent Basis) and Average Balances
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2003 2002 2001
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash equivalents $ 229 $ 2 1.00% $ 193 $ 3 1.55% $ 338 $ 12 3.48%
Securities available for sale (1),(2) 1,904 78 4.12% 1,508 80 5.31% 1,317 83 6.33%
Loans to banking clients (3) 5,304 230 4.56% 4,204 236 5.62% 3,469 240 6.91%
Other interest-earning assets 447 9 1.89% 45 2 4.49% 38 3 7.14%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,614 319 4.19% 5,950 321 5.40% 5,162 338 6.54%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 810 771 776
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 8,424 $ 6,721 $ 5,938
====================================================================================================================================
Liabilities and Stockholder's Equity:
Interest-bearing banking deposits 5,395 97 1.80% 4,046 95 2.36% 3,365 128 3.80%
Short-term borrowings 1,013 13 1.24% 813 19 2.30% 619 24 3.90%
Long-term debt 58 4 7.76% 96 6 6.28% 52 4 8.42%
- ------------------------------------------------------------------------------------------------------------------------------------
Total sources on which interest is paid 6,466 114 1.77% 4,955 120 2.43% 4,036 156 3.87%
====================================================================================================================================
Non-interest-bearing deposits 589 632 797
Non-interest-bearing liabilities 392 446 469
Stockholder's equity 977 688 636
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $ 8,424 $ 6,721 $ 5,938
====================================================================================================================================
Net interest revenue - taxable equivalent
basis 205 201 182
Net free funds $ 1,149 $ 994 $ 1,126
- ------------------------------------------------------------------------------------------------------------------------------------
Tax equivalent adjustment (2) (5) (4) (5)
Provision for credit loss (3) (3) -
- ------------------------------------------------------------------------------------------------------------------------------------
$ 197 $ 194 $ 177
====================================================================================================================================
Net yield on interest earning assets
(tax equivalent basis) 2.69% 3.38% 3.51%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The average balance and average rate for securities available for sale have been calculated using their amortized cost.
(2) Yields on state and municipal obligations are stated on a taxable equivalent basis, employing the federal statutory income tax
rate adjusted for the effect of state and local taxes, resulting in a marginal tax rate of approximately 40% for 2003, 41% for
2002, and 45% for 2001.
(3) Includes average principal balances of non-accrual and reduced rate loans.
F-11
3. Securities Available for Sale
The amortized cost, estimated fair value and gross unrealized gains and losses on securities available for sale are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. treasury securities:
Amortized cost $ 301 $ 290 $ 159
Aggregate fair value $ 302 $ 296 $ 160
Gross unrealized gains $ 1 $ 6 1
Gross unrealized losses - - -
U.S. government sponsored agencies and corporations:
Amortized cost 1,421 701 748
Aggregate fair value 1,421 727 754
Gross unrealized gains 5 26 7
Gross unrealized losses 5 - 1
State and municipal obligations:
Amortized cost 148 169 154
Aggregate fair value 155 178 158
Gross unrealized gains 7 9 4
Gross unrealized losses - - -
Collateralized mortgage obligations (1):
Amortized cost 1,508 88 84
Aggregate fair value 1,508 87 84
Gross unrealized gains 4 - -
Gross unrealized losses 4 1 -
Other securities:
Amortized cost 51 33 32
Aggregate fair value 51 34 33
Gross unrealized gains - 1 1
Gross unrealized losses - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale:
Amortized cost $ 3,429 $ 1,281 $ 1,177
Aggregate fair value $ 3,437 $ 1,322 $ 1,189
Gross unrealized gains $ 17 $ 42 $ 13
Gross unrealized losses $ 9 $ 1 $ 1
====================================================================================================================================
(1) Collateralized by either GNMA, FNMA or FHLMC obligations.
F-12
4. Loans to Banking Clients and Related Allowance for Credit Losses
An analysis of the composition of the loan portfolio is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Residential real estate mortgages $ 4,624 $ 3,580 $ 3,076 $ 2,239 $ 1,980
Consumer loans 735 630 584 554 471
Other 404 369 407 374 258
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,763 $ 4,579 $ 4,067 $ 3,167 $ 2,709
====================================================================================================================================
An analysis of nonperforming assets is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans $ 1 $ 1 $ 5 $ 1 $ 2
Average non-accrual loans $ 1 $ 3 $ 4 $ 1 $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
An analysis of the allowance for credit losses on the loan portfolio is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 24 $ 21 $ 20 $ 20 $ 19
Provision charged to income 3 3 - - -
Net recoveries - - 1 - 1
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 27 $ 24 $ 21 $ 20 $ 20
====================================================================================================================================
The maturities of the loan portfolio at December 31, 2003 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Within 1-5 Over
1 Year Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Residential real estate mortgages (1) $ 12 $ 698 $3,914 $4,624
Consumer loans 720 7 8 735
Other 357 23 24 404
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,089 $ 728 $3,946 $5,763
====================================================================================================================================
(1) Maturities are based upon the contractual terms of the loans.
F-13
The interest sensitivity of loans with maturities in excess of one year at December 31, 2003 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1-5 Over
Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Loans with predetermined interest rates $ 145 $ 644 $ 789
Loans with floating or adjustable interest rates 583 3,302 3,885
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 728 $3,946 $4,674
====================================================================================================================================
5. Summary of Credit Loss on Banking Loans Experience
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans $ 5,034 $ 4,204 $ 3,469 $ 2,867 $ 2,404
Allowance to year end loans .46% .52% .53% .64% .74%
Allowance to nonperforming loans n/m n/m n/m n/m n/m
Net recoveries to average loans - - .01% - .02%
Nonperforming assets to average
loans and real estate owned .03% .03% .14% .05% .07%
- ------------------------------------------------------------------------------------------------------------------------------------
n/m - Not meaningful, greater than two hundred percent.
At December 31, 2003, the loan portfolio included loans to individuals involved in the financial services industry of approximately
$1.5 billion. Recoveries exceeded charge-offs from loans to individuals involved in the financial services industry in 1999 through
2001. Recoveries approximated charge-offs from loans to individuals involved in the financial services industry in 2002 and 2003.
6. Deposits from Banking Clients
- ------------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis of average daily deposits:
Noninterest-bearing deposits $ 589 - $ 632 - $ 797 -
Certificates of deposits of $100,000 or
more 372 1.23% 63 2.30% 80 4.21%
Money market and other savings deposits 5,023 1.85% 3,983 2.36% 3,285 3.79%
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $5,984 $4,678 $4,162
====================================================================================================================================
F-14
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Certificates Other
of Deposit Deposits
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Maturity distribution of interest bearing deposits in
Amounts of $100,000 or more at December 31, 2003:
Three months or less $ 858 $ 4,516
Three through six months 16 -
Six through twelve months 5 -
Over twelve months 7 -
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Total $ 886 $ 4,516
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7. Short-term Borrowings
An analysis of outstanding short-term borrowings is as follows:
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December 31, 2003 2002 2001
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Federal funds purchased:
Year-end balance $ 58 $ 16 $ 26
Daily average balance $ 82 $ 133 $ 66
Maximum month-end balance $ 232 $ 449 $ 63
Weighted-average interest rate during the year 1.13% 1.74% 3.89%
Weighted-average interest rate at year end .93% 1.13% 1.71%
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Securities sold under agreements to repurchase:
Year-end balance $ 128 $ 326 $ 183
Daily average balance $ 304 $ 296 $ 136
Maximum month-end balance $ 354 $ 388 $ 225
Weighted-average interest rate during the year 1.29% 2.20% 3.66%
Weighted-average interest rate at year end 1.17% 2.00% 2.26%
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Other borrowed funds:
Year-end balance $ 905 $ 200 $ 384
Daily average balance $ 627 $ 384 $ 417
Maximum month-end balance $ 983 $ 449 $ 867
Weighted-average interest rate during the year 1.23% 2.60% 3.99%
Weighted-average interest rate at year end 1.19% 1.43% 3.69%
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8. Ratios
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Year ended December 31, 2003 2002 2001 2000 1999
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Return on average stockholder's equity (1) 5.90% 4.53% 22.50% 10.54% 29.22%
Return on average total assets (1) .69% .46% 2.41% .87% 1.85%
Average stockholder's equity as a percentage of
Average total assets 11.61% 10.24% 10.70% 8.29% 6.35%
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(1) Includes a tax benefit related to retention programs of $11 million in 2003. Excluding this tax benefit, return on average
stockholder's equity would have been 4.81% and return on average total assets would have been .56%. Includes after-tax
extraordinary gain related to the sale of corporate trust business of $12 million, retention program costs of $13 million, and
restructuring and other charges of $24 million in 2002. Excluding these costs, return on average stockholder's equity would
have been 8.17% and return on average total assets would have been .84%.
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