1
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, 1996 COMMISSION FILE NUMBER 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
101 MONTGOMERY STREET, SAN FRANCISCO, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - $0.01 par value New York Stock Exchange, Inc.
Pacific Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
As of March 13, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $4,210,149,060. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant and by the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 13, 1997 was
176,254,174 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1996 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 12, 1997 by reference to portions of that document.
2
THE CHARLES SCHWAB CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------------
TABLE OF CONTENTS
Part I
Item 1. Business ................................................................................... 1
Item 2. Properties ................................................................................ 9
Item 3. Legal Proceedings .......................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ........................................ 9
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 ...... 10
Item 8. Financial Statements and Supplementary Data ................................................ 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 10
Part III
Item 10. Directors and Executive Officers of the Registrant ......................................... 10
Item 11. Executive Compensation ..................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................. 12
Item 13. Certain Relationships and Related Transactions ............................................. 12
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 12
Exhibit Index ........................................................................ 14
Signatures ........................................................................... 19
Index to Financial Statement Schedules ............................................... F-1
3
THE CHARLES SCHWAB CORPORATION
PART I
ITEM 1. BUSINESS
(a) General Development of Business. The Charles Schwab Corporation (CSC)
was incorporated in 1986 and engages, through its subsidiaries, in securities
brokerage and related financial services. As used herein, the "Company" refers
to CSC and its subsidiaries. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer. Schwab was incorporated in 1971,
and entered the discount brokerage business in 1974. Mayer & Schweitzer, Inc.
(M&S), a subsidiary acquired in 1991, is a market maker in Nasdaq securities
that provides trade execution services to broker-dealers and institutional
customers.
Other subsidiaries of CSC include Charles Schwab Investment Management,
Inc. (CSIM), The Charles Schwab Trust Company (CSTC) and ShareLink. CSIM,
incorporated in 1989, acts as the investment adviser for Schwab's proprietary
mutual funds. The Company refers to certain funds for which CSIM is the
investment adviser as the SchwabFunds (registered trademark). CSTC, incorporated
in 1992, provides custody services for fee-compensated independent investment
managers and serves as trustee for employee benefit plans, primarily 401(k)
plans. ShareLink, acquired in 1995 to expand the Company's international
operations, is a retail discount securities brokerage firm located in the United
Kingdom.
New developments in the Company's business during 1996 include broadening
its offering of online brokerage services and expanding its retirement plan
services. In addition, the Company is enhancing the ways in which it may help
investors by using its branch office network to assist investors in developing
asset allocation strategies and evaluating their investment choices. This
assistance is directed to the new generation of investors who are currently
entering their peak savings years, as well as the many individuals who are
willing to assume greater control over their financial affairs.
(b) Financial Information About Industry Segments. The Company operates in
a single industry segment: securities brokerage and related financial services.
Fees received from the Company's proprietary mutual funds represented
approximately 12% of the Company's consolidated revenues in 1996. As of December
31, 1996, approximately 27% of Schwab's total customer accounts were located in
California. The next highest geographic concentrations of total customer
accounts were approximately 7% in New York and 6% in Texas.
(c) Narrative Description of Business. The Company's strategy is to attract
and retain customer assets by focusing on a number of areas within the financial
services industry - retail brokerage, mutual funds, support services for
independent investment managers, equity securities market-making, online
brokerage and 401(k) defined contribution plans. To pursue its strategy and its
objective of long-term profitable growth, the Company plans to continue to
leverage its competitive advantages. These advantages include advertising and
marketing programs that have created a national brand, a broad range of products
and services, diverse delivery systems and an ongoing investment in technology.
The Company's primary focus is serving retail investors, directly or
through independent investment managers, who seek a wide selection of quality
investment services at prices that, in most cases, are substantially lower than
those of full-commission firms. The Company, through Schwab, serves over 4.0
million active customer accounts(a). Customer assets totaled $253.2 billion as
of December 31, 1996.
The Company, through M&S and Schwab, engages in market-making activities in
Nasdaq and exchange-listed securities. New rules, regulatory actions, and
changes in market customs and practices are significantly impacting these
market-making activities. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in the Company's 1996 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report, and "Regulation" below.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Such fluctuations
are affected by many national and international economic and political factors
that cannot be predicted, including broad trends in business and finance, the
availability of credit and capital, legislation and regulation affecting the
United States and international business and financial communities, currency
values, and the level and volatility of interest rates. Shifts in customer
investment preferences or in customer usage of Schwab's diverse delivery
systems could reduce transaction-based revenues, which include commission and
principal transaction revenues. Since transaction-based revenues continue to
represent a majority of the Company's revenues, the Company may experience
significant variations in revenues from period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors, overtime hours,
professional services, and advertising and market
- -------------------
(a) Accounts with balances or activity within the preceding twelve months.
-1-
4
THE CHARLES SCHWAB CORPORATION
SOURCES OF REVENUES
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ------------------------
TYPE OF REVENUE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------------- ---------------------- ------------------------
Commissions
Listed securities $ 423,232 22.9% $ 356,069 25.1% $ 278,025 26.1%
Nasdaq 393,882 21.3% 283,024 19.9% 169,236 15.9%
Mutual funds 70,805 3.8% 58,470 4.1% 59,949 5.6%
Options 66,210 3.5% 53,333 3.8% 38,902 3.7%
- ------------------------------------------------------------------------------------------------------------------------------
COMMISSIONS 954,129 51.5% 750,896 52.9% 546,112 51.3%
- ------------------------------------------------------------------------------------------------------------------------------
MUTUAL FUND SERVICE FEES 311,067 16.8% 218,784 15.4% 156,812 14.7%
PRINCIPAL TRANSACTIONS 256,902 13.9% 191,392 13.5% 162,595 15.3%
Interest revenue
Investments, customer-related 316,760 17.1% 283,031 19.9% 168,485 15.8%
Margin loans to customers 339,433 18.3% 264,025 18.6% 184,871 17.4%
Other 24,667 1.4% 21,064 1.6% 9,588 .9%
Interest expense (425,872) (23.0%) (357,223) (25.2%) (198,236) (18.6%)
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST REVENUE, NET OF
INTEREST EXPENSE 254,988 13.8% 210,897 14.9% 164,708 15.5%
- ------------------------------------------------------------------------------------------------------------------------------
OTHER 73,836 4.0% 47,934 3.3% 34,370 3.2%
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,850,922 100.0% $1,419,903 100.0% $1,064,597 100.0%
==============================================================================================================================
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
development are adjustable over the short term to help the Company achieve its
financial objectives. Additionally, developmental spending (e.g., branch
openings, product and service rollouts, and technology enhancements) is
discretionary and can be altered in response to market conditions. However, a
significant portion of the Company's expenses such as salaries and wages,
occupancy and equipment, and depreciation and amortization do not vary directly,
at least in the short term, with fluctuations in revenues or securities trading
volumes. Given the nature of the Company's revenues and expenses, and the
economic and competitive factors discussed in this report, the Company's
earnings and common stock price may be subject to significant volatility. The
Company's results for any period are not necessarily indicative of results for a
future period.
The table above sets forth on a comparative basis the Company's revenues
for the three years ended December 31, 1996.
COMPETITION
The Company faces significant competition from full commission and discount
brokerage firms, as well as mutual fund companies. Increasingly, competition has
also come from banks, software development companies, insurance companies and
others as they expand their product lines. A general trend of consolidation in
financial services has
-2-
5
THE CHARLES SCHWAB CORPORATION
attracted new competitors and strengthened existing ones. Some of
these competitors are larger, more diversified, have greater financial
resources, and offer a wider range of services and financial products than the
Company. Particularly as financial services and products proliferate, to the
extent such competitors are able to attract and retain customers on the basis of
the convenience of one-stop shopping, the Company's business or its ability to
grow could be adversely affected. In many instances, the Company is competing
with such organizations for the same customers. The Company primarily competes
on the basis of quality, convenience, price of services and products offered,
technological innovation and expertise, and breadth of product line.
Most discount brokerage firms charge commissions lower than Schwab.
Full-commission brokerage firms also offer discounted commissions to selected
retail brokerage customers. Many brokerage firms employ substantial funds in
advertising and direct solicitation of customers to increase their market share
of commission dollars and other securities-related income. Such competition may
negatively impact the Company's customer asset growth, revenue growth and profit
margin.
ADVERTISING AND MARKETING PROGRAMS
The Company's nationwide advertising and marketing programs are designed to
distinguish the Schwab brand as well as its products and services. The Company's
advertising and market development expense for the years ended December 31,
1996, 1995 and 1994 was $84 million, $53 million and $36 million, respectively.
For the same years, new accounts opened were 985,000, 698,000 and 688,000,
respectively. New account openings represent a significant portion of the growth
in customer assets, which the Company believes is critical to growth in
revenues. Accounts opened during 1996, 1995 and 1994 generated approximately
16%, 13% and 14% of total commission revenues during each of those years,
respectively.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications. Schwab
advertisements appear regularly on national and local cable television and
periodically on radio and independent television stations. Schwab also engages
extensively in targeted direct mail advertising through monthly statement
"inserts" and special mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has promoted the name and likeness of its Chairman, Mr.
Schwab. The Company has an agreement with Mr. Schwab by which he, subject to
certain limitations, has assigned to the Company and Schwab all service mark,
trademark, and trade name rights in his name (and variations thereon) and
likeness.
PRODUCTS AND SERVICES
The Company offers a broad range of products and services to meet
customers' investment and financial needs at prices that management believes
represent superior value.
Accounts and Features. The Company offers the purchase and sale of
securities which include Nasdaq and exchange-listed securities, options, mutual
funds, variable annuities and fixed income investments, including United States
Treasuries, zero-coupon bonds, listed and OTC corporate bonds, municipal bonds,
GNMAs, unit investment trusts and CDs. If approved for margin transactions, a
customer may borrow a portion of the price of certain securities purchased
through Schwab, or may sell securities short. Customers must have specific
approval to trade options; as of December 31, 1996, 205,000 accounts were so
approved. To write uncovered options, customers must go through an additional
approval process and must maintain a significantly higher level of equity in
their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept into certain SchwabFunds (registered trademark)
money market funds.
A customer may receive additional services by qualifying for and opening a
Schwab One (registered trademark) brokerage account. A customer may access
available funds in his or her Schwab One account either with a personal check
or a VISA debit card. When a Schwab One customer is approved for margin trading,
the checks and debit card also provide access to margin cash available. For cash
balances awaiting investment, Schwab pays interest to Schwab One customers at a
discretionary rate of interest. Alternatively, Schwab One customers seeking
tax-exempt income may elect to have cash balances swept into one of three
tax-exempt SchwabFunds money market funds or a tax-exempt municipal trust (for
Florida taxpayers only). During 1996, the number of active Schwab One accounts
increased 29% to 966,000 accounts and the customer assets in all Schwab One
accounts increased 42% to $114.7 billion.
Customers who want to interact with Schwab through their computers may use
e.Schwab (trademark), one of Schwab's flexible online brokerage services. A
customer may open an e.Schwab account to place orders, receive account
information and obtain real-time securities information, all online.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of
three SchwabFunds money market funds. During 1996, active IRAs increased 20%
to 1,342,000 accounts and customer assets in all IRAs increased 35% to $65.4
billion. Schwab also acts as custodian and broker for Keogh accounts.
-3-
6
THE CHARLES SCHWAB CORPORATION
Customer Financing. Customers' securities transactions are effected on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually three business days after the trade is executed. However, for purchases
of certain types of securities, such as certain mutual fund shares, a customer
must have a cash or money market fund balance in his or her account sufficient
to pay for the trade prior to execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the customer's
account. Short sales of securities represent sales of borrowed securities and
create an obligation to purchase the securities at a later date. Customers may
sell securities short in a margin account subject to minimum equity and
applicable margin requirements and the availability of such securities to be
borrowed and delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During the year ended December 31, 1996, Schwab's outstanding
margin loans to its customers averaged $4.5 billion.
In permitting a customer to engage in transactions, Schwab takes the risk
of such customer's failure to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions, Schwab,
in the event of such an adverse change, requires the customer to deposit
additional securities or cash, so that the amount of the customer's obligation
is not greater than specified percentages of the cash and market values of the
securities in the account. As a matter of policy, Schwab generally requires its
customers to maintain higher percentages of collateral values than the minimum
percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Pursuant to the requirements of Rule 15c3-3 of the
Securities Exchange Act of 1934, the portion of such cash balances not used to
extend margin credit (increased or decreased by certain other customer-related
balances) must be held in segregated investment accounts. The balances in these
segregated investment accounts must be invested in qualified interest-bearing
securities. To the extent customer cash balances are available for use by
Schwab at interest costs lower than Schwab's costs of borrowing from
alternative sources (e.g., balances in Schwab One (registered trademark)
brokerage accounts) or at no interest cost (e.g., balances in other accounts
and outstanding checks that have not yet cleared Schwab's bank), Schwab's cost
of funds is reduced and its net income is enhanced. Such interest savings
contribute substantially to Schwab's profitability and, if a significant
reduction of customer cash balances were to occur, Schwab's borrowings from
other sources may have to increase and such profitability would decline. To the
extent Schwab's customers elect to have cash balances in their brokerage
accounts swept into certain SchwabFunds(registered trademark) money market
funds, the cash balances available to Schwab for investments or for
financing margin loans are reduced. However, Schwab receives mutual fund
service fees from such funds based on the daily average invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's 1996 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" below.
Mutual Funds. At December 31, 1996, Schwab's Mutual Fund OneSource
(registered trademark) service enabled customers to trade over 620 mutual funds
in 70 well-known fund families without incurring transaction fees. The service
is particularly attractive to investors who would otherwise execute mutual fund
trades directly with multiple mutual fund companies to avoid brokerage
transaction fees, and to achieve investment diversity among fund families. In
addition, investors' record keeping, investment monitoring and tax reporting are
simplified through consolidated statements. Fees received by Schwab for
providing services, including record keeping and shareholder services, from the
Mutual Fund OneSource program are based upon daily balances of customer assets
invested in the participating funds through Schwab and are paid by the funds
and/or fund sponsors. Customer assets held by Schwab that have been purchased
through the Mutual Fund OneSource service, excluding Schwab's proprietary funds,
totaled $39.2 billion at the end of 1996.
Schwab's proprietary funds, collectively referred to as the SchwabFunds,
include money market funds, equity funds, bond funds, asset allocation funds,
which contain stocks, bonds and cash equivalents, and funds that primarily
invest in stock, bond and money market funds. Schwab customers may elect to have
cash balances in their brokerage accounts automatically invested in certain
SchwabFunds money market funds. Customer assets invested in the SchwabFunds,
substantially all of which are in money market funds, were $43.1 billion at the
end of 1996. Fees received by the Company from the SchwabFunds, for providing
transfer agent services, shareholder services, administration and investment
management, are based upon daily balances of customer assets invested in these
funds.
Through its Mutual Fund Marketplace (registered trademark) program, Schwab
purchases and redeems for its customers shares of over 1,100 mutual funds in
over 260 fund families sponsored by third parties. Customer assets invested in
the Mutual Fund Marketplace, excluding the Mutual Fund OneSource service,
totaled $35.4 billion at the end of 1996. Schwab charges a transaction fee on
trades placed in the funds included in the
-4-
7
THE CHARLES SCHWAB CORPORATION
Mutual Fund Marketplace (registered trademark) (except on trades through the
Mutual Fund OneSource(registered trademark) service)and these fees are
recorded as commission revenues. Commissions from customer transactions in
mutual fund shares comprised 7%, 8% and 11% of Schwab's total commission
revenues in 1996, 1995 and 1994, respectively.
Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade
execution services in Nasdaq securities to broker-dealers, including Schwab, and
institutional customers. In most instances, customer orders are routed directly
to M&S' trading system and are executed automatically. M&S generally executes
customer trades as principal. M&S business practices call for competitively
priced customer trade executions on the most favorable terms under the
circumstances, generally defined as the highest bid price on a sell order and
the lowest offer price on a buy order reasonably available in the market.
Certain customer trades are executed on a negotiated basis. Substantially all
Nasdaq security trades originated by the customers of Schwab are directed to
M&S.
Schwab has specialist operations on the Pacific Exchange to make markets in
exchange-listed securities. The majority of trades originated by the customers
of Schwab in exchange-listed securities for which Schwab makes a market are
directed to these operations. At December 31, 1996, Schwab had 14 specialist
posts that collectively made markets in 900 securities. In January 1997, Schwab
expanded its specialist operations to include three specialist posts on the
Boston Stock Exchange.
In the normal course of its market making in Nasdaq and exchange-listed
securities activities, M&S and Schwab maintain inventories in such securities on
both a long and short basis. While long inventory positions represent M&S' and
Schwab's ownership of securities, short inventory positions represent
obligations of M&S and Schwab to deliver specified securities at a contracted
price, which may differ from market prices prevailing at the time of completion
of the transaction. Accordingly, long or short inventory positions may result in
gains or losses as market values of such securities fluctuate.
Services for Independent Investment Managers. To attract the business of
accounts managed by fee-compensated independent investment managers, Schwab has
a dedicated business unit which includes experienced registered representatives
assigned to individual managers. Independent investment managers participating
in this program may use SchwabLink (registered trademark), the computer-based
information network for investment managers who custody customer accounts
at Schwab, to access information in their customers' accounts directly from
Schwab's computer data bases and to enter their customers' trades online.
During 1996, Schwab customer assets held in accounts managed by 4,800 active
independent investment managers increased $22.3 billion (44%) to a total of
$72.9 billion. Independent investment managers and other professional investors
generated 12% of Schwab's total commission revenues in 1996, 13% in 1995 and
14% in 1994.
Retirement Plan Services. In response to the growth in 401(k) assets,
Schwab began serving company 401(k) plans directly through a dedicated sales
force, as well as indirectly through alliances with national and regional
third-party administrators. During 1996, Schwab introduced SchwabPlan
(trademark), a comprehensive 401(k) retirement plan offering. This new service
enables employers to offer a wide range of investment options as well as
employee education to their 401(k) retirement plan participants.
DIVERSE DELIVERY SYSTEMS
The Company invests in diverse delivery systems that uphold the Company's
customer service standards. In addition to its branch office network, the
Company maintains four regional customer telephone service centers as well as
electronic brokerage channels.
Branch Office Network. At December 31, 1996, the Company operated 235
branch offices in 46 states, the Commonwealth of Puerto Rico and the United
Kingdom. The branch office network plays a key role in building Schwab's
business. With the customer service support of regional customer telephone
service centers and online brokerage channels, branch personnel are focusing a
significant portion of their time on business development. Customers can use
branch offices to obtain market information, place orders, open accounts,
deliver and receive checks and securities, and obtain related customer services
in person, yet most branch activities are conducted by telephone and mail.
The Company is enhancing the ways in which it may help investors by using
the branch office network to assist investors in developing asset allocation
strategies and evaluating their investment choices. Branch staff are also
referring investors who desire additional guidance to independent
fee-compensated investment managers through the Schwab AdvisorSource (trademark)
service.
Regional Customer Telephone Service Centers. Schwab's four regional
customer telephone service centers, located in Indianapolis, Denver, Phoenix and
Orlando, handle calls to many of Schwab's toll-free numbers, customer calls that
otherwise would have to wait for available registered representatives at
branches during business hours, and calls routed from branches after hours and
on weekends. Through the service centers, customers may place orders twenty-four
hours-a-day, seven days-a-week, except for certain holidays. Customer orders
placed during nonmarket hours are routed to appropriate markets the following
business day. The capacity
-5-
8
THE CHARLES SCHWAB CORPORATION
of the service centers allows new branches to be opened and maintained
at lower staffing levels.
The Company's customer service approach is to use teams of registered
representatives in the service centers, working closely with branch personnel.
Each registered representative has immediate access to the customer account and
market-related information necessary to respond to any customer's inquiries, and
for most customer orders, can enter the order and confirm the transaction. As a
result of this approach, the departure of a registered representative generally
does not result in a loss of customers for the Company.
Electronic Brokerage Channels. The Company's electronic brokerage channels
include telephonic channels such as TeleBroker (registered trademark) - Schwab's
touch-tone telephone trading service and VoiceBroker (trademark) - introduced in
the third quarter of 1996 as the first telephone-based service that uses voice
recognition technology to provide individual investors with real-time quotes.
Other channels include PC-based online services such as SchwabLink (registered
trademark), StreetSmart (registered trademark), e.Schwab (trademark) and
SchwabNOW! (trademark), introduced in the third quarter of 1996 which provides
information and trading services through the Company's World Wide Web site.
These electronic brokerage channels enable investors to place orders, receive
account information and obtain real-time securities market information. These
channels are designed to provide added convenience for customers and minimize
Schwab's costs of responding to and processing routine customer transactions.
In addition, TeleBroker, e.Schwab and SchwabNOW! provide customers with
significant commission discounts from Schwab's standard rates. During 1996, the
electronic brokerage channels handled over 67% of Schwab's total calls and over
43% of Schwab's total trades.
INFORMATION SYSTEMS
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its diverse delivery systems, as well as other applications
such as clearing functions, account administration, record keeping and direct
customer access to investment information, Schwab maintains a sophisticated
computer network connecting all of the branch offices and regional customer
telephone service centers. Schwab's computers are also linked to the major
registered United States securities exchanges, M&S, the National Securities
Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations. External events, such as an earthquake or
power failure, loss of external information feeds, such as security price
information, as well as internal malfunctions, such as those that could occur
during the implementation of system modifications, could render part of or all
such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains carefully monitored backup and recovery functions. These include
logging of all critical files intraday, duplication and storage of all critical
data outside of its central computer site every 24 hours, and maintenance of
facilities for backup and communications in San Francisco. They also include the
maintenance and periodic testing of a disaster recovery plan that management
believes would permit Schwab to recommence essential computer operations if its
central computer site were to become inaccessible. To reduce the exposure to
system failures caused by external factors, including earthquakes, the Company's
primary data center is located in Phoenix.
CLEARING AND ACCOUNT MAINTENANCE
Schwab performs clearing services for all securities transactions in
customer accounts. Schwab clears the vast majority of customer transactions
through the facilities of the National Securities Clearing Corporation or the
Options Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement
through a clearing corporation, are settled directly with the mutual funds or
other financial institutions. Schwab is obligated to settle transactions with
clearing corporations, mutual funds and other financial institutions even if
Schwab's customer fails to meet his or her obligations to Schwab. In addition,
for transactions that do not settle through a clearing corporation, Schwab takes
the risk of the other party's failure to settle the trade. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
EMPLOYEES
As of December 31, 1996, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of 10,400
-6-
9
THE CHARLES SCHWAB CORPORATION
full-time employees, including 8,900 full-time employees and part-time
equivalents.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The Securities and Exchange
Commission (SEC) is the Federal agency charged with administration of the
Federal securities laws. Schwab and M&S are registered as broker-dealers with
the SEC. Schwab and CSIM are registered as investment advisers with the SEC.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the National Association of
Securities Dealers (NASD) and the national securities exchanges such as the New
York Stock Exchange (NYSE), which has been designated by the SEC as Schwab's
primary regulator with respect to its securities activities. The NASD has been
designated by the SEC as M&S' primary regulator with respect to its securities
activities. During 1996, the Chicago Board Options Exchange was Schwab's
designated primary regulator with respect to options trading activities, and
also has been designated as such for 1997. These self-regulatory organizations
adopt rules (subject to approval by the SEC) governing the industry and conduct
periodic examinations of broker-dealers. Securities firms are also subject to
regulation by state securities authorities in the states in which they do
business. Schwab was registered as a broker-dealer in 50 states, the District of
Columbia and Puerto Rico as of December 31, 1996. M&S was registered as a
broker-dealer in 32 states and the District of Columbia as of December 31, 1996.
The principal purpose of regulations and discipline of broker-dealers and
investment advisers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisers. The regulations to which broker-dealers and investment
advisers are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping, fee arrangements, disclosure to clients, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers. The SEC,
self-regulatory organizations and state securities authorities may conduct
administrative proceedings which can result in censure, fine, cease and desist
orders, or suspension or expulsion of a broker-dealer or an investment adviser,
its officers, or employees. Schwab and M&S have been the subject of such
administrative proceedings.
In August 1996, the SEC adopted certain new rules and rule amendments,
known as the Order Handling Rules, which significantly alter the manner in which
orders related to both Nasdaq and listed securities are handled. These rules
became effective on January 20, 1997, with respect to exchange-listed stocks and
a limited number of Nasdaq securities, and are being phased in with respect to
additional Nasdaq securities during 1997. The SEC has also issued for comment
certain proposed rules by the NASD which, if approved, would introduce a new
system for processing orders in the Nasdaq market. The proposed NASD rules, if
approved, along with other potential regulatory actions and improvements in
technology, could impact the manner in which business is currently conducted in
the Nasdaq market. In addition, during 1994, the SEC commenced an investigation
into the Nasdaq market and the activities of broker-dealers, including M&S, who
act as market makers in Nasdaq securities. On August 8, 1996, the SEC issued a
report of its investigation, and the NASD consented to sanctions for failing to
enforce compliance with its rules and the federal securities laws. The SEC is
continuing its investigation and has stated that further enforcement proceedings
have not been precluded. These new rules, regulatory actions, and changes in
market customs and practices are expected to have a material adverse impact on
M&S' principal transaction revenues, M&S' profit margin and on the manner in
which M&S conducts its business. See "Commitments and Contingent Liabilities"
note in the Notes to Consolidated Financial Statements in the Company's 1996
Annual Report to Stockholders, which is incorporated herein by reference to
Exhibit No. 13.1 of this report.
As registered broker-dealers and NASD member organizations, Schwab and M&S
are required by Federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 for
claims of between-investment cash balances. SIPC is funded through assessments
on registered broker-dealers. In addition, in 1996, Schwab purchased from a
private surety company additional account protection of up to $74.5 million per
customer, as defined, for customer securities positions only. This additional
account protection was increased to $99.5 million in March 1997. Stocks, bonds,
mutual funds and money market funds are considered securities and are protected
on a share basis for the purposes of SIPC protection and the additional
protection (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
-7-
10
THE CHARLES SCHWAB CORPORATION
Schwab is also authorized by the Municipal Securities Rulemaking Board to
effect transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board Options
Exchange govern the amount of margin customers must provide and maintain in
writing uncovered options.
As a California state-chartered trust company, CSTC is primarily regulated
by the California State Banking Department. Since it provides employee benefit
plan trust services, CSTC is also required to comply with the Employee
Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to
oversight by both the Internal Revenue Service and Department of Labor. CSTC is
required under ERISA to maintain a fidelity bond for the protection of employee
benefit trusts for which it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an
arranger with the Securities and Futures Authority (SFA) in the United Kingdom,
and engages in business development activities on behalf of Schwab.
ShareLink is registered as a broker-dealer with the SFA in the United
Kingdom.
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Schwab and M&S are subject to the Uniform Net
Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule), which
has also been adopted through incorporation by reference in NYSE Rule 325.
Schwab is a member firm of the NYSE and the NASD, and M&S is a member firm of
the NASD. The Net Capital Rule specifies minimum net capital requirements for
all registered broker-dealers and is designed to measure financial integrity and
liquidity. Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain specified
levels of net capital, such failure would constitute a default by CSC under
certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (Rule 15c3-3 of the Securities Exchange
Act of 1934). "Aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Under the alternative
method of the Net Capital Rule, a broker-dealer may not (a) pay, or permit the
payment or withdrawal of, any subordinated borrowings or (b) pay cash dividends
or permit equity capital to be removed if, after giving effect to such payment,
withdrawal, or removal, its net capital would be less than 5% of its aggregate
debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for more than 15 consecutive
business days; NYSE Rule 326 also prohibits the expansion of business if net
capital is less than 5% of aggregate debit items for more than 15 consecutive
business days. The provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings during
the following six months) would result in a reduction of a firm's net capital to
the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and their ability to repay subordinated debt to CSC, this in
turn could limit CSC's ability to repay debt, pay cash dividends and purchase
shares of its outstanding stock. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" in the Company's 1996 Annual
Report to Stockholders, which is incorporated herein by reference to Exhibit No.
13.1 of this report.
At December 31, 1996, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $105 million and had total regulatory net capital
of $541 million. At December 31, 1996, the amounts in excess of 2%, 4% and 5% of
aggregate debit items were $436 million, $332 million and $279 million,
respectively.
-8-
11
THE CHARLES SCHWAB CORPORATION
At December 31, 1996, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital of
$6 million. At December 31, 1996, the amount in excess of 2% of aggregate debit
items was $5 million.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco, California. The building contains
296,000 square feet and is leased by Schwab under a term expiring in the year
2010. Schwab has three successive five-year options to renew the lease at the
then market rental value. Schwab also leases space in other buildings for its
San Francisco operations aggregating 536,000 additional square feet at year-end
1996. M&S' headquarters are located in leased office space in Jersey City, New
Jersey.
All of the Company's branch offices are located in leased premises,
generally with lease expiration dates five to ten years from inception.
The Company has four regional customer telephone service centers. The
Company owns the service centers located in Phoenix and Indianapolis, with
330,000 and 164,000 square feet, respectively. The Company leases the service
centers located in Orlando and Denver, with 216,000 and 150,000 square feet,
respectively.
The Company owns its primary data center facility located in Phoenix with
105,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The information required to be furnished pursuant to this item is set forth
under the caption "Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 in Part III of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange and the
Pacific Exchange under the ticker symbol SCH. The number of common stockholders
of record as of February 7, 1997 was 2,705.
The other information required to be furnished pursuant to this item is set
forth under the caption "Quarterly Financial Information (Unaudited)" in the
Company's 1996 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
ITEM 6. SELECTED FINANCIAL DATA
The information required to be furnished pursuant to this item is set forth
under the captions "Operating Results (for the year)," "Other (for the year)"
and "Other (at year end)" in the Company's 1996 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report.
-9-
12
THE CHARLES SCHWAB CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required to be furnished pursuant to this item is set forth
under the caption "Management's Discussion and Analysis of Results of Operations
and Financial Condition" in the Company's 1996 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1996 and
1995 are summarized as follows (dollars in millions):
- ---------------------------------------------------------------------
Three Months Ended
December 31,
1996 1995
- ---------------------------------------------------------------------
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $6,544 $5,144
Average interest rate 5.33% 5.68%
Margin loans to customers:
Average balance outstanding $4,812 $3,759
Average interest rate 7.55% 8.08%
Average yield on earning assets 6.27% 6.69%
FUNDING SOURCES (CUSTOMER-RELATED
AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $9,137 $7,257
Average interest rate 4.42% 4.72%
Other interest-bearing sources:
Average balance outstanding $ 926 $ 491
Average interest rate 4.24% 4.68%
Average noninterest-bearing portion $1,293 $1,155
Average interest rate on funding sources 3.90% 4.11%
SUMMARY:
Average yield on earning assets 6.27% 6.69%
Average interest rate on funding sources 3.90% 4.11%
- ---------------------------------------------------------------------
Average net interest margin 2.37% 2.58%
=====================================================================
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1995 to the fourth quarter of 1996 was primarily due to higher levels
of average earning assets, partially offset by higher levels of funding sources
and a decrease in average net interest margin.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is set forth
in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1996 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after December 31, 1996 (the Proxy Statement) under the
captions "Election of Directors" (excluding all information under the caption
"Information about the Board of Directors and Committees of the Board") and
"Principal Stockholders."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors. However, Mr. Schwab
has an employment agreement with the Company through March 2001, which includes
an automatic renewal feature that, as of each March 31, extends the agreement
for an additional year unless either party elects to not extend the agreement.
-10-
13
THE CHARLES SCHWAB CORPORATION
================================================================================
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Charles R. Schwab 59 Chairman and Chief Executive Officer, and
Director
Lawrence J. Stupski 51 Vice Chairman, and Director
David S. Pottruck 48 President and Chief Operating Officer, and
Director
John Philip Coghlan 45 Executive Vice President - Schwab
Institutional (trademark)
Daniel O. Leemon 43 Executive Vice President - Business
Strategy
Dawn Gould Lepore 42 Executive Vice President and Chief
Information Officer
Timothy F. McCarthy 45 Executive Vice President - Financial
Products and International Group
Elizabeth Gibson Sawi 44 Executive Vice President - Electronic
Brokerage
Steven L. Scheid 43 Executive Vice President and Chief
Financial Officer
Tom Decker Seip 47 Executive Vice President - Retail
Brokerage
Luis E. Valencia 52 Executive Vice President and Chief
Administrative Officer
================================================================================
MR. SCHWAB has been Chairman and Chief Executive Officer and a director of
the Company since its incorporation in 1986. Mr. Schwab was a founder of Schwab
in 1971 and has been its Chairman since 1978. Mr. Schwab is currently a director
of The Gap, Inc., Transamerica Corporation, Siebel Systems, Inc., AirTouch
Communications and a trustee of The Charles Schwab Family of Funds, Schwab
Investments, Schwab Capital Trust and Schwab Annuity Portfolios, all registered
investment companies.
MR. STUPSKI has been Vice Chairman of the Company since 1992 and a director
of the Company since its incorporation in 1986. Mr. Stupski was Chief Operating
Officer of the Company from 1986 to 1994 and the Company's President from 1986
to 1992. Mr. Stupski also served as Chief Executive Officer from 1988 to 1992
and Chief Operating Officer of Schwab from 1981 to 1992. Mr. Stupski served as
Vice Chairman of Schwab from 1992 to 1994.
MR. POTTRUCK has been Chief Operating Officer and a director of the Company
since 1994 and President of the Company since 1992. Mr. Pottruck was Executive
Vice President of the Company from 1987 to 1992. Mr. Pottruck has been Chief
Executive Officer of Schwab since 1992 and President of Schwab since 1988. Mr.
Pottruck was Executive Vice President of Schwab from 1987 to 1992. Mr. Pottruck
joined Schwab in 1984.
MR. COGHLAN has been Executive Vice President of the Company and Schwab and
General Manager of Schwab Institutional since 1992. Mr. Coghlan
joined Schwab in 1986, became Vice President in 1988 and became Senior Vice
President in 1990.
MR. LEEMON has been Executive Vice President - Business Strategy of the
Company and Schwab since 1995. Before joining Schwab in 1995, Mr. Leemon held
various positions with The Boston Consulting Group, Inc., a management
consulting firm, from 1989 to 1995, including Vice President from 1990.
MS. LEPORE has been Executive Vice President and Chief Information Officer
of the Company and Schwab since 1993. Ms. Lepore joined Schwab in 1983 and
became Senior Vice President in 1989.
MR. MCCARTHY has been Executive Vice President - Financial Products and
International Group of the Company and Schwab since September 1996 and was
Executive Vice President - Mutual Funds of the Company and Schwab and Chief
Executive Officer of CSIM from 1995 to 1996. Before joining Schwab in 1995,
Mr. McCarthy was Chief Executive Officer of Jardine Fleming Unit Trusts Ltd.,
a mutual fund company, from 1994 to 1995. From 1987 to 1994, Mr. McCarthy held
various executive positions with Fidelity Investments, including President of
Fidelity Investments
-11-
14
THE CHARLES SCHWAB CORPORATION
Advisor Group, President of National Financial Institutional Services and
Executive Director of Fidelity Brokerage Group.
MS. SAWI has been Executive Vice President - Electronic Brokerage of the
Company and Schwab since 1995. Ms. Sawi was President of CSIM from 1994 to
1995. From 1994 to 1995, Ms. Sawi was Executive Vice President - Mutual Funds
of the Company and Schwab. Prior to that, Ms. Sawi was Executive Vice President
- - Marketing and Advertising of the Company and Schwab from 1992 to 1994. Ms.
Sawi joined Schwab in 1982.
MR. SCHEID has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since June 1996. Before joining Schwab in 1996, Mr.
Scheid was Executive Vice President of Finance for First Interstate Bancorp
from 1994 to 1996 and was Principal Financial Officer from 1995 to 1996. From
1990 to 1994, Mr. Scheid was Chief Financial Officer of First Interstate Bank
of Texas.
MR. SEIP has been Executive Vice President - Retail Brokerage of the
Company and Schwab since 1994. Mr. Seip was President of CSIM from 1992 to 1994
and Chief Operating Officer of CSIM from 1991 to 1994. From 1992 to 1994, Mr.
Seip was Executive Vice President - Mutual Funds and Fixed Income Products of
the Company and Schwab. Mr. Seip joined Schwab in 1983.
MR. VALENCIA has been Executive Vice President and Chief Administrative
Officer of the Company and Schwab since February 1996. From 1994 to 1996, Mr.
Valencia was Executive Vice President - Human Resources of the Company and
Schwab. Before joining Schwab in 1994, Mr. Valencia served as a Managing
Director of Commercial Credit Corp., a subsidiary of the Travelers engaged in
consumer finance for the Travelers, from 1993 to 1994. From 1975 to 1993, Mr.
Valencia held various positions with Citicorp, including President and Chief
Executive Officer of Transaction Technology, a subsidiary of Citicorp, from 1990
to 1993.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the
captions "Election of Directors - Director Compensation", "Executive
Compensation" (excluding all information under the caption "Board
Compensation Committee Report on Executive Compensation" and "Performance
Graph") and "Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the caption
"Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under the
caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are set forth in
the Company's 1996 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
-12-
15
(b) Reports on Form 8-K
On November 8, 1996, the Registrant filed a Current Report on Form 8-K
relating to up to $196 million aggregate principal amount of debt securities
issuable by the Registrant pursuant to Registration Statement Numbers 333-12727
and 33-61943 declared effective by the SEC on November 1, 1996 and August 18,
1995, respectively. Certain exhibits relating to Medium-Term Notes, Series A,
issuable pursuant to the Registration Statements are contained in the Current
Report.
-13-
16
THE CHARLES SCHWAB CORPORATION
(c) Exhibits
The exhibits listed below are filed as part of this annual report on Form
10-K.
Exhibit
Number Exhibit
3.7 Third Restated Certificate of Incorporation, as amended on May 6,
1996, of the Registrant, filed as Exhibit 3.7 to the Registrant's
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference.
3.8 Second Restated Bylaws, as amended on July 17, 1996, of the
Registrant, filed as Exhibit 3.8 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. Copies of
instruments with respect to long-term debt of lesser amounts will be
provided to the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and
former shareholders of Schwab Holdings, Inc. *
10.9 Executive Officer Stock Option Plan (1987) dated as of March 24,
1987, with form of Non-Qualified Stock Option Agreement (Executive
Officer Stock Option Plan (1987)) attached. * +
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between
International Business Machines Corporation and Charles Schwab &
Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data
Research, Inc. and Beta Systems, Inc. and Assignment, dated February
21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta
Systems, Inc. and Charles Schwab & Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush
Street Associates and Charles Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant
and certain members of the Board of Directors of Registrant, filed
as Exhibit 10.34 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.55 Cash Subordination Agreements between Schwab Holdings, Inc. and
Charles Schwab & Co., Inc. with Assignments dated March 31, 1987 by
Schwab Holdings, Inc., of all right, title, and interest in Cash
Subordination Agreements to Registrant, filed as Exhibit 4.20 to
Registrant's Registration Statement No. 33-16192 on Form S-1 and
incorporated herein by reference.
-14-
17
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.57 Registration Rights and Stock Restriction Agreement, dated as of
March 31, 1987, between the Registrant and the holders of the Common
Stock, filed as Exhibit 4.23 to Registrant's Registration Statement
No. 33-16192 on Form S-1 and incorporated herein by reference.
10.63 Revolving Subordinated Loan Agreement as of September 29, 1988,
between the Registrant and Charles Schwab & Co., Inc., filed as
Exhibit 10.63 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988,
among Charles Schwab & Co., Inc., Charles R. Schwab and the
Registrant, filed as Exhibit 10.72 to the Registrant's Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
10.73 1987 Stock Option Plan, as Amended and Restated, as of April 17,
1989, with form of Non-Qualified Stock Option Agreement (General
Management Plan) attached, filed as Exhibit 4.1 to Registrant's
Registration Statement No. 33-21582 on Form S-8 and incorporated
herein by reference. +
10.83 First Amendment to Revolving Subordinated Loan Agreement, as of
April 18, 1990, between the Registrant and Charles Schwab & Co.,
Inc., filed as Exhibit 10.83 to the Registrant's Form 10-Q for the
quarter ended March 31, 1995 and incorporated herein by reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee
Stock Ownership Plan, effective November 1, 1990, dated October 25,
1990, filed as Exhibit 10.87 to the Registrant's Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by
reference.
10.99 Second Amendment to Revolving Subordinated Loan Agreement, as of
November 1, 1991, between the Registrant and Charles Schwab & Co.,
Inc.
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.
10.113 Schwab One Services Agreement dated April 17, 1992 between Charles
Schwab & Co., Inc. and Provident National Bank, filed as Exhibit
10.113 to the Registrant's Form 10-Q for the quarter ended March 31,
1992 and incorporated herein by reference.
10.116 Second Amendment to the Trust Agreement for the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan effective July 1,
1992, dated June 30, 1992, filed as Exhibit 10.116 to the
Registrant's Form 10-Q for the quarter ended June 30, 1992 and
incorporated herein by reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.120 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference. +
-15-
18
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended,
effective January 1, 1994, filed as Exhibit 10.132 to Registrant's
Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference. +
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors, filed as Exhibit 4.4 to the Registrant's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference. +
10.140 Form of Restricted Shares Agreement, filed as Exhibit 4.6 to the
Registrant's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference. +
10.141 The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended October 18, 1994, filed as Exhibit 10.141 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994
and incorporated herein by reference. +
10.143 Form of Nonstatutory Stock Option Agreement, filed as Exhibit 10.143
to the Registrant's Form 10-Q for the quarter ended September 30,
1994 and incorporated herein by reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit 10.144 to
the Registrant's Form 10-Q for the quarter ended September 30, 1994
and incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January 1,
1995, filed as Exhibit 10.146 to the Registrant's Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference. +
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995 (formerly
the Annual Executive Bonus Plan), filed as Exhibit 10.147 to the
Registrant's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab, filed as Exhibit 10.149 to the
Registrant's Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference. +
10.152 The Charles Schwab Profit Sharing and Employee Stock Ownership Plan,
amended July 6, 1995, effective January 1, 1995 and April 1, 1995,
filed as Exhibit 10.152 in the Registrant's Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by reference. +
10.155 Forms of Restricted Share Award Agreements, incorporating
performance vesting provisions and/or supplemental cash payment
provisions, filed as Exhibit 10.155 in the Registrant's Form 10-Q
for the quarter ended September 30, 1995 and incorporated herein by
reference. +
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by
letter agreement dated September 21, 1995 and by Second Amendment to
Agreement of Sale dated September 22, 1995, between American Express
Company and Charles Schwab & Co., Inc., regarding American Express
Western Regional Operations Center located at 2423 Lincoln Drive,
Phoenix, Arizona, filed as Exhibit 10.156 in the Registrant's Form
10-Q for the quarter ended September 30, 1995 and incorporated
herein by reference.
-16-
19
THE CHARLES SCHWAB CORPORATION
Exhibit
Number Exhibit
10.157 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, effective January 1, 1996, filed as Exhibit 10.157 to the
Registrant's Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference. +
10.158 Credit Agreement dated June 28, 1996 between the Registrant and the
banks listed therein, filed as Exhibit 10.158 to the Registrant's
Form 10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference.
10.159 The Charles Schwab Corporation Executive Officer Stock Option Plan
(1987), as amended September 17, 1996, with form of Non-Qualified
Stock Option Agreement (Executive Officer Stock Option Plan (1987))
attached (supersedes Exhibit 10.9), filed as Exhibit 10.159 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.160 The Charles Schwab Corporation 1987 Stock Option Plan, as amended
September 17, 1996, with form of Non-Qualified Stock Option
Agreement (General Management Plan) attached (supersedes Exhibit
10.73), filed as Exhibit 10.160 to the Registrant's Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference. +
10.161 The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended
September 17, 1996 (supersedes Exhibit 10.141), filed as Exhibit
10.161 to the Registrant's Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference. +
10.162 The Charles Schwab Corporation Deferred Compensation Plan, as
amended September 17, 1996, filed as Exhibit 10.162 to the
Registrant's Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference. +
10.163 Lease of 101 Montgomery Street between 101 Montgomery Street Co.
and Charles Schwab & Co., Inc. dated October 8, 1996.
10.164 Office Lease of Pacific Telesis Center Telesis Tower between
Post-Montgomery Associates and Charles Schwab & Co., Inc. dated
October 4, 1996.
10.165 Third Amendment to Revolving Subordinated Loan Agreement, as of
December 12, 1995, between the Registrant and Charles Schwab &
Co., Inc.
11.1 Computation of Earnings Per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1996 Annual Report to
Stockholders, which have been incorporated herein by reference.
Except for such portions, such annual report is not deemed to be
"filed" herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
-17-
20
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as amended
and declared effective on September 22, 1987.
+ Management contract or compensatory plan.
-18-
21
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 28, 1997.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ CHARLES R. SCHWAB
---------------------------------
Charles R. Schwab
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 1997.
SIGNATURE TITLE
/s/ CHARLES R. SCHWAB Chairman, Chief Executive Officer and Director
- ------------------------- (principal executive officer)
Charles R. Schwab
/s/ LAWRENCE J. STUPSKI Vice Chairman and Director
- -------------------------
Lawrence J. Stupski
/s/ DAVID S. POTTRUCK President, Chief Operating Officer and Director
- -------------------------
David S. Pottruck
/s/ STEVEN L. SCHEID Executive Vice President and Chief Financial
- ------------------------- Officer
Steven L. Scheid (principal financial and accounting officer)
/s/ NANCY H. BECHTLE Director
- -------------------------
Nancy H. Bechtle
/s/ C. PRESTON BUTCHER Director
- -------------------------
C. Preston Butcher
/s/ DONALD G. FISHER Director
- -------------------------
Donald G. Fisher
/s/ ANTHONY M. FRANK Director
- -------------------------
Anthony M. Frank
/s/ FRANK C. HERRINGER Director
- -------------------------
Frank C. Herringer
/s/ STEPHEN T. McLIN Director
- -------------------------
Stephen T. McLin
/s/ ROGER O. WALTHER Director
- -------------------------
Roger O. Walther
-19-
22
THE CHARLES SCHWAB CORPORATION
================================================================================
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 and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
SCHEDULE II - Valuation and Qualifying Accounts F-6
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 1996 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
================================================================================
F-1
23
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, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, and have
issued our report thereon dated February 21, 1997; such consolidated financial
statements and report are included in your 1996 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the financial
statement schedules of the Company and subsidiaries appearing on pages F-3
through F-6. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 1997
F-2
24
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(In thousands, except per share amounts)
DECEMBER 31,
1996 1995
ASSETS
Cash and cash equivalents $ 74,785 $ 41,198
Receivable from subsidiaries 15,276 7,229
Subordinated receivable from subsidiaries 235,000 203,000
Investment in subsidiaries, at equity 820,289 640,368
Other assets 5,004 4,762
- -----------------------------------------------------------------------------------------------------------------
TOTAL $1,150,354 $896,557
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other $ 17,799 $ 23,663
Borrowings 278,000 240,000
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 295,799 263,663
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value per share;
none issued
Common stock - 500,000 shares authorized in 1996 and 200,000 shares authorized
in 1995; $.01 par value per share; 178,459 shares issued in 1996 and 1995 1,785 1,785
Additional paid-in capital 200,857 180,302
Retained earnings 723,085 520,532
Treasury stock - 3,391 shares in 1996 and 4,427 shares in 1995, at cost (60,277) (50,968)
Unearned ESOP shares (5,517) (9,397)
Unamortized restricted stock compensation (8,658) (7,074)
Foreign currency translation adjustment 3,280 (2,286)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 854,555 632,894
- -----------------------------------------------------------------------------------------------------------------
TOTAL $1,150,354 $896,557
=================================================================================================================
See Notes to Consolidated Financial Statements in the Company's 1996 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of borrowings and contingent
liabilities.
================================================================================
F-3
25
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Interest revenue $ 26,287 $ 18,879 $ 14,379
Interest expense (19,091) (13,886) (12,079)
- -----------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE 7,196 4,993 2,300
Other revenues 268 1,032 18
Other expenses (3,400) (2,984) (8,467)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND EQUITY
IN EARNINGS OF SUBSIDIARIES 4,064 3,041 (6,149)
Income tax expense (benefit) 1,568 1,235 (2,490)
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES 2,496 1,806 (3,659)
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 154,922 134,418 30,632
Dividends paid by subsidiaries 76,385 36,380 108,370
- -----------------------------------------------------------------------------------------------------------
Total 231,307 170,798 139,002
NET INCOME 233,803 172,604 135,343
Dividends on common stock (31,495) (24,249) (16,038)
Other 245 (984) 164
RETAINED EARNINGS:
At beginning of year 520,532 373,161 253,692
- -----------------------------------------------------------------------------------------------------------
AT END OF YEAR $723,085 $520,532 $373,161
===========================================================================================================
================================================================================
F-4
26
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 233,803 $172,604 $135,343
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (154,922) (134,418) (30,632)
Change in other assets (157) (50) (2,144)
Change in accrued expenses and other (7,805) 4,455 7,011
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 70,919 42,591 109,578
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in receivable from subsidiaries 23,446 53,958 17,475
Collection on subordinated loans to subsidiary 4,000 8,728
Issuance of subordinated loans to subsidiaries (36,000) (79,000)
Increase in net investment in subsidiaries (10,132) (16,206) (3,468)
Cash payments for businesses acquired (4,709) (63,696)
Other (1,720) (801)
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (23,395) (106,664) 21,934
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 64,000 70,000 20,000
Repayment of borrowings (26,000) (35,000)
Dividends paid (31,495) (24,249) (16,038)
Purchase of treasury stock (28,171) (17,345) (46,781)
Other 7,729 12,972 10,200
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (13,937) 41,378 (67,619)
- ------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,587 (22,695) 63,893
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 41,198 63,893 --
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 74,785 $ 41,198 $ 63,893
======================================================================================================
See Notes to Consolidated Financial Statements in the Company's 1996 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of additional cash flow information.
================================================================================
F-5
27
THE CHARLES SCHWAB CORPORATION
================================================================================
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
BALANCE AT --------------------- BALANCE AT
BEGINNING CHARGED END
DESCRIPTION OF YEAR TO EXPENSE OTHER WRITTEN OFF OF YEAR
------- ---------- ----- ----------- -------
FOR THE YEAR ENDED
DECEMBER 31, 1996:
Allowance for doubtful accounts $3,700 $2,651 $ 99 $ (932) $5,518
===============================================================
FOR THE YEAR ENDED
DECEMBER 31, 1995:
Allowance for doubtful accounts $3,204 $1,349 $272 $(1,125) $3,700
===============================================================
FOR THE YEAR ENDED
DECEMBER 31, 1994:
Allowance for doubtful accounts $2,229 $1,193 $150 $ (368) $3,204
===============================================================
================================================================================
F-6