<PAGE> 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, 1993 COMMISSION FILE NUMBER 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
</TABLE>
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:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock - $0.01 par value New York Stock Exchange, Inc.
The Pacific Stock Exchange Incorporated
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 11, 1994, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $973,497,672. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant and by the Charles Schwab Profit
Sharing and Employee Stock Ownership Plan were deemed to be shares of Common
Stock held by affiliates.
The number of shares of Common Stock outstanding as of March 11, 1994 was
57,215,482* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in
the registrant's 1993 Annual Report to Stockholders by reference to portions of
that document. Part III of this Form 10-K incorporates certain information
contained in the registrant's definitive proxy statement for its annual meeting
of stockholders to be held May 9, 1994 by reference to portions of that
document.
* Reflects the 1993 three-for-two common stock split.
<PAGE> 2
THE CHARLES SCHWAB CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1993
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I
- ------
Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 11
Item 4a. Executive Officers of the Registrant . . . . . . 11
Part II
- -------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . 11
Item 8. Financial Statements and Supplementary Data . . 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . 12
Part III
- --------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . 12
Item 11. Executive Compensation . . . . . . . . . . . . . 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions . 15
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . 15
Exhibit Index . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . 21
Index to Financial Statement Schedules . F-1
</TABLE>
<PAGE> 3
THE CHARLES SCHWAB CORPORATION
PART I
ITEM 1. BUSINESS
(a) General Development of Business. The Charles Schwab Corporation (CSC)
is a holding company engaged, through its subsidiaries, in brokerage and
related investment services. CSC's principal operating subsidiary, Charles
Schwab & Co., Inc. (Schwab), serves an estimated 44% of the discount brokerage
market as measured by commission revenue. Another subsidiary, Mayer &
Schweitzer, Inc. (M&S), a market maker in Nasdaq securities, provides trade
execution services to institutional clients and broker-dealers. During 1993,
customer orders handled by M&S totaled over 4 billion shares, or over 6% of the
total shares traded on Nasdaq. As used herein, the "Company" refers to CSC and
subsidiaries.
Schwab was incorporated in California in 1971 and adopted the name Charles
Schwab & Co., Inc. after Mr. Charles R. Schwab became its owner and President.
In 1974, Schwab participated in the Securities and Exchange Commission's (SEC)
pilot program to permit discounts on securities commissions. In 1975, when
fixed commission rates were abolished, Schwab focused its strategy on providing
financial services to investors who wish to conduct their own research and make
their own investment decisions and who do not wish to pay, through brokerage
commissions, for research or portfolio management. Schwab grew significantly
through January 1983 when, to ensure the availability of sufficient capital for
continued expansion, Schwab merged with an affiliate of BankAmerica Corporation
(BAC).
CSC was incorporated in November 1986 for the purpose of acquiring Schwab
from BAC. In March 1987, Schwab was acquired from BAC in a management-led
leveraged buyout. In September 1987, the Company raised $123 million in its
initial public offering, using the offering proceeds to expand its business and
repay debt issued in the leveraged buyout.
Since becoming a publicly-owned entity, the Company has continued to
experience significant growth in revenues, customer assets and number of
accounts. This growth has been accomplished through investment in technology,
product and service development, marketing programs and customer service
delivery systems. In addition, the Company has broadened its service
capability through the acquisition and development of additional businesses.
In October 1989, Charles Schwab Investment Management, Inc. (CSIM) was
formed as a subsidiary of CSC. In January 1990, CSIM became the general
investment adviser (employing a sub-adviser to perform portfolio management for
certain funds), as well as the administrator for three money market mutual
funds organized as portfolios of the then newly organized The Charles Schwab
Family of Funds. Substantially all of the balances previously invested by
Schwab customers in other money market mutual funds having similar investment
objectives were transferred to these money market mutual funds in January 1990.
Schwab subsequently introduced additional mutual funds, some as portfolios of
two separate Massachusetts business trusts, Schwab Investments and Schwab
Capital Trust. The Company refers to all funds for which CSIM is the
investment adviser as the SchwabFunds (registered trademark).
During July 1992, Schwab introduced nationally its no-transaction-fee
mutual fund service, known as the Mutual Fund OneSource (trademark) service,
which by December 31, 1993, enabled customers to trade over 200 mutual funds in
25 well-known fund families without incurring brokerage transaction fees.
Customer assets held by Schwab that have been purchased through the Mutual Fund
OneSource service, excluding SchwabFunds, totaled $8.3 billion at December 31,
1993.
In response to the continued growth of customer trading activity in Nasdaq
securities and a desire to secure a capability to execute customer trades in
these and other securities, CSC acquired M&S in July 1991. Since the
acquisition, M&S has executed essentially all the Nasdaq security trades
originated by the customers of Schwab, which in 1993 accounted for
approximately 20% of Schwab's total trading volume. Principal transaction
revenues generated by M&S have contributed significantly to the Company's
operating results.
In March 1992, the Company opened The Charles Schwab Trust Company (CSTC),
which provides custody services for investment portfolios and serves as trustee
for employee benefit plans (primarily 401(k) plans). CSTC, based in San
Francisco, is regulated as a limited-purpose bank by the California State
Banking Department. CSTC's primary focus is to provide services to
independent, fee-based financial advisers and 401(k) plan record keepers and
administrators.
In November 1992, the Company capitalized Charles Schwab Limited, its
first European subsidiary. The wholly owned subsidiary is registered as an
arranger with the United Kingdom Securities and Futures Authority, and engages
in business development activities on behalf of Schwab. The subsidiary's first
office, located in London, was opened in February 1993.
DEVELOPMENTS DURING 1993 AND EARLY 1994
During 1993, the Company experienced record revenues, net income, and
growth in customer assets and accounts. Net income for 1993 was $118 million,
or $1.98 per share, up from $81 million, or $1.39 per share, in 1992 and $49
million, or $.84 per share, in 1991. Reflected in
- 1 -
<PAGE> 4
THE CHARLES SCHWAB CORPORATION
1993's operating results is an extraordinary charge of $.11 per share relating
to CSC's prepayment of its Junior and Senior Subordinated Debentures. Schwab
opened 706,000 new accounts during 1993, which contributed significantly to the
$30.2 billion, or 46%, increase in assets held in Schwab customer accounts.
The Company made significant capital expenditures during 1993, investing
$77 million in a new primary data center, a fourth regional customer telephone
service center, which opened in January 1994, and enhancements to its data
processing and telecommunications systems. The Company also opened 23 branch
offices and made improvements to certain existing office facilities.
A new Massachusetts business trust, Schwab Capital Trust, was formed in
July 1993. During 1993, Schwab added to the SchwabFunds (registered trademark)
by introducing two new funds under the Schwab Capital Trust, an international
index fund and an index fund that attempts to track the performance of common
stocks of the second 1,000 largest United States corporations. During 1993,
Schwab also introduced a long-term government bond fund and two
short/intermediate tax-free bond funds. Customer assets invested in the
SchwabFunds at December 31, 1993 totaled $15.8 billion, a 39% increase over the
prior year.
Several financing transactions were completed during 1993. The Company
prepaid its 10% Senior and 9% Junior Subordinated Debentures totaling $116
million, and paid a related prepayment premium of approximately $11 million.
The Company prepaid the debentures using proceeds received from the issuance of
medium-term notes with an average interest rate of 5.91%.
In March 1993, the Company's Board of Directors approved a three-for-two
stock split of the Company's common stock, which was effected in the form of a
50% stock dividend. The stock dividend was paid on June 1, 1993 to
stockholders of record May 3, 1993. In January 1994, the Board increased the
Company's quarterly cash dividend 40% to $.070 per share payable February 15,
1994 to stockholders of record February 1, 1994.
(b) Financial Information About Industry Segments. The Company operates
in a single industry segment: securities brokerage and related investment
services. No material part of the Company's consolidated revenues is received
from a single customer or group of customers, or from foreign operations. As
of December 31, 1993, approximately 29% of Schwab's total customer accounts
were located in California. The next highest geographic concentrations of
total customer accounts were approximately 7% in each of New York and Florida.
(c) Narrative Description of Business. Schwab provides brokerage and
related investment services to more than 2.5 million active investor accounts.
These accounts held $95.8 billion in assets at December 31, 1993. M&S operates
four offices in four states offering trade execution services for Nasdaq
securities to institutional clients and broker-dealers, including Schwab.
Schwab's primary focus is serving retail clients who seek a wide selection of
quality investment services at fees that, in most cases, are substantially
lower than those of full-commission firms. The table on the following page
sets forth on a comparative basis the Company's revenues for the three years
ended December 31, 1993. These revenue figures reflect developments in, and
the composition of, the Company's business.
Schwab provides its customers, most of whom are retail investors, with
convenient and prompt execution of their orders to purchase and sell
securities, and with rapid access to market-related information. A key to both
the quality and speed of Schwab's service and to its ability to provide
commission discounts is its sophisticated communications and information
processing systems.
Schwab primarily serves investors who wish to conduct their own research
and make their own investment decisions and do not wish to pay, through
brokerage commissions, for research or portfolio management. To attract and
accommodate investors who want research and portfolio management services,
however, Schwab offers a variety of fee-based (primarily third-party) research
and portfolio management products. This customer segment has become
increasingly significant to Schwab's growth in customer assets and accounts.
During 1993, Schwab client assets held in customer accounts managed by
financial advisors increased $9.6 billion (73%) to a total of $22.9 billion.
Schwab does not generally maintain inventories of securities for sale to
its customers or engage in principal transactions with its customers.
Exceptions to this general rule include: (1) having temporary positions
resulting from execution errors, unavailability of the various exchanges'
automated trade execution facilities, or nonpayment by customers, (2)
positioning of listed securities to accommodate institutional customers, and
(3) engaging in certain riskless principal and other similar transactions
where, in response to a customer order, Schwab will purchase securities
(generally municipal and government securities) from another source and resell
them to customers at a markup. Schwab concentrates on the execution of
unsolicited transactions on an agency basis.
Schwab's customer service delivery system reduces dependency on the need
for personal relationships between Schwab's customers and employees to generate
orders. Schwab does not generally assign customers to individual employees.
Each customer-contact employee has immediate access to the customer account
and market-related information necessary to respond to any customer's
inquiries, and for most customer orders, can enter the order and confirm the
transaction. Customer orders involving certain
- 2 -
<PAGE> 5
THE CHARLES SCHWAB CORPORATION
SOURCES OF REVENUES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1992 1991
---------------------- -------------------- --------------------
TYPE OF REVENUE AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 300,229 31.1% $ 251,453 33.6% $ 202,743 35.6%
Nasdaq 168,855 17.5% 122,022 16.3% 89,328 15.7%
Mutual funds 46,189 4.8% 35,507 4.7% 25,104 4.4%
Options 36,933 3.8% 32,290 4.3% 31,192 5.5%
Other -- -- 157 -- 553 0.1%
--------- ---- --------- ---- --------- ----
TOTAL COMMISSION REVENUES 552,206 57.2% 441,429 58.9% 348,920 61.3%
--------- ---- --------- ---- --------- ----
PRINCIPAL TRANSACTIONS 169,081 17.5% 130,013 17.3% 63,421 11.1%
Interest revenues
Investments 112,944 11.7% 140,428 18.7% 207,710 36.5%
Margin loans 132,471 13.7% 104,337 13.9% 88,129 15.5%
Other 6,816 0.7% 6,266 0.9% 6,359 1.1%
Interest expense (132,382) (13.7%) (159,491) (21.3%) (225,558) (39.6%)
--------- ---- --------- ---- --------- ----
INTEREST REVENUE, NET OF
INTEREST EXPENSE 119,849 12.4% 91,540 12.2% 76,640 13.5%
--------- ---- --------- ---- --------- ----
MUTUAL FUND SERVICE FEES 98,554 10.2% 63,391 8.5% 54,152 9.5%
OTHER REVENUES 25,323 2.7% 23,139 3.1% 26,494 4.6%
--------- ---- --------- ---- --------- ----
REVENUES $ 965,013 100.0% $ 749,512 100.0% $ 569,627 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
Certain prior years' revenues and expenses have been reclassified to conform to
the 1993 presentation.
This table should be read in connection with the Company's consolidated
financial statements and notes in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
- -------------------------------------------------------------------------------
types of transactions, such as those in fixed income securities and mutual
funds, are handled by separate groups of registered representatives that
specialize in such transactions. As a result of this approach, the departure
of a registered representative generally does not result in a loss of customers
for the firm.
As a market maker in Nasdaq securities, M&S executes customer trades
generally as principal. M&S' business practices call for competitively priced
customer executions. As a member of the National Association of Securities
Dealers, Inc. (NASD), M&S provides its customers with the highest bid price on
a customer's sell order and the lowest offer price on a customer's buy order
available through the network of NASD member firms that are market makers.
Customer trades exceeding certain sizes are executed on a negotiated basis.
M&S maintains inventories in Nasdaq securities on both a "long" and
"short" basis. While long inventory positions represent M&S' ownership of
securities, short inventory positions represent obligations of M&S to deliver
specified securities at a contracted price, which may differ from market prices
prevailing at the time of completion of the transaction. Accordingly, long or
short inventory positions may result in gains or losses to M&S as market values
of these securities fluctuate.
The securities brokerage industry is directly affected by
- 3 -
<PAGE> 6
THE CHARLES SCHWAB CORPORATION
fluctuations in volumes and price levels of securities transactions generally,
which are affected by many national and international economic and political
factors that cannot be predicted, including broad trends in business and
finance, legislation and regulation affecting the United States and
international business and financial communities, currency values, and the
level and volatility of interest rates. Sustained low volumes of retail
investment activity or of securities transactions generally, particularly if
accompanied by low securities prices, could substantially reduce the Company's
transaction-based revenues and could lead to reduced margin account balances,
thus reducing interest revenue as well. Shifts in customer investment vehicle
preferences from individual equity securities to products that have lower
commissions per transaction, such as mutual funds, could also reduce
transaction-based revenues.
In connection with its information processing systems, its branch network,
and other aspects of its business, the Company incurs substantial expenses that
do not vary directly, at least in the short term, with fluctuations in
securities transaction volumes and revenues. In the event of a material
reduction in revenues, the Company may not reduce such expenses quickly and, as
a result, the Company could experience reduced profitability or losses.
Conversely, sudden surges in transaction volume can result in increased profits
and profit margins. To ensure that it has the capacity to process projected
increases in transaction volumes, the Company has historically made substantial
capital and operating expenditures in advance of such projected increases,
including during periods of low transaction volumes. In the event that such
growth in transaction volumes does not occur, the expenses related to such
investments could, as they have in the past, cause reduced profitability or
losses.
COMPETITION
The Company encounters rigorous competition from full-commission and
discount brokerage firms, as well as from financial institutions, mutual fund
sponsors, market makers in Nasdaq securities and other organizations. The
recent general financial success of the securities industry has strengthened
existing competitors, and management believes that such success will continue
to attract additional competitors such as banks and insurance companies. Some
of these competitors are larger, more diversified, and have greater capital
resources than the Company. In many instances the Company is competing with
such organizations for the same customers. Management believes that the main
competitive factors are quality, convenience, price of services and products
offered, and breadth of product line.
Most discount brokerage firms charge commissions lower than Schwab. Full-
commission brokerage firms also offer discounted commissions to selected retail
customers. Many brokerage firms employ substantial funds in advertising and
direct solicitation of customers to increase their market share of commission
dollars and other securities-related income. If the well-capitalized brokerage
firms pursue these competitive strategies successfully, Schwab's new account
growth, commission revenues and profit margins could be adversely affected.
Many of the large full-commission brokerage firms, as well as other
financial institutions, including commercial banks and insurance companies,
offer a wider range of services and financial products than does the Company.
Particularly as financial services and products proliferate, to the extent such
competitors are able to attract and retain customers on the basis of the
convenience of one-stop shopping, the Company's business or its ability to grow
could be adversely affected. Schwab's philosophy of generally refraining from
directly recommending particular securities and its methods of marketing may
cause it not to offer some of the financial products and services offered by
others.
MARKETING AND PROMOTION
Advertising plays a crucial role in obtaining new customers, which have
constituted an important source of revenue and revenue growth for the Company.
The Company's advertising and market development expense for the years ended
December 31, 1993, 1992 and 1991 was $41 million, $34 million and $25 million,
respectively. For the same years, the numbers of new accounts opened were
approximately 706,000, 562,000 and 384,000, respectively. New account openings
represent a significant portion of the growth in customer assets, which the
Company believes is critical to growth in revenues. The Company estimates that
accounts opened during 1993 generated 16% of total commission revenues during
that year and that accounts opened during 1992 and 1991 generated 18% and 19%
of total commission revenues during each of those years, respectively.
The branch office network also plays a key role in building Schwab's
business. Many customers prefer to open accounts in person in Schwab branch
offices. With the customer service support of the regional customer telephone
service centers and TeleBroker (trademark), branch personnel are able to focus
a significant portion of their time on business development. Branch training
programs and compensation plans emphasize identifying customer needs that can
be satisfied with Schwab products and services, and increasing customer assets
held in Schwab accounts.
Schwab advertises regularly in financially-oriented newspapers and
periodicals and occasionally in general circulation publications. Schwab
advertisements appear regularly on national and local cable television and
- 4 -
<PAGE> 7
THE CHARLES SCHWAB CORPORATION
periodically on radio and independent television stations. Schwab's national
network television advertising campaign, launched during the fourth quarter of
1991, has resulted in significant increases in Schwab brand awareness among
investors. Schwab employs volume-buying and other strategies to minimize the
expense of broadcast advertising. Through these broadcast-buying strategies
and by using Schwab employees to produce and buy print advertising, management
believes Schwab realizes savings on its promotional expenses. Schwab also
engages extensively in targeted direct mail advertising through monthly
statement "inserts" and special mailings.
In its advertising, as well as in promotional events such as press
appearances, Schwab has aggressively promoted the name and likeness of its
Chairman, Mr. Schwab. The Company believes there is a substantial benefit
related to Mr. Schwab's association with the Company and that Schwab's
marketing programs and overall business is dependent on the ability to continue
to use Mr. Schwab's name and likeness. The Company has entered into an
agreement with Mr. Schwab by which he, subject to certain limitations, has
assigned to the Company and Schwab all service mark, trademark, and trade name
rights in his name (and variations thereon) and likeness.
PRODUCTS AND SERVICES
Securities and Other Investments Available. Schwab's customers may
purchase and sell both listed and unlisted corporate securities, and listed
put, call and index options.
Through its Mutual Fund Marketplace (registered trademark) program, Schwab
purchases and redeems for its customers shares of over 700 mutual funds in
approximately 100 fund families sponsored by third parties. This program
provides Schwab's customers with the convenience of purchasing and redeeming
mutual fund shares with a single telephone call and of using margin credit to
purchase most mutual fund shares. Schwab charges a transaction fee on trades
placed in the funds included in its Mutual Fund Marketplace (except as
described below), or in some cases, receives compensation directly from the
funds and/or fund sponsors. Commissions from customer transactions in mutual
fund shares comprised approximately 9% of Schwab's total commission revenues in
1993, compared to approximately 8% in 1992 and approximately 7% in 1991.
During July 1992, Schwab introduced nationally its no-transaction-fee
mutual fund service, known as the Mutual Fund OneSource (trademark) service,
which by December 31, 1993, enabled customers to trade over 200 mutual funds in
25 well-known fund families without incurring brokerage transaction fees. The
service is particularly attractive to investors who previously chose to execute
mutual fund trades directly with multiple mutual fund companies to avoid
brokerage transaction fees and achieve investment diversity among fund
families. Mutual fund trades placed through the Mutual Fund OneSource service
grew from an average of 1,000 per day in July 1992, including 500 per day in
SchwabFunds (registered trademark), to an average of 9,800 per day in December
1993, including 1,200 per day in SchwabFunds. While Schwab does not receive
transaction fees (commissions) on customer trades in the Mutual Fund OneSource
participating mutual funds, it is compensated directly by the participating
funds or their sponsors via fees received for providing record keeping and
shareholder services. Such compensation is ongoing, based on daily balances of
customer assets invested in the participating funds and held at Schwab. These
revenues are recorded as mutual fund service fees.
Fixed income investments available through Schwab include U.S. Treasuries,
zero-coupon bonds, listed and OTC corporate bonds, municipal bonds, GNMAs, unit
investment trusts and bond mutual funds. Schwab also makes available to its
customers certificates of deposit (CDs) with specific financial institutions
located in a variety of states. Schwab does not perform a credit evaluation of
such institutions. Such institutions pay Schwab fees for its services in
making such CDs available and in transmitting funds and performing certain
accounting functions. Schwab's customers do not pay any commission or fee when
they purchase CDs.
Accounts and Features. Each Schwab customer has a brokerage account
through which securities may be purchased or sold. If approved for margin
transactions, a customer may borrow a portion of the price of certain
securities purchased through Schwab, or may sell securities short. Customers
must have specific approval to trade options; as of December 31, 1993,
approximately 131,000 accounts were so approved. To write uncovered options,
customers must go through an additional approval process and must maintain a
significantly higher level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept into money market mutual fund portfolios available
through the SchwabFunds. For basic brokerage accounts opened after January 1,
1991, cash balances (that exceed specified minimum amounts) are automatically
swept into the Schwab Money Market Fund unless customers elect otherwise.
A customer may receive additional services by qualifying for and opening a
Schwab One (registered trademark) Brokerage Account. A customer may remove
available funds from his or her Schwab One account either with a personal check
or a VISA debit card. If a Schwab One customer is approved for margin trading,
which most are, the checks and debit card also provide access to margin cash
available. For cash
- 5 -
<PAGE> 8
THE CHARLES SCHWAB CORPORATION
balances awaiting investment, Schwab pays interest to Schwab One (registered
trademark) customers at a discretionary rate of interest. Alternatively,
Schwab One customers seeking tax-exempt interest income may elect to have cash
balances swept into one of three tax-exempt money market mutual funds,
including two that are available through the SchwabFunds (registered
trademark). During 1993, the number of active Schwab One accounts increased
19% and the customer assets in all Schwab One accounts increased 42%. The
Company considers all customer accounts with cash balances, positions or
trading activity within the preceding twelve months to be active.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of
three SchwabFunds money market mutual funds. During 1993, active IRAs
increased 31% and customer assets in all IRAs increased 53%. Schwab also acts
as custodian and broker for Keogh accounts.
During 1992, Schwab introduced an IRA that does not carry an annual fee
for accounts with balances of $10,000 or more, which was offered to existing
and prospective IRA customers. The Company had previously charged an annual
account fee of $22 on virtually all IRAs. At December 31, 1993, over
two-thirds of the Company's 760,000 active IRAs were included in the
no-annual-fee program. In order for the Company to maintain a competitive
pricing structure, this lifetime no-annual-fee offer will continue through
1994.
Customer Financing. Customers' securities transactions are effected on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by settlement date,
usually five business days after the trade is executed. However, for purchases
of certain types of securities, such as mutual fund shares, a customer must
have a cash balance in his or her account sufficient to pay for the trade prior
to execution. When selling securities, a customer is required to deliver the
securities, and is entitled to receive the proceeds, on the settlement date.
In an account authorized for margin trading, Schwab may lend its customer a
portion of the market value of certain securities up to the limit imposed by
the Federal Reserve Board, which for most equity securities is initially 50%.
Such loans are collateralized by the securities in the customer's account.
"Short" sales of securities represent sales of borrowed securities and create
an obligation to purchase the securities at a later date. Customers may sell
securities "short" in a margin account subject to minimum equity and applicable
margin requirements and the availability of such securities to be borrowed and
delivered.
Interest on margin loans to customers provides an important source of
revenue to Schwab. During the year ended December 31, 1993, Schwab's
outstanding margin loans to its customers averaged approximately $2.2 billion,
up from 1992's average of $1.6 billion.
In permitting a customer to engage in transactions, Schwab takes the risk
of such customer's failure to meet his or her obligations in the event of
adverse changes in the market value of the securities positions in his or her
account. Under applicable rules and regulations for margin transactions,
Schwab, in the event of such an adverse change, requires the customer to
deposit additional securities or cash, so that the amount of the customer's
obligation is not greater than specified percentages of the cash and market
values of the securities in the account. As a matter of policy, Schwab
generally requires its customers to maintain higher percentages of collateral
values than the minimum percentages required under these regulations.
Schwab may use cash balances in customer accounts to extend margin credit
to other customers. Under the SEC's Rule 15c3-3, the portion of such cash
balances not used to extend margin credit (increased or decreased by certain
other customer-related balances) must be held in segregated investment
accounts. The balances in these segregated investment accounts may be invested
in qualified interest-bearing securities. To the extent customer cash balances
are available for use by Schwab at interest costs lower than Schwab's costs of
borrowing from alternative sources (e.g., balances in Schwab One brokerage
accounts) or at no interest cost (e.g., balances in other accounts and
outstanding checks that have not yet cleared Schwab's bank), Schwab's cost of
funds is reduced and its net income is enhanced. Such interest savings
contribute substantially to Schwab's profitability and, if a significant
reduction of customer cash balances were to occur, Schwab's borrowings from
other sources would have to increase and such profitability would decline. To
the extent Schwab's customers elect to have cash balances in their brokerage
accounts swept into certain SchwabFunds money market mutual funds, the cash
balances available to Schwab for investments or for financing margin loans are
reduced. However, Schwab receives mutual fund service fees from such funds
based on the average daily invested balances.
See also "Regulation" on page 9 and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Company's 1993 Annual
Report to Stockholders, which is incorporated herein by reference to Exhibit
No. 13.1 of this report.
Mutual Funds. CSIM provides investment advisory and administrative
services to the SchwabFunds, which consisted of six money market funds, a
broad-based equity index fund, an international index fund, an index fund that
attempts to track the performance of common stocks of the second 1,000 largest
United States corporations and six bond funds at December 31, 1993. Customer
assets invested in the SchwabFunds totaled approximately $15.8 billion at
December 31, 1993.
- 6 -
<PAGE> 9
THE CHARLES SCHWAB CORPORATION
The Company intends to offer additional mutual funds to its customers in
the future.
Market Making In Nasdaq Securities. M&S provides trade execution services
in Nasdaq securities to institutional and broker-dealer clients. These
services feature highly automated, competitively priced executions of both
Nasdaq and non-Nasdaq stocks and warrants. In most instances, customer orders
are routed directly to M&S' trading system and are executed automatically.
Other Activities. To attract the business of accounts managed by
independent fee-based financial advisors, Schwab has a dedicated group through
which, among other things, it assigns specific, experienced registered
representatives to individual financial advisors and occasionally provides
certain research materials for the benefit of the advised accounts. Financial
advisors participating in this program may access the information in their
clients' accounts directly from Schwab's computer data bases. During 1993,
Schwab added approximately 1,000 advisors to this program, which at December
31, 1993 included more than 4,200 financial advisors.
Schwab has taken other steps to provide services tailored to meet the
specialized needs of other professional investors, including corporations and
institutions such as pension funds and investment companies. For example,
Schwab's institutional brokerage department provides its customers with
technical information and analysis of general conditions and trends in the
securities market. Schwab also acts as agent for corporations in repurchasing
their securities and in implementing dividend reinvestment plans.
Schwab's brokerage business generated by financial advisors and other
professional investors represented approximately 11% of Schwab's total
commission revenues in 1993, 10% in 1992 and 9% in 1991.
DELIVERY SYSTEMS
Branch Office Network. Schwab believes that the existence of branch
offices is important to increasing new account openings and maintaining high
levels of customer satisfaction. At December 31, 1993, the Company maintained
a network of 198 branches throughout the United States, including a branch
office in the United Kingdom. Schwab plans to continue its branch expansion
program in 1994 by opening approximately 28 new branches. Customers can use
branch offices to obtain market information, place orders, open accounts,
deliver and receive checks and securities and obtain related customer services
in person, yet most branch activities are conducted by telephone and mail.
Branch offices remain open during normal market hours to service customers
in person and by telephone. Many branch offices offer extended office hours.
Customer calls received during nonbranch hours are routed to customer telephone
service centers.
Customer Telephone Service Centers. Schwab's four customer telephone
service centers, located in Indianapolis, Denver, Phoenix and Orlando (which
opened in January 1994), handle calls to many of Schwab's toll-free numbers,
customer calls that otherwise would have to wait for available registered
representatives at branches during business hours, and calls routed from
branches after hours and on weekends. Through the service centers, customers
may place orders twenty-four hours a day, seven days a week, except for certain
holidays. Customer orders placed during nonmarket hours are routed to
appropriate markets the following business day. The capacity of the service
centers allows new branches to be opened and maintained at lower staffing
levels. The service centers, the first of which was opened in 1990, have
developed into a significant component of Schwab's overall service delivery
system and handled 28% of customer calls and 31% of customer trades during
1993.
Electronic Delivery Services. Schwab provides automated brokerage
services through which investors may place orders, receive account information
and obtain securities market information. These services are designed to
provide added convenience for customers and minimize Schwab's costs of
responding to and processing routine customer transactions.
Schwab's TeleBroker Service (registered trademark), which enables
customers to place orders for stocks, options and certain mutual funds, as well
as obtain real-time securities quotes and account information electronically
from any touchtone telephone, was introduced in 1989 and was made available to
customers nationally during 1991. TeleBroker (trademark), which provides
customers with an additional 10% discount on commissions, has become
increasingly important in providing customers access to Schwab, particularly
during periods of heavy customer activity. During 1992, Schwab more than
doubled the processing capacity of TeleBroker to accommodate increased customer
usage and continued to increase capacity in 1993. In November 1993, TeleBroker
was enhanced to accommodate Mutual Fund OneSource (trademark) transactions.
On-line access to brokerage and investment information services is also
available through Schwab's on-line trading software, StreetSmart (trademark)
for Windows (trademark), introduced in October 1993. During 1993, TeleBroker
and other on-line brokerage services handled over 53% of Schwab's customer
calls and 22% of customer trades.
Information Systems. Schwab's system for processing a securities
transaction is highly automated. Registered
- 7 -
<PAGE> 10
THE CHARLES SCHWAB CORPORATION
representatives equipped with on-line computer terminals can access customer
account information, obtain securities prices and related information and enter
orders on-line. Most equity market orders are automatically executed and the
representative is able to confirm execution to the customer while on the
telephone. A written confirmation is generated automatically and is generally
sent to the customer on the next business day. Under normal circumstances,
most customer orders are executed without any Schwab employee filling out a
single piece of paper.
To support its service delivery system, as well as other applications such
as clearing functions, account administration, record keeping and direct
customer access to investment information, Schwab maintains a sophisticated
computer network connecting all of the branch offices. Schwab's computers are
also linked to the major registered United States securities exchanges, M&S,
the National Securities Clearing Corporation and The Depository Trust Company.
In 1979, Schwab obtained from Beta Systems, Inc. a non-exclusive license
to use its basic software for executing brokerage functions. Since that time,
Schwab has made substantial additions and modifications to that program.
Schwab's computer systems also support on-line employee training, management
information systems, software development activities and telecommunication
network control functions.
During periods of exceptionally high trading volume, the Company takes
steps to provide customer service functions with maximum processing capacity.
These steps include rescheduling processing jobs unrelated to customer trading
functions and restricting on-line access to the Company's mainframe computer
functions. The Company's computer capacity is continuously monitored and
efforts are made to achieve an optimal balance between the costs of additional
processing capacity and the customer service benefits it provides during
high-volume periods.
Schwab's operations rely heavily on its information processing and
communications systems. External events, such as an earthquake or power
failure, loss of external information feeds, such as security price
information, as well as internal malfunctions, could render part of or all such
systems inoperative. To enhance the reliability of the system and integrity of
data, Schwab maintains carefully monitored backup and recovery functions.
These include logging of all critical files intraday, duplication and storage
of all critical data outside of its central computer site every 24 hours, and
maintenance of facilities for backup and communications in San Francisco. They
also include the maintenance and periodic testing of a disaster recovery plan
that management believes would permit Schwab to recommence essential operations
within 72 hours if its central computer site were to become inaccessible. In
March 1994, Schwab installed a new recovery system which permits essential
operations to recommence within 24 hours.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly, could cause it to be unable to
satisfy its obligations to customers and other securities firms, and could
result in regulatory violations. The Company constructed a computer data
center in Phoenix and relocated its primary data center to this site in 1993.
This move strengthens the Company's backup recovery capability and provides
additional support in the event of extended interruptions in existing
processing capability.
CLEARING AND ACCOUNT MAINTENANCE
Schwab performs clearing services for all securities transactions in
customer accounts. These services involve the confirmation, receipt,
execution, settlement and delivery functions involved in securities
transactions. Among other things, performing its own clearing services allows
Schwab to provide margin loans and use customer cash balances to finance them.
During the year ended December 31, 1993, Schwab processed over nine million
separate securities, options and mutual fund trades.
Schwab clears the vast majority of customer transactions through the
facilities of the National Securities Clearing Corporation or the Options
Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with
clearing corporations, mutual funds and other financial institutions even if
Schwab's customer fails to meet his or her obligations to Schwab. In addition,
for transactions that do not settle through a clearing corporation, Schwab
takes the risk of the other party's failure to settle the trade. See
"Commitments, Contingent Liabilities and Other Information" in the Notes to
Consolidated Financial Statements in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
Customer securities are typically held by Schwab in nominee name, on
deposit at one or more of the recognized securities industry depository trust
companies, or in the case of government and certain other fixed-income
securities and other instruments (e.g., certain limited partnership interests),
at a custodial bank. Schwab collects dividends and interest on securities held
in nominee name, making the appropriate credits to customer accounts. Schwab
also facilitates exercise of subscription rights on securities held for
customers. Schwab arranges for the transmittal of proxy and tender offer
materials and company reports to customers.
- 8 -
<PAGE> 11
THE CHARLES SCHWAB CORPORATION
EMPLOYEES
As of December 31, 1993, the Company had approximately 6,500 employees,
including full-time, part-time and temporary employees, as well as persons
employed on a contract basis. None of the employees are represented by a
union, and the Company believes its relations with its employees are good.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The SEC is the Federal agency
charged with administration of the Federal securities laws. Schwab and M&S are
registered as broker-dealers with the SEC. Schwab and CSIM are registered as
investment advisers with the SEC.
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges such as the New York Stock Exchange, Inc. (NYSE), which has been
designated by the SEC as Schwab's primary regulator with respect to its
securities activities. The NASD has been designated as M&S' primary regulator
by the SEC with respect to its securities activities. During 1993, the NASD
was Schwab's designated primary regulator with respect to options trading
activities. Currently, the American Stock Exchange is Schwab's designated
primary regulator with respect to options trading activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC)
governing the industry and conduct periodic examinations of broker-dealers.
Securities firms are also subject to regulation by state securities commissions
in the states in which they do business. Schwab is registered as a
broker-dealer in 50 states, the District of Columbia and Puerto Rico. M&S is
registered as a broker-dealer in 17 states as of December 1993.
The regulations to which broker-dealers and investment advisers are
subject cover all aspects of the securities business, including sales methods,
trading practices among broker-dealers, uses and safekeeping of customers'
funds and securities, capital structure of securities firms, record keeping,
fee arrangements, disclosure to clients, and the conduct of directors, officers
and employees. Additional legislation, changes in rules promulgated by the SEC
and by self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers. The
SEC, self-regulatory organizations, and state securities commissions may
conduct administrative proceedings which can result in censure, fine, cease and
desist orders, or suspension or expulsion of a broker-dealer or an investment
adviser, its officers, or employees. In the past, Schwab occasionally has been
the subject of such administrative proceedings. The principal purpose of
regulations and discipline of broker-dealers and investment advisers is the
protection of customers and the securities markets, rather than protection of
creditors and stockholders of broker-dealers and investment advisers.
As registered broker-dealers and NASD member organizations, Schwab and M&S
are required by Federal law to belong to the Securities Investor Protection
Corporation (SIPC), which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 on
claims for cash balances. SIPC is funded through assessments on registered
broker-dealers. SIPC assessments currently are .054% of net operating revenues
(as defined) per year. In addition, Schwab has purchased from private insurers
additional account protection of up to $24.5 million per customer, as defined,
in 1993 for customer securities positions only. This account protection is up
from protection in 1992 of $2 million. Mutual funds, including money market
funds, are considered securities for the purposes of SIPC coverage and the
supplemental coverage.
Schwab is also authorized by the Municipal Securities Rulemaking Board to
effect transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities
incidental to its brokerage business. For example, Schwab is registered with
the SEC as a transfer agent in connection with certain services it provides to
the SchwabFunds (registered trademark).
Margin lending by Schwab and M&S is subject to the margin rules of the
Board of Governors of the Federal Reserve System and the NYSE. Under such
rules, broker-dealers are limited in the amount they may lend in connection
with certain purchases and short sales of securities and are also required to
impose certain maintenance requirements on the amount of securities and cash
held in margin accounts. In addition, those rules and rules of the Chicago
Board Options Exchange govern the amount of margin customers must provide and
maintain in writing uncovered options.
As a California state-chartered trust company, CSTC is authorized to
conduct business in California, and is primarily regulated by the California
State Banking Department. Since it provides custody services to employee
benefit plan trusts, CSTC is also required to comply with the Employee
Retirement Income Security Act of 1974 (ERISA) and, consequently, is subject to
oversight by both the Internal Revenue Service and Department of Labor. CSTC
is required under state law to maintain a fidelity bond for the protection of
account holders.
- 9 -
<PAGE> 12
THE CHARLES SCHWAB CORPORATION
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Schwab and M&S are subject to the Uniform
Net Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule),
which has also been adopted through incorporation by reference in NYSE Rule
325. Schwab is a member firm of the NYSE and the NASD, and M&S is a member
firm of the NASD. The Net Capital Rule specifies minimum net capital
requirements for all registered broker-dealers and is designed to measure
financial integrity and liquidity. Failure to maintain the required net
capital may subject a firm to suspension or expulsion by the NYSE and the NASD,
certain punitive actions by the SEC and other regulatory bodies, and ultimately
may require a firm's liquidation. Because CSC itself is not a registered
broker-dealer, it is not subject to the Net Capital Rule. However, Schwab's
failure to maintain specified levels of net capital would constitute a default
by CSC under certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash
and from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
During 1991, the SEC adopted Net Capital Rule amendments which limit
withdrawals of equity capital from broker-dealers. The amendments require
notice of withdrawals be provided to the SEC prior to and subsequent to
withdrawals exceeding certain sizes. The amendments prohibit withdrawals that
would reduce a broker-dealer's net capital to an amount less than 25% of its
deductions required by the Net Capital Rule as to its security positions. The
amendments also allow the SEC, under limited circumstances, to restrict a
broker-dealer from withdrawing net capital for up to 20 business days.
Schwab has elected the alternative method of calculation under paragraph
(a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to maintain
minimum net capital equal to 2% of its "aggregate debit items", computed in
accordance with the Formula for Determination of Reserve Requirements for
Brokers and Dealers (SEC Rule 15c3-3). "Aggregate debit items" are assets that
have as their source transactions with customers, primarily margin loans.
Under the alternative method of the Net Capital Rule, a broker-dealer may not
(a) pay, or permit the payment or withdrawal of, any subordinated borrowings or
(b) pay cash dividends or permit equity capital to be removed if, after giving
effect to such payment, withdrawal, or removal, its net capital would be less
than 5% of its aggregate debit items.
Under NYSE Rule 326, Schwab is required to reduce its business if its net
capital is less than 4% of aggregate debit items for 15 consecutive days; NYSE
Rule 326 also prohibits the expansion of business if net capital is less than
5% of aggregate debit items for 15 consecutive days. The provisions of NYSE
Rule 326 also become operative if capital withdrawals (including scheduled
maturities of subordinated borrowings during the following six months) would
result in a reduction of a firm's net capital to the levels indicated.
Since its acquisition by the Company and through February 27, 1992, M&S
computed net capital under the aggregate indebtedness method of the Net Capital
Rule. Effective February 28, 1992, M&S elected to compute net capital under
the alternative method of the Net Capital Rule.
If compliance with applicable net capital rules were to limit Schwab's or
M&S' operations and Schwab's ability to repay its subordinated debt to the
Company, this in turn could limit the Company's ability to repay debt, pay cash
dividends, and purchase shares of its outstanding stock. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in
the Company's 1993 Annual Report to Stockholders, which is incorporated herein
by reference to Exhibit No. 13.1 of this report.
At December 31, 1993, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $53 million and had total regulatory net capital
of $260 million. At December 31, 1993, the amounts in excess of 2%, 4% and 5%
of aggregate debit items were $207 million, $155 million and $128 million,
respectively.
At December 31, 1993, M&S was required to maintain minimum net capital
under the Net Capital Rule of $1 million and had total regulatory net capital
of $13 million. At December 31, 1993, the amounts in excess of 2%, 4% and 5%
of aggregate debit items all exceeded $12 million.
During 1993, CSIM was deemed no longer to be subject to the regulations
for investment advisers promulgated by the State of California Department of
Corporations and, therefore, has no net capital requirements.
CSTC's capital requirement is established by the California Superintendent
of Banks under the California Financial Code. The Code requires that CSTC's
ratio of contributed capital, as defined, to accumulated deficit shall exceed
2.5 to 1. At December 31, 1993 the ratio of contributed capital to accumulated
deficit was 2.8 to 1. If CSTC's capital declines, or if the Superintendent of
Banks determines that additional capital is required for other reasons, CSC
could be required to contribute additional capital to CSTC.
- 10 -
<PAGE> 13
THE CHARLES SCHWAB CORPORATION
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a 28-story building at
101 Montgomery Street in San Francisco. The building contains approximately
295,000 square feet and is leased by Schwab under a term expiring in the year
2000. The current rental is approximately $8.6 million per year, subject to
certain increases and obligations to pay certain operating expenses such as
utilities, insurance and taxes. Schwab has three successive five-year options
to renew the lease at the then market rental value. Schwab also leases space
in other buildings for its San Francisco operations aggregating approximately
380,000 square feet at year-end 1993. M&S' headquarters are located in leased
office space in Jersey City, New Jersey.
In 1992, the Company purchased land in the Phoenix area and in 1993
completed construction of a data center that is Schwab's centralized computer
processing facility. The data center has approximately 105,000 square feet of
floor space.
All of Schwab's branch offices and customer telephone service centers and
M&S' branch offices are located in leased premises, generally with lease
expiration dates five to ten years from inception.
ITEM 3. LEGAL PROCEEDINGS
The information required to be furnished pursuant to this item is set
forth under the caption "Commitments, Contingent Liabilities and Other
Information" in the Notes to the Consolidated Financial Statements in the
Company's 1993 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1993.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
See Item 10 in Part III of this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item is set
forth under the captions "Common Stock Data" and "Quarterly Financial
Information (Unaudited)" in the Company's 1993 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report.
ITEM 6. SELECTED FINANCIAL DATA
The information required to be furnished pursuant to this item is set
forth under the captions "Operating Results (for the year)," "Other (at year
end)" and "Other (for the year)" in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required to be furnished pursuant to this item is set
forth under the caption "Management's Discussion and Analysis of Results of
Operations and Financial Condition" in the Company's 1993 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report. Additional statistics for the fourth quarters of 1993 and 1992
are presented as follows.
- 11 -
<PAGE> 14
THE CHARLES SCHWAB CORPORATION
Average balances and interest rates for the fourth quarters of 1993 and
1992 are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------
1993 1992
------ ------
<S> <C> <C>
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $3,564 $3,448
Average interest rate 3.23% 3.48%
Margin loans to customers:
Average balance outstanding $2,448 $1,769
Average interest rate 5.97% 6.02%
Average yield on earning assets 4.35% 4.34%
FUNDING SOURCES (CUSTOMER-RELATED
AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $4,883 $4,405
Average interest rate 2.39% 2.69%
Other interest-bearing sources:
Average balance outstanding $ 329 $ 222
Average interest rate 3.17% 4.61%
Average noninterest-bearing portion $ 800 $ 590
Average interest rate on funding sources 2.11% 2.47%
SUMMARY:
Average yield on earning assets 4.35% 4.34%
Average interest rate on funding sources 2.11% 2.47%
------ ------
Average net interest margin 2.24% 1.87%
====== ======
</TABLE>
Average balances of investments increased 3% and margin loans to customers
increased 38% from the fourth quarter of 1992 to the fourth quarter of 1993.
The average yield on investments and margin loans to customers increased one
basis point from the fourth quarter of 1992 to the fourth quarter of 1993.
Over this same period, interest-bearing customer cash balances increased 11%,
and the average interest rate paid on these balances declined 30 basis points.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item is set
forth in the Consolidated Financial Statements and under the caption "Quarterly
Financial Information (Unaudited)" in the Company's 1993 Annual Report to
Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated by reference from portions of
the Company's definitive proxy statement for its annual meeting of stockholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after December 31, 1993 (the Proxy Statement) under the
captions "Election of Directors" (excluding all information under the
subcaption "Information about the Board of Directors and Committees of the
Board") and "Principal Stockholders."
Executive Officers of the Registrant
The following table provides certain information about each of the
Company's current executive officers. Executive officers are elected by and
serve at the discretion of the Company's Board of Directors.
- 12 -
<PAGE> 15
THE CHARLES SCHWAB CORPORATION
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Charles R. Schwab 56 Chairman and Chief Executive Officer, and
Director
Lawrence J. Stupski 48 Vice Chairman, and Director
David S. Pottruck 45 President and Chief Operating Officer, and
Director
Ronald W. Readmond 51 Senior Executive Vice President
Tom Decker Seip 44 Senior Executive Vice President - Retail
Brokerage
Darell W. Choate 53 Executive Vice President - Retail Service
Delivery
John Phillip Coghlan 42 Executive Vice President - Schwab Institutional
A. John Gambs 48 Executive Vice President - Finance and Chief
Financial Officer
Dawn Gould Lepore 40 Executive Vice President and Chief Information
Officer
Helen D. Ojha 46 Executive Vice President - Core Services
Elizabeth Gibson Sawi 42 Executive Vice President - Mutual Funds
John N. Tognino 55 Executive Vice President - Capital Markets and
Trading
Luis E. Valencia 49 Executive Vice President - Human Resources
</TABLE>
MR. SCHWAB has been Chairman and Chief Executive Officer and a director of
the Company since its incorporation in November 1986. Mr. Schwab was a founder
of Schwab in 1971 and has been its Chairman since 1978. He also served as
Chief Executive Officer of Schwab from 1978 to July 1988. Mr. Schwab is
currently a director of The Gap, Inc., Transamerica Corporation and Chairman of
Schwab Investments and The Charles Schwab Family of Funds and was formerly a
director of BankAmerica Corporation. Mr. Schwab currently serves as
Governor-at-Large of the National Association of Securities Dealers, Inc.
MR. STUPSKI has been Vice Chairman of the Company since July 1992 and a
director of the Company since its incorporation in November 1986. Mr. Stupski
was Chief Operating Officer of the Company from November 1986 to March 1994,
the Company's President from November 1986 to July 1992, and its Chief
Financial Officer from April 1987 to March 1988. Mr. Stupski has been a
director of Schwab since 1981. He also served as President of Schwab from 1981
to July 1988, and as Chief Executive Officer of Schwab from that date to July
1992. He served as Chief Operating Officer of Schwab from 1981 to July 1992.
During 1990 and 1991, Mr. Stupski was a member of the board of directors of
the Chicago Board Options Exchange. From 1982 to 1985, Mr. Stupski was a
Governor of The Pacific Stock Exchange Incorporated.
MR. POTTRUCK was named Chief Operating Officer and a director of the
Company in March 1994 and has been President of the Company since July 1992.
Mr. Pottruck was Executive Vice President from March 1987 until July 1992. Mr.
Pottruck joined Schwab in 1984 and served as Executive Vice President -
Marketing and Branch Management until his appointment as President and a
director of Schwab in July 1988. He was promoted to Chief Executive Officer of
Schwab in July 1992. Mr. Pottruck was Senior Vice President of Consumer
Marketing and Advertising for Shearson/American Express from 1981 until joining
Schwab, with responsibility for execution of all retail marketing, advertising,
direct response and consumer communications.
MR. READMOND has been Senior Executive Vice President of the Company and
Schwab, as well as Chief Operating Officer of Schwab, since July 1992. From
August 1989 until July 1992, he was Executive Vice President - Operations,
Trading and Credit of the Company and Schwab. Prior to joining Schwab, Mr.
Readmond held various positions with Alex Brown & Sons, Inc., including
Operations Principal in 1985, Managing Director in 1986 and Division Manager of
Information Systems and Operations from 1987 until he joined Schwab.
- 13 -
<PAGE> 16
THE CHARLES SCHWAB CORPORATION
MR. SEIP was named Senior Executive Vice President - Retail Brokerage of
the Company and Schwab in March 1994. He has been President of Charles Schwab
Investment Management, Inc. (CSIM) since July 1992 and Chief Operating Officer
of CSIM since June 1991. From July 1992 until March 1994, he was Executive
Vice President - Mutual Funds and Fixed Income Products. Mr. Seip has been
with the Company since January 1983. Prior to becoming Senior Vice President
of the Company and assuming his mutual fund responsibilities in June 1991, Mr.
Seip was the divisional executive in charge of Schwab's retail branches east of
the Mississippi. From 1985 to 1988, Mr. Seip founded and was responsible for
Schwab's Financial Advisors Service. Before joining Schwab, he was a Vice
President and Partner at Korn Ferry International.
MR. CHOATE has been Executive Vice President - Retail Service Delivery of
the Company and Schwab since March 1991. Mr. Choate was Executive Vice
President of Branch Systems with Security Pacific Bank from 1988 until joining
Schwab, responsible for the statewide branch banking system. He held a full
range of branch administration positions with Security Pacific Bank from 1969
to 1988, including Division Administrator, Regional Vice President and Branch
Manager.
MR. COGHLAN has been Executive Vice President and General Manager of
Schwab Institutional of the Company and Schwab since July 1992. Mr. Coghlan
joined Schwab in 1986, became a Vice President in 1988 and became Senior Vice
President in 1990. From 1988 to 1990, he was also an Adjunct Professor of
Marketing at the McLaren School of Business at the University of San Francisco
and from 1985 to 1987 he was a Lecturer in the Department of Marketing and
Management in the School of Business at San Francisco State University.
MR. GAMBS has been Executive Vice President and Chief Financial Officer of
the Company and Schwab since March 1988. Mr. Gambs was Deputy Treasurer of
Merrill Lynch & Co., Inc. from 1987 until he joined Schwab, and from 1984 to
1987 was Vice President/Corporate Staff, with responsibilities for financing,
cash management and credit relationships.
MS. LEPORE has been Executive Vice President and Chief Information Officer
of the Company and Schwab since October 1993. Ms. Lepore joined Schwab in
1983, became a Vice President in 1987 and became Senior Vice President in 1989.
Prior to joining Schwab, Ms. Lepore was a consultant with Informatics, an
information consulting firm in San Francisco.
MS. OJHA has been Executive Vice President - Core Services of the Company
and Schwab since March 1993. Before joining the Company, Ms. Ojha served as a
Director and then a Partner in the National Advanced Technology Group, of
Coopers & Lybrand, an international professional service firm, since 1987.
From 1975 to 1987, Ms. Ojha was a consultant in the Operations Research
Practice and then a manager in the Center for Applied Artificial Intelligence
of Arthur D. Little, Inc.
MS. SAWI was named Executive Vice President - Mutual Funds in March 1994
and she was Executive Vice President - Marketing and Advertising from January
1992 until March 1994. Ms. Sawi joined Schwab in 1982, became a Vice President
in 1984 and became Senior Vice President in 1985. Before joining Schwab in
1982, Ms. Sawi was a Marketing Manager for the travel and entertainment card
division of American Express.
MR. TOGNINO joined the Company in October 1993 as the Executive Vice
President of Capital Markets and Trading. Prior to joining Schwab, Mr. Tognino
was a Managing Director at Merrill Lynch in New York since 1991, and was based
in London as Managing Director of the equity product from 1990 to 1991. He
served as Managing Director of Unlisted Trading from 1987 to 1988, and
previously served as Managing Director of the OTC department, which included
agency orders, institutional sales trading and market making. Mr. Tognino
serves on the Nasdaq Board of Governors as Chairman of the Securities Traders
Association and as President of the Securities Traders Association of New York.
MR. VALENCIA joined the Company and was named Executive Vice President -
Human Resources of the Company and Schwab in March 1994. Before joining the
Company, Mr. Valencia served as a Managing Director of Commercial Credit
Corp., a subsidiary of the Travelers engaged in consumer finance for the
Travelers, from January 1993 to February 1994. From 1975 to 1993, he held
various positions with Citicorp, including Regional Business Manager in the New
York Banking Division from 1981 to 1984, President and Chief Executive Officer
of Citicorp Savings from 1984 to 1990, and President and Chief Executive
Officer of Transaction Technology, a subsidiary of Citicorp, from 1990 to 1993.
Prior to Citicorp, Mr. Valencia held Human Resource positions with Pfizer, Inc.
- 14 -
<PAGE> 17
THE CHARLES SCHWAB CORPORATION
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the
captions "Executive Compensation" (excluding all information under the
subcaption "Board Compensation Committee Report on Executive Compensation" and
"Performance Graph") and "Certain Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement under the
caption "Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required to be furnished pursuant to this item is
incorporated by reference from a portion of the Proxy Statement under the
caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors' report are set forth in
the Company's 1993 Annual Report to Stockholders, which are incorporated herein
by reference to Exhibit No. 13.1 of this report and are listed below:
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
The financial statement schedules required to be furnished pursuant to this
item are listed in the accompanying index appearing on page F-1.
(b) Reports on Form 8-K
None filed during the last quarter of 1993.
- 15 -
<PAGE> 18
THE CHARLES SCHWAB CORPORATION
(c) Exhibits
The exhibits listed below are filed as part of this annual report on
Form 10-K.
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
<S> <C> <C>
3.3 Restated Certificate of Incorporation, as amended as of December 1, 1988, of the Registrant,
filed as Exhibit 3.3 to the Registrant's Form 10-K for the year ended December 31, 1989 and
incorporated herein by reference.
3.4 Amended and Restated By-Laws of the Registrant, as amended March 25, 1991, filed as
Exhibit 3.4 to the Registrant's Form 10-K for the year ended December 31, 1990 and
incorporated herein by reference.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings,
Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc. *
10.5 Employment Agreement dated as of March 31, 1987 among Registrant, Charles Schwab & Co., Inc.
and Charles R. Schwab. *
10.9 Executive Officer Stock Option Plan (1987) dated as of March 24, 1987, with form of
Non-Qualified Stock Option Agreement (Executive Officer Stock Option Plan (1987)) attached. *
10.17 Agreement of Lease dated May 18, 1983 between California Jones Company and Charles Schwab &
Co., Inc. (headquarters, San Francisco, California). *
10.20 License Agreements dated April 18, 1979 and April 11, 1983 between International Business
Machines Corporation and Charles Schwab & Co., Inc. *
10.22 License Agreement dated as of February 28, 1979 between Applied Data Research, Inc. and Beta
Systems, Inc. and Assignment, dated February 21, 1979. *
10.23 License Agreement dated as of February 21, 1979 between Beta Systems, Inc. and Charles Schwab
& Co., Inc. *
10.25 333 Bush Street Office Lease dated July 29, 1987 between 333 Bush Street Associates and Charles
Schwab & Co., Inc. *
10.34 Form of Indemnification Agreement entered into between Registrant and certain members of the
Board of Directors of Registrant, filed as Exhibit 10.34 to the Registrant'S Form 10-K for the
year ended December 31, 1988 and incorporated herein by reference.
10.55 Cash Subordination Agreements between Schwab Holdings, Inc. and Charles Schwab & Co., Inc.
with Assignments dated March 31, 1987 by Schwab Holdings, Inc., of all right, title, and interest
in Cash Subordination Agreements to Registrant, filed as Exhibit 4.20 to Registrant's Registration
Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
</TABLE>
- 16 -
<PAGE> 19
THE CHARLES SCHWAB CORPORATION
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
<S> <C> <C>
10.57 Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between
the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant's
Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
10.63 Revolving Subordinated Loan Agreement as of September 29, 1988, between the Registrant and
Charles Schwab & Co., Inc., filed as Exhibit 10.63 to the Registrant's Form 10-K for the
year ended December 31, 1988 and incorporated herein by reference.
10.72 Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab
& Co., Inc., Charles R. Schwab and the Registrant, filed as Exhibit 10.72 to the
Registrant's Form 10-K for the year ended December 31, 1989 and incorporated herein by
reference.
10.73 1987 Stock Option Plan, as Amended and Restated, as of April 17, 1989, with Form of
Non-Qualified Stock Option Agreement (General Management Plan) attached, filed as
Exhibit 4.1 to Registrant's Registration Statement No. 33-21582 on Form S-8 and
incorporated herein by reference.
10.82 ESOP Loan Agreement, effective as of April 26, 1990, between the Registrant and The
Charles Schwab Profit Sharing and Employee Stock Ownership Plan and Trust, filed as
Exhibit 10.82 to the Registrant's Form 10-Q for the quarter ended March 31, 1990 and
incorporated herein by reference.
10.83 First Amendment to Revolving Subordinated Loan Agreement, as of April 18, 1990,
between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.83 to the
Registrant's Form 10-Q for the quarter ended March 31, 1990 and incorporated herein by
reference.
10.87 Trust Agreement under the Charles Schwab Profit Sharing and Employee Stock Ownership
Plan, effective November 1, 1990, dated October 25, 1990, filed as Exhibit 10.87 to
the Registrant's Form 10-Q for the quarter ended September 30, 1990 and incorporated
herein by reference.
10.90 Amendment to the ESOP Loan Agreement effective as of April 26, 1990, dated December 14,
1990, between the Registrant and The Charles Schwab Profit Sharing and Employee Stock
Ownership Plan and Trust, filed as Exhibit 10.90 to the Registrant's Form 10-K for the
year ended December 31, 1990 and incorporated herein by reference.
10.97 Stock Purchase Agreement dated June 4, 1991, among the Registrant, Leonard Mayer,
Herbert Schweitzer, the Mayer & Schweitzer Trust and Mayer & Schweitzer, Inc. (M&S),
with respect to the acquisition of all of the capital stock of M&S by the Registrant,
filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated July 15, 1991
and incorporated herein by reference.
10.98 Credit Agreement dated as of August 30, 1991, between the Registrant and the Banks listed
therein, filed as Exhibit 10.62 to the Registrant's Form 10-Q for the quarter ended
September 30, 1991 and incorporated herein by reference.
</TABLE>
- 17 -
<PAGE> 20
THE CHARLES SCHWAB CORPORATION
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
<S> <C> <C>
10.99 Second Amendment to Revolving Subordinated Loan Agreement, as of November 1, 1991,
between the Registrant and Charles Schwab & Co., Inc., filed as Exhibit 10.99 to the
Registrant's Form 10-K for the year ended December 31, 1991 and incorporated herein
by reference.
10.101 First Amendment to the Trust Agreement under the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan, effective January 1, 1992, dated December 20, 1991,
filed as Exhibit 10.101 to the Registrant's Form 10-K for the year ended December 31,
1991 and incorporated herein by reference.
10.102 Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective January 1,
1992, dated December 12, 1991, filed as Exhibit 10.102 to the Registrant's Form 10-K
for the year ended December 31, 1991 and incorporated herein by reference.
10.111 Credit Agreement dated as of March 31, 1992, between the Registrant and Certain
Commercial Lending Institutions, as the Lenders, and Continental Bank, N.A., as
the Agent for the Lenders, filed as Exhibit 10.111 to the Registrant's Form 10-Q for
the quarter ended March 31, 1992 and incorporated herein by reference.
10.113 Schwab One Services Agreement dated April 17, 1992 between Charles Schwab & Co.,
Inc. and Provident National Bank, filed as Exhibit 10.113 to the Registrant's Form
10-Q for the quarter ended March 31, 1992 and incorporated herein by reference.
10.114 First Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective May 8, 1992, dated June 30, 1992, filed as Exhibit 10.114
to the Registrant's Form 10-Q for the quarter ended June 30, 1992 and incorporated
herein by reference.
10.115 Second Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective July 1, 1992, dated June 30, 1992, filed as Exhibit 10.115
to the Registrant's Form 10-Q for the quarter ended June 30, 1992 and incorporated
herein by reference.
10.116 Second Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and
Employee Stock Ownership Plan effective July 1, 1992, dated June 30, 1992, filed
as Exhibit 10.116 to the Registrant's Form 10-Q for the quarter ended June 30, 1992
and incorporated herein by reference.
10.118 Credit Agreement dated as of August 28, 1992, between Registrant and the banks listed
therein, filed as Exhibit 10.118 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
10.119 First Amendment to Credit Agreement dated as of August 28, 1992, between Registrant
and the banks listed therein, filed as Exhibit 10.119 to the Registrant's Form 10-K
for the year ended December 31, 1992 and incorporated herein by reference.
</TABLE>
- 18 -
<PAGE> 21
THE CHARLES SCHWAB CORPORATION
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
<S> <C> <C>
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between Registrant and The
Charles Schwab Profit Sharing and Employee Stock Ownership Plan and Trust, filed as
Exhibit 10.120 to the Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference.
10.121 Construction Agreement dated July 21, 1992 between Carlson Design/Construct Corp. (West),
DBA Carlson Design/Construction Corp. and Mayer & Schweitzer, Inc. for Schwab Data
Center, Phoenix, Arizona, a 105,000 square foot two-story facility, filed as Exhibit
10.121 to the Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference.
10.126 First Amendment dated June 30, 1993 to the Credit Agreement dated August 28, 1992,
between Registrant and the banks listed therein, filed as Exhibit 10.126 to the
Registrant's Form 10-Q for the quarter ended June 30, 1993 and incorporated herein
by reference.
10.127 Second Amendment dated June 30, 1993 to the Credit Agreement dated August 30, 1991
as amended by the First Amendment dated August 28, 1992, between Registrant and the
banks listed therein, filed as Exhibit 10.127 to the Registrant's Form 10-Q for the
quarter ended June 30, 1993 and incorporated herein by reference.
10.130 Annual Executive Bonus Plan dated as of January 1, 1994.
10.131 1992 Stock Incentive Plan, as Amended and Restated, as of January 1, 1994
(Supersedes Exhibit 10.112 to Registrant's Form 10-Q for the quarter ended March 31,
1992).
10.132 Charles Schwab & Co., Inc. Long-Term Incentive Plan III, as Amended, effective
January 1, 1994 (Supersedes Exhibit 10.96 to Registrant's Form 10-Q for the quarter
ended June 30, 1991).
10.133 The Charles Schwab Corporation Deferred Compensation Plan, dated March 24, 1994,
effective July 1994.
10.134 Annual Executive Individual Performance Plan dated as of January 1, 1994.
10.135 Third Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan, effective January 1, 1993, dated December 29, 1993.
10.136 Fourth Amendment to the Restated Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective January 31, 1994, dated March 22, 1994.
11.1 Computation of Earnings per Common Equivalent Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1993 Annual Report to Stockholders,
which have been incorporated herein by reference. Except for such portions,
such annual report is not deemed to be "filed" herewith.
</TABLE>
- 19 -
<PAGE> 22
THE CHARLES SCHWAB CORPORATION
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------- ------- ------------
<S> <C> <C>
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
</TABLE>
* Incorporated by reference to the identically-numbered exhibit to
Registrant's Registration Statement No. 33-16192 on Form S-1, as
amended and declared effective on September 22, 1987.
- 20 -
<PAGE> 23
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 30, 1994.
THE CHARLES SCHWAB CORPORATION
(Registrant)
By: CHARLES R. SCHWAB /s/
-----------------------------
Charles R. Schwab
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 30, 1994.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
CHARLES R. SCHWAB /s/ Chairman, Chief Executive Officer
- --------------------- and Director
Charles R. Schwab (principal executive officer)
LAWRENCE J. STUPSKI /s/ Vice Chairman and Director
- -----------------------
Lawrence J. Stupski
DAVID S. POTTRUCK /s/ President, Chief Operating Officer
- --------------------- and Director
David S. Pottruck
A. JOHN GAMBS /s/ Executive Vice President - Finance,
- ----------------- and Chief Financial Officer
A. John Gambs (principal financial and accounting
officer)
NANCY H. BECHTLE /s/ Director
- --------------------
Nancy H. Bechtle
C. PRESTON BUTCHER /s/ Director
- ----------------------
C. Preston Butcher
DONALD G. FISHER /s/ Director
- --------------------
Donald G. Fisher
ANTHONY M. FRANK /s/ Director
- --------------------
Anthony M. Frank
JAMES R. HARVEY /s/ Director
- -------------------
James R. Harvey
STEPHEN T. MCLIN /s/ Director
- --------------------
Stephen T. McLin
ROGER O. WALTHER /s/ Director
- --------------------
Roger O. Walther
</TABLE>
- 21 -
<PAGE> 24
THE CHARLES SCHWAB CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
SCHEDULE III - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
SCHEDULE VIII - Valuation and Qualifying Accounts F-6
SCHEDULE IX - Short-Term Borrowings F-7
SCHEDULE X - Supplemental Income Statement Information F-8
</TABLE>
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1993 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation (the Company) and subsidiaries as of December 31, 1993 and 1992,
and for each of the three years in the period ended December 31, 1993, and have
issued our report thereon dated February 17, 1994 (February 25, 1994 as to
Subsequent Event note); such consolidated financial statements and report are
included in your 1993 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
the Company and subsidiaries appearing on pages F-3 through F-8. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE
San Francisco, California
February 17, 1994
(February 25, 1994 as to Subsequent Event note)
F-2
<PAGE> 26
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1993 1992
-------- --------
<S> <C> <C>
ASSETS
Receivable from subsidiary $ 49,831 $ 7,848
Subordinated receivable from subsidiary 132,728 154,228
Investment in subsidiaries, at equity 384,043 251,043
Other assets 2,512 797
-------- --------
TOTAL $569,114 $413,916
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 4,941 $ 4,380
Long-term borrowings 185,000 35,000
Subordinated borrowings 115,728
-------- --------
Total liabilities 189,941 155,108
-------- --------
Stockholders' equity:
Preferred stock - 10,000,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value
per share; 59,486,680 shares in 1993 and 58,761,013 shares in 1992* 595 392
Additional paid-in capital 161,052 141,946
Retained earnings 253,692 147,168
Treasury stock - 1,649,478 shares in 1993 and 2,086,315 shares in 1992, at cost* (23,153) (26,444)
Note receivable from Profit Sharing Plan (13,013) (4,254)
-------- --------
Stockholders' equity 379,173 258,808
-------- --------
TOTAL $569,114 $413,916
======== ========
</TABLE>
* Reflects the 1993 three-for-two common stock split.
See Notes to Consolidated Financial Statements in the Company's 1993 Annual
Report to Stockholders, which are incorporated herein by reference to Exhibit
No. 13.1 of this report, for a discussion of long-term and subordinated
borrowings and contingent liabilities.
F-3
<PAGE> 27
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
Interest revenue $ 14,952 $ 12,235 $ 12,554
Interest expense (13,258) (13,570) (12,088)
------- ------- --------
NET INTEREST INCOME (EXPENSE) 1,694 (1,335) 466
Other expenses (2,159) (2,132) (1,354)
------ ------ --------
LOSS BEFORE INCOME TAX BENEFIT, EQUITY IN EARNINGS OF
SUBSIDIARIES AND EXTRAORDINARY CHARGE (465) (3,467) (888)
Income tax benefit 472 1,254 355
------ ------ --------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES
AND EXTRAORDINARY CHARGE 7 (2,213) (533)
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 86,821 48,063 22,796
Dividends paid by subsidiaries 37,540 35,378 27,205
------- ------- --------
Total 124,361 83,441 50,001
INCOME BEFORE EXTRAORDINARY CHARGE 124,368 81,228 49,468
Extraordinary charge - early retirement of debt (6,700)
------- ------- --------
NET INCOME 117,668 81,228 49,468
Dividends on common stock (10,946) (8,411) (4,864)
Transfer of par value on stock issued
in three-for-two stock dividend (198) (131)
Stock options and warrants exercised 1,413 (16,333)
RETAINED EARNINGS:
At beginning of year 147,168 72,938 44,798
-------- -------- --------
AT END OF YEAR $253,692 $147,168 $ 72,938
======== ======== ========
</TABLE>
F-4
<PAGE> 28
SCHEDULE III
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $117,668 $ 81,228 $ 49,468
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (86,821) (48,063) (22,796)
Extraordinary charge for early retirement of debt 11,205
Change in accrued expenses 4,312 4,095 1,638
Change in other assets (1,715) (239) 590
------ ------ -------
Net cash provided by operating activities 44,649 37,021 28,900
------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in net investment in subsidiaries (46,179) (5,295) (12,603)
Decrease (increase) in receivable from subsidiary (41,983) (2,520) 5,220
Collection on subordinated loans to subsidiary 26,500 10,000 12,500
Collection on note receivable from Profit Sharing Plan 6,241 3,925 1,821
Subordinated loans to subsidiary (5,000) (48,500) (12,500)
------- ------- -------
Net cash used by investing activities (60,421) (42,390) (5,562)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 150,000 35,000
Repayment of subordinated borrowings (126,933)
Dividends paid (10,946) (8,411) (4,864)
Purchase of treasury stock (23,227) (6,205)
Payment for surrendered contingent payment rights (15,951)
Exercise of warrants on common stock 1,861
Other 3,651 2,007 1,821
-------- ------ --------
Net cash provided (used) by financing activities 15,772 5,369 (23,338)
-------- ------ --------
CHANGE IN CASH AND EQUIVALENTS ---- ---- ----
CASH AND EQUIVALENTS AT BEGINNING OF YEAR ---- ---- ----
-------- ------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ ---- $ ---- $ ----
======= ====== =======
</TABLE>
Prior years' financial statements have been reclassified to conform to the
1993 presentation.
See Notes to the Consolidated Financial Statements in the Company's 1993
Annual Report to Stockholders, which are incorporated herein by reference to
Exhibit No. 13.1 of this report, for a discussion of additional cash flow
information.
F-5
<PAGE> 29
SCHEDULE VIII
THE CHARLES SCHWAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION> Additions
Balance at --------------------- Balance at
Beginning Charged End of
Description of Year to Expense Other(1) Written off Year
----------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1993:
Allowance for doubtful accounts $3,449 $ 336 $ 19 $(1,575) $2,229
====== ====== ==== ======= ======
FOR THE YEAR ENDED
DECEMBER 31, 1992:
Allowance for doubtful accounts $2,769 $1,270 $(75) $ (515) $3,449
====== ====== ==== ======= ======
FOR THE YEAR ENDED
DECEMBER 31, 1991:
Allowance for doubtful accounts $2,357 $ 190 $584 $ (362) $2,769
====== ====== ==== ======= ======
</TABLE>
(1) Primarily represents collections of previously written off accounts.
Amounts for 1993, 1992 and 1991 include a $57, a $123 and a $65
reduction, respectively, to the allowance recorded in connection with
CSC's 1989 acquisition of Rose & Company Investment Brokers, Inc.
F-6
<PAGE> 30
SCHEDULE IX
THE CHARLES SCHWAB CORPORATION
SHORT-TERM BORROWINGS
(In thousands)
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance at Average Outstanding Outstanding Interest
End of Interest During the During the Rate During
Description of Year Rate Year Year (2) the Year (3)
----------- --------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1993:
Bank loans (1) --- N/A $ 65,000 $18,520 3.7%
======= === ======== ======= ===
FOR THE YEAR ENDED
DECEMBER 31, 1992:
Bank loans (1) --- N/A $ 89,000 $24,357 4.3%
======= === ======== ======= ===
FOR THE YEAR ENDED
DECEMBER 31, 1991:
Bank loans (1) $20,000 5.4% $108,000 $28,518 6.2%
======= === ======== ======= ===
</TABLE>
(1) Bank loans are under lines of credit, are payable on demand, and may
be collateralized by customer securities.
(2) Represents the weighted average daily balances outstanding for days on
which there were borrowings - 25 days in 1993, 42 days in 1992 and 41
days in 1991.
(3) Weighted average interest rate computed by dividing the daily interest
expense by the daily amounts outstanding.
F-7
<PAGE> 31
SCHEDULE X
THE CHARLES SCHWAB CORPORATION
SUPPLEMENTAL INCOME STATEMENT INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Advertising $44,563 $37,843 $28,011
Amortization of intangibles 13,783 17,577 27,922
</TABLE>
Items not shown have been omitted because they do not exceed 1% of total
revenues.
F-8
<PAGE> 1
Exhibit 10.34
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made this ______ day of March, 1988
by and between The Charles Schwab Corporation, a Delaware corporation (the
"Corporation"), and _________________________________________ (the
"Indemnitees").
WHEREAS, the Corporation and Indemnitee recognize the increasing
difficulty in obtaining directors' and officers' liability insurance, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance; and
WHEREAS, the Corporation and Indemnitee further recognize the
substantial increase in corporate litigation subjecting officers and directors
to expensive litigation risks at the same time as liability insurance has been
severely limited; and
WHEREAS, the Corporation believes that there can be no assurance that
such insurance will continue to be available to the Corporation and Indemnitee,
and believes that it is possible that the cost of such insurance, if
obtainable, may not be acceptable to the Corporation; and
WHEREAS, Indemnitee is unwilling to serve, or continue to serve, the
Corporation as a director without assurances that adequate liability insurance,
indemnification or a combination thereof is, and will continue to be provided;
and
WHEREAS, the Corporation, in order to induce Indemnitee to continue to
serve the Corporation, has agreed to provide Indemnitee with the benefits
contemplated by this Agreement which benefits are intended to supplement or, if
necessary, replace the Corporation's existing directors' and officers'
liability insurance; and
WHEREAS, as a result of the provision of such benefits Indemnitee has
agreed to serve or to continue to serve as a director of the Corporation;
NOW THEREFORE, in consideration of the promises, conditions,
representations and warranties set forth herein, including Indemnitee's
continued service to the Corporation, the Corporation and Indemnitee hereby
agree as follows:
1. Definitions. The following terms, as used in this Agreement,
shall have the following respective meanings:
(a) "Advancement of Expenses" shall mean the right to be paid
by the Corporation the expenses incurred in defending any Proceeding for which
the right to indemnification conferred in Section 2 of this Agreement is
applicable in advance of its final disposition.
(b) "Final Adjudication" shall mean a determination by a
final judicial decision from which there is no further right to appeal.
<PAGE> 2
(c) "Proceeding" shall mean any action, suit or proceeding,
whether civil, criminal, administrative or investigative.
2. Right to Indemnification. The Corporation shall indemnify and
hold harmless Indemnitee if Indemnitee was or is made a party or is threatened
to be made a party to or is otherwise involved in any Proceeding by reason of
the fact that Indemnitee is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee
benefit plan, whether the basis of such Proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than permitted prior thereto), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred
or suffered by Indemnitee in connection therewith and such indemnification
shall continue whether or not Indemnitee has ceased to be a director, officer,
employee or agent; provided, however, that except as provided in Section 4
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify the Indemnitee in connection with a Proceeding (or
part thereof) initiated by Indemnitee only if such Proceeding (or part thereof)
was authorized or is subsequently ratified by the board of directors of the
Corporation.
3. Right to Advancement of Expenses. The right to
indemnification pursuant to Section 2 of this Agreement shall include the right
to the Advancement of Expenses; provided, however, that, if the Delaware
General corporation Law requires, an Advancement of Expenses incurred by
Indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by Indemnitee, including,
without limitation, service to an employee benefit plan) shall be made only
upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of Indemnitee, to repay all amounts so advanced
if it shall ultimately be determined by Final Adjudication that Indemnitee is
not entitled to be indemnified for such expenses under this Agreement or
otherwise.
4. Right of Indemnitee to Bring Suit. If a claim under Section 2
or 3 of this Agreement is not paid in full by the Corporation within sixty (60)
days after a written claim has been received by the Corporation, except in the
case of a claim for an Advancement of Expenses, in which case the applicable
period shall be twenty (20) days, the Indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim.
If successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an Advancement of Expenses pursuant to the terms of an
undertaking, the Indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the Indemnitee
to enforce a right to indemnification hereunder (but not in a suit brought by
the Indemnitee to enforce a right to an Advancement of Expenses) it shall be a
defense that, and (ii) in any suit by the Corporation to recover an Advancement
of Expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a Final Adjudication that, the
Indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that
<PAGE> 3
indemnification of the Indemnitee is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel,
or its stockholders) that the Indemnitee has not met such applicable
standard of conduct, shall create a presumption that the Indemnitee has not
met the applicable standard of conduct or, in the case of such a suit brought
by the Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an Advancement of
Expenses hereunder, or by the Corporation to recover an Advancement of
Expenses pursuant to the terms of an undertaking, the burden of proving that
the Indemnitee is not entitled to be indemnified, or to such Advancement of
Expenses, under this Agreement or otherwise shall be on the Corporation.
5. Non-Exclusivity of Rights. The rights to indemnification and
to the Advancement of Expenses conferred in this Agreement shall not be
exclusive of any other right which Indemnitee may have or hereafter acquire
under any statute, the Corporation's certificate of incorporation, bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
6. Officer and Director Liability Insurance. The Corporation
shall, from time to time, make the good faith determination whether or not it
is practicable for the Corporation to obtain and maintain a policy or policies
of insurance with reputable insurance companies providing the officers and
directors of the Corporation with coverage for losses from wrongful acts, or to
ensure the Corporation's performance of its indemnification obligations under
this Agreement. Among other considerations, the Corporation will weigh the
costs of obtaining such insurance coverage against the protection afforded by
such coverage. In all policies of director and officer liability insurance,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Corporation's directors. Notwithstanding the foregoing, the
Corporation shall have no obligation to obtain or maintain such insurance if
the Corporation determines in good faith that such insurance is not reasonably
available, the premium costs for such insurance are disproportionate to the
amount of coverage provided, the coverage provided by such insurance is limited
by exclusions so as to provide an insufficient benefit, or Indemnitee is
covered by similar insurance maintained by a subsidiary or parent of the
Corporation.
7. Construction of Certain Phrases.
(a) The term "Corporation" shall include, in addition to
the Corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that if Indemnitee is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or joint venture, trust or other enterprise, Indemnitee shall
stand in the same position under the provisions of this Agreement with respect
to the resulting or surviving corporation as Indemnitee would have with respect
to such constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to
"serving at the request of the Corporation" shall include any service as a
director, officer, employee or agent
<PAGE> 4
of the Corporation which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit plan,
its participants or beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in the Delaware General Corporation Law.
8. Scope. Notwithstanding any other provision of this Agreement,
in the event that the express provisions of the Delaware General Corporation
Law relating to indemnification by the Corporation of, or Advancement of
Expenses by the Corporation to, its directors or officers are amended to permit
broader indemnification or advancement of expenses, then the Corporation will
provide such indemnification and advancement of expenses to the maximum extent
permitted by the Delaware General Corporation Law. Any repeal or modification
of this Agreement or any repeal or modification of relevant provisions of the
Delaware General Corporation Law or any other applicable laws shall not in any
way diminish any rights to indemnification of Indemnitee or the obligations of
the Corporation hereunder.
9. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Corporation to do or fail to do
any act in violation of applicable law. The Corporation's inability, pursuant
to court order, to perform its obligations under the Agreement shall not
constitute a breach of this Agreement. If this Agreement or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify Indemnitee as to costs, charges
and expenses (including attorney's fees), judgments, fines and amounts paid in
settlement with respect to any Proceeding, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated and to the full
extent permitted by applicable law.
10. Successors and Assigns. This Agreement shall be binding upon
all successors and assigns of the Corporation (including any transferee of all
or substantially all of its assets and any successor by merger or otherwise by
operation of law) and shall be binding on and inure to the benefit of the
Indemnitee's heirs, executors and administrators.
11. Amendment. No amendment, modification termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
13. Choice of Law. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents entered into and to be
performed entirely within Delaware.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
THE CHARLES SCHWAB CORPORATION
By: /s/
INDEMNITEE:
/s/
<PAGE> 1
Exhibit 10.63
REVOLVING SUBORDINATED LOAN AGREEMENT
AGREEMENT dated as of September 29, 1988 between The Charles
Schwab Corporation (the "Lender") and Charles Schwab & Co., Inc. (the
"Organization").
1. GENERAL - Subject to the terms and conditions hereinafter set
forth, the Lender agrees to make revolving subordinated loans to the
Organization through September 29, 1992 (the "Scheduled Maturity Date").
The Lender agrees that from time to time from September 29,
1988 until September 29, 1991, (the "Commitment Termination Date") it will lend
to the Organization sums which, in the aggregate principal amount outstanding
at any one time, shall not exceed $100 million. Subject to the terms hereof,
the Organization may from time to time, borrow, prepay, and reborrow at any
time prior to the Commitment Termination Date. The Organization promises to
pay to the Lender or assigns, on the Scheduled Maturity Date at the principal
office of the Organization the aggregate unpaid principal amount of all
promissory notes plus all accrued interest from the last interest payment date
The obligation of the Organization to repay the aggregate
unpaid principal amount shall be evidenced by one or more promissory notes (the
"Revolving Note") in the form attached hereto as Exhibit A.
The applicable interest rate under this agreement shall be
prime rate plus one percent per annum (with prime rate equal to U.S. Prime
Rate on page 17 of Telerate Systems); provided, however, that in no event shall
the rate of interest hereunder exceed the maximum rate permitted by law, and
any amount received by Lender as interest hereunder which would exceed the
maximum rate permitted by law shall be applied to reduce the unpaid principal
balance hereunder or returned to the Organization. Interest payments hereunder
shall be made on the last day of each calendar quarter.
2. SUSPENDED REPAYMENT - The Organization's obligation to pay the
principal amount hereof on the Scheduled Maturity Date shall be suspended and
the obligation shall not mature for any period of time during which, after
giving effect to such payment (together with (a) the payment of any other
obligation of the Organization payable at or prior to the payment hereof and
(b) the return of any Secured Demand Note and the Collateral therefor held by
the Organization and returnable at or prior to the payment hereof):
(i) in the event that the Organization is not operating
pursuant to the alternative net capital requirement
provided for in paragraph (f) of Rule 15c3-1 (the
"Rule") under the Securities Exchange Act of 1934, as
amended (the "Act"), the aggregate indebtedness of
the Organization would exceed 1200 percentum of its
net capital as those terms are defined in the Rule or
any successor rule as in effect at the time payment
is to be made (or such other percentum as may be
applicable to the Organization at the time of such
payment by the New York Stock Exchange, Inc. (the
"Exchange") or the Securities and Exchange Commission
(the "SEC")), or
(ii) in the event that the Organization is operating
pursuant to such alternative net capital requirement,
the net capital of the Organization would be less
than 5 percentum (or other such percentum as may be
made applicable to the Organization at the time of
such payment by the Exchange or the SEC) of aggregate
debit items computed in accordance with Exhibit A to
Rule 15c3-3 under the Act or any successor rule as in
effect at such time, or
(iii) in the event that the Organization is registered as a
futures commission merchant under the Commodity
Exchange Act (the "CEA"), the net capital of the
Organization (as defined in the CEA or the
regulations thereunder as in effect at the time of
such payment) would be less than 6 percentum (or such
other percentum that may be made applicable to the
Organization at the time of such payment by the
Commodity Futures Trading Commission (the "CFTC")) of
the funds required to be segregated pursuant to the
CEA and the regulations thereunder and the foreign
futures or foreign options secured amount less the
market value of commodity options purchased by
customers on or subject to the rules of a
<PAGE> 2
contract market or a foreign board of trade, provided,
however, the deduction for each customer shall be
limited to the amount of customer funds in such
customer's account and foreign futures and foreign
options secured amounts, or
(iv) the Organization's net capital, as defined in the
Rule or any successor rule as in effect at the time
of such payment, would be less than 120 percentum (or
such other percentum as may be made applicable to the
Organization at the time of such payment by the
Exchange or the SEC) of the minimum dollar amount
required by the Rule as in effect at such time (or
such other dollar amount as may be made applicable to
the Organization at the time of such payment by the
Exchange or the SEC), or
(v) in the event that the Organization is registered as a
futures commission merchant under the CEA and if its
net capital, as defined in the CEA or the regulations
thereunder as in effect at the time of such payment,
would be less than 120 percentum (or such other
percentum as may be made applicable to the
Organization at the time of such payment by the CFTC)
of the minimum dollar amount required by the CEA or
the regulations thereunder as in effect at such time
(or such other dollar amount as may be made
applicable to the Organization at the time of such
payment by the CFTC), or
(vi) in the event that the Organization is subject to the
provisions of paragraph (a)(6)(v) or (a)(7)(iv) or
(c)(2)(x)(B)(l) of the Rule, the net capital of the
Organization would be less than the amount required
to satisfy the 1000% test (or such other percentum
test as may be made applicable to the Organization at
the time of such payment by the Exchange or the SEC)
stated in such applicable paragraph
(the net capital necessary to enable the Organization to avoid such suspension
of its obligation to pay the principal amount hereof being hereinafter referred
to as the "Applicable Minimum Capital") and during any such suspension the
Organization shall, as promptly as consistent with the protection of its
customers, reduce its business to a condition whereby the principal amount
hereof with accrued interest thereon could be paid (together with (a) the
payment of any other obligation of the Organization payable at or prior to the
payment hereof and (b) the return of any Secured Demand Note and the Collateral
therefor held by the Organization and returnable at or prior to the payment
hereof) without the Organization's net capital being below the Applicable
Minimum Capital, at which time the Organizations shall repay the principal
amount hereof plus accrued interest thereon on not less than 5 days' prior
written notice to the Exchange. This loan shall mature on the first day at
which under this paragraph the Organization has an obligation to pay the
principal amount hereof. If pursuant to the terms hereof the Organization's
obligation to pay the principal amount hereof is suspended and does not mature,
the Organization and the Lender recognize and agree that the Organization may
be summarily suspended by the Exchange. The Organization agrees that, if its
obligation to pay the principal amount hereof is ever suspended for a period of
six months or more, it will promptly take whatever steps are necessary to
effect a rapid and orderly complete liquidation of its business. If payment is
made of all or any part of the principal hereof on the Scheduled Maturity Date
and if immediately after any such payment the Organization's net capital is
less than the Applicable Minimum Capital, the Lender agrees irrevocably
(whether or not such Lender had any knowledge or notice of such fact at the
time of any such payment) to repay the Organization, its successors or assigns,
the sum so paid, to be held by the Organization pursuant to the provisions
hereof as if such payment had never been made; provided, however, that any suit
for the recovery of any such payment must be commenced within two years of the
date of such payment.
3. SUBORDINATION OF OBLIGATIONS - The Lender irrevocably agrees
that the obligations of the Organization under this agreement with respect to
the payment of principal and interest are and shall be fully and irrevocably
subordinate in right of payment and subject to the prior payment or provision
for payment in full of all claims of all other present and future creditors of
the Organization whose claims are not similarly subordinated (claims hereunder
shall rank pari passu with claims similarly subordinated) and to claims which
are now or hereafter expressly stated in the instruments creating such claims
to be senior in right of payment to the claims of the class of this claim
arising out of any matter occurring prior to the date on which the
Organization's obligation to make such payment matures consistent with the
provisions hereof in the event of the appointment of a receiver or trustee of
the Organization or in the event of its insolvency, liquidation pursuant to the
Securities Investor Protection Act of 1970 ("SIPA") or otherwise, its
bankruptcy, assignment for the benefit of creditors,
2
<PAGE> 3
reorganization whether or
not pursuant to bankruptcy laws, or any other marshalling of the assets and
liabilities of the Organization, the holder hereof shall not be entitled to
participate or share, ratably or otherwise, in the distribution of the assets
of the Organization until all claims of all other present and future creditors
of the Organization, whose claims are senior hereto, have been fully satisfied,
or adequate provision has been made therefor.
4. PERMISSIVE PREPAYMENT - With the prior written permission of
the Exchange, and after the loan has been outstanding for at least one year,
the Organization may, at its option, pay all or any portion of the principal
amount hereof to the Lender prior to the Scheduled Maturity Date (such payment
being hereinafter referred to as a "Subordinated Loan Prepayment") No
Prepayment shall be made if after giving effect thereto (and to all other
payments of principal of outstanding subordination agreements of the
Organization, including the return of any Secured Demand Note and the
Collateral therefor held by the Organization, the maturity or accelerated
maturity of which are scheduled to occur within six months after the date such
Prepayment is to occur pursuant to the provisions of this paragraph, or on or
prior to the Scheduled Maturity Date for payment of the principal amount hereof
disregarding this paragraph, whichever date is earlier) without reference to
any projected profit or loss of the Organization,
(i) in the event that the Organization is not operating
pursuant to the alternative net capital requirement
provided for in paragraph (f) of the Rule, the
aggregate indebtedness of the Organization would
exceed 1000 percentum of its net capital as those
terms are defined in the Rule or any successor rule
as in effect at the time such Prepayment is to be
made (or such other percentum as may be made
applicable at such time to the Organization by the
Exchange or the SEC), or
(ii) in the event that the Organization is operating
pursuant to such alternative net capital requirement,
the net capital of the Organization would be less
than 5 percentum (or such other percentum as may be
made applicable to the Organization at the time of
such Prepayment by the Exchange or the SEC) of
aggregate debit items computed in accordance with
Exhibit A to Rule 15c3-3 under the Act or any
successor rule as in effect at such time, or
(iii) in the event that the Organization is registered as a
futures commission merchant under the CEA, the net
capital of the Organization (as defined in the CEA or
the regulations thereunder as in effect at the time
of such Prepayment) would be less than 7 percentum
(or such other percentum as may be made applicable to
the Organization at the time of such Prepayment by
the CFTC) of the funds required to be segregated
pursuant to the CEA and the regulations thereunder
and the foreign futures or foreign options secured
amount less the market value of commodity options
purchased by customers on or subject to the rules of
a contract market or a foreign board of trade,
provided, however, the deduction for each customer
shall be limited to the amount of customer funds in
such customer's account and foreign futures and
foreign options secured amounts, or
(iv) the Organization's net capital, as defined in the
Rule or any successor rule as in effect at the time
of such Prepayment, would be less than 120 percentum
(or such other percentum as may be made applicable to
the Organization at the time of such Prepayment by
the Exchange or the SEC) of the minimum dollar amount
required by the Rule as in effect at such time (or
such other dollar amount as may be made applicable to
the Organization at the Prepayment by the Exchange or
the SEC), or
(v) in the event that the Organization is registered as a
futures commission merchant under the CEA, its net
capital, as defined in the CEA or the regulations
thereunder as in effect at the time of such
Prepayment would be less than 120 percentum (or such
other percentum as may be made applicable to the
Organization at the time of such Prepayment by the
CFTC) of the minimum dollar amount required by the
CEA or the regulations thereunder as in effect at
such time or such other dollar amount as may be made
applicable to the Organization at the time of such
Prepayment by the CFTC, or
3
<PAGE> 4
(vi) in the event that the Organization is subject to the
provisions of paragraph (a)(6)(v) or (a)(7)(iv) or
(c)(2)(x)(B)(l) of the Rule, the net capital of the
Organization would be less than the amount required
to satisfy the 1000% test (or such other percentum
test as may be made applicable to the Organization at
the time of such Prepayment by the Exchange or the
SEC) stated in such applicable paragraph, or
If Prepayment is made of all or any part of the principal hereof prior to the
Scheduled Maturity Date and if the Organization's net capital is less than the
amount required to permit such Prepayment pursuant to the foregoing provisions
of this paragraph, the Lender agrees irrevocably (whether or not such Lender
had any knowledge or notice of such fact at the time of such Prepayment) to
repay the Organization, its successors or assigns, the sum so paid to be held
by the Organization pursuant to the provisions hereof as if such Prepayment had
never been made; provided, however, that any suit for the recovery of any such
Prepayment must be commenced within two years of the date of such Prepayment
With the prior written permission of the Exchange, the Organization may, at its
option, pay all or any portion of the principal amount hereof to the Lender
prior to the Scheduled Maturity Date (such payment being hereinafter referred
to as a "Prepayment"). No Prepayment shall be made if after giving effect
thereto without reference to any projected profit or loss of the Organization,
(i) in the event that the Organization is not operating
pursuant to the alternative net capital requirement
provided for in paragraph (f) of the Rule, the
aggregate indebtedness of the Organization would
exceed 900 percentum of its net capital as those
terms are defined in the Rule or any successor rule
as in effect at the time such Prepayment is to be
made (or such other percentum as may be made
applicable at such time to the Organization by the
Exchange or the SEC), or
(ii) in the event that the Organization is operating
pursuant to such alternative net capital requirement,
the net capital of the Organization would be less
than 6 percentum (or such other percentum as may be
made applicable to the Organization at the time of
such Prepayment by the Exchange or the SEC) of
aggregate debit items computed in accordance with
Exhibit A to Rule 15c3-3 under the Act or any
successor rule as in effect at such time, or
(iii) in the event that the Organization is registered as a
futures commission merchant under the CEA, the net
capital of the Organization (as defined in the CEA or
the regulations thereunder as in effect at the time
of such Prepayment) would be less than 10 percentum
(or such other percentum as may be made applicable to
the Organization at the time of such Prepayment by
the CFTC) of the funds required to be segregated
pursuant to the CEA and the regulations thereunder
and the foreign futures or foreign options secured
amount less the market value of commodity options
purchased by customers on or subject to the rules of
a contract market or a foreign board of trade,
provided, however, the deduction for each customer
shall be limited to the amount of customer funds in
such customer's account and foreign futures and
foreign options secured amounts, or
(iv) the Organization's net capital, as defined in the
Rule or any successor rule as in effect at the time
of such Prepayment, would be less than 200 percentum
(or such other percentum as may be made applicable to
the Organization at the time of such Prepayment by
the Exchange or the SEC) of the minimum dollar amount
required by the Rule as in effect at such time (or
such other dollar amount as may be made applicable to
the Organization at the time of such Prepayment by
the Exchange or the SEC), or
(v) in the event that the Organization is registered as a
futures commission merchant under the CEA, its net
capital, as defined in the CEA or the regulations
thereunder as in effect at the time of such
Prepayment would be less than 200 percentum (or such
other percentum as may be made applicable to the
Organization at the time of such Prepayment by the
CFTC) of the minimum dollar amount required by the
CEA or the regulations thereunder as in
4
<PAGE> 5
effect at such time or such other dollar amount as
may be made applicable to the Organization at the
time of such Prepayment by the CFTC, or
(vi) in the event that the Organization is subject to the
provisions of paragraph (a)(6)(v) or (a)(7)(iv) or
(c)(2)(X)(B)(l) of the Rule, the net capital of the
Organization would be less than the amount required
to satisfy the 1000% test (or such other percentum
test as may be made applicable to the Organization at
the time of such Prepayment by the Exchange or the
SEC) stated in such applicable paragraph, or
(vii) in the event that the Organization has incurred
pre-tax losses during the latest three-month period
greater than 15% of current excess net capital
If Prepayment is made of all or any part of the principal hereof prior to the
Scheduled Maturity Date and if the Organization's net capital is less than the
amount required to permit such Prepayment pursuant to the foregoing provisions
of this paragraph, the Lender agrees irrevocably (whether or not such Lender
had any knowledge or notice of such fact at the time of such Prepayment) to
repay the Organization, its successors or assigns, the sum so paid to be held
by the Organization pursuant to the provisions hereof as if such Prepayment had
never been made; provided, however, that any suit for the recovery of any such
Prepayment must be commenced within two years of the date of such Prepayment
5. "SET-OFF" PROVISION - The Lender agrees that it is not taking
and will not take or assert as security for the payment of the note any
security interest in or lien upon, whether created by contract, statute or
otherwise, any property of the Organization or any property in which the
Organization may have an interest, which is or at any time may be in the
possession or subject to the control of the Lender. The Lender hereby waives,
and further agrees that it will not seek to obtain payment of the note in whole
or in any part by exercising any right of set-off it may assert or possess
whether created by contract, statute or otherwise.
6. ACCELERATION IN THE EVENT OF INSOLVENCY - The Organization's
obligation to pay the unpaid principal amount hereof shall forthwith mature,
together with interest accrued thereon, in the event of any receivership
insolvency, liquidation pursuant to SIPA or otherwise, bankruptcy, assignment
for the benefit of creditors, reorganization whether or not pursuant to
bankruptcy laws, or any other marshalling of the assets and liabilities of the
Organization; but payment of the same shall remain subordinate as hereinabove
set forth.
7. EFFECT OF DEFAULT - Default in any payment hereunder,
including the payment of interest, shall not accelerate the maturity hereof
except as herein specifically provided, and the obligation to make payment
shall remain subordinated as hereinabove set forth.
8. NON-LIABILITY OF EXCHANGE - The Lender irrevocably agrees that
the loan evidenced hereby is not being made in reliance upon the standing of
the Organization as a member organization of the Exchange or upon the
Exchange's surveillance of the Organization's financial position or its
Compliance with the Constitution, Rules and practices of the Exchange. The
Lender has made such investigation of the Organization and its partners,
officers, directors and stockholders as the Lender deems necessary and
appropriate under the circumstances. The Lender is not relying upon the
Exchange to provide any information concerning or relating to the Organization
and agrees that the Exchange has no responsibility to disclose to the Lender
any information concerning or relating to the Organization which it may now, or
at any future time, have. The Lender agrees that neither the Exchange, its
Special Trust Fund, nor any director, officer, trustee or employee of the
Exchange or said Trust Fund shall be liable to the Lender with respect to the
loan evidenced hereby or the repayment thereof or of any interest thereon.
9. STATUS OF PROCEEDS - The proceeds of the loan evidenced hereby
shall be dealt with in all respects as capital of the Organization, shall be
subject to the risks of its business, and may be deposited in an account or
accounts in the Organization's name in any bank or trust company.
10. FUTURES COMMISSION MERCHANTS - If the Organization is a
futures commission merchant, as that term is defined in the CEA, the
Organization agrees, consistent with the requirements of Section 1 17(h) of the
regulations of the CFTC (17 CFR 1 17(h)), that,
5
<PAGE> 6
(a) whenever prior written notice by the Organization to
the Exchange is required pursuant to the provisions of this agreement, the same
prior written notice shall be given by the Organization to (i) the CFTC at its
principal office in Washington, D.C., Attention Chief Accountant of Division of
Trading and Markets, and/or (ii) the commodity exchange of which the
Organization is a member and which is then designated by the CFTC as the
Organization's designated self-regulatory organization (the "DSRO"), and
(b) whenever prior written consent, permission or
approval of the Exchange is required pursuant to the provisions of this
agreement, the Organization shall also obtain the prior written consent,
permission or approval of the CFTC and/or of the DSRO, and
(c) whenever the Organization receives written notice of
acceleration of maturity pursuant to the provisions of this agreement, the
Organization shall promptly give written notice thereof to the CFTC at the
address above stated and/or to the DSRO.
11. DEFINITION OF ORGANIZATION - The term "Organization" as used
in this agreement shall include the Organization, its heirs, executors,
administrators, successors and assigns.
12. EFFECT OF EXCHANGE MEMBERSHIP TERMINATION - Upon termination
of the Organization as a member organization of the Exchange, the references
herein to the Exchange shall be deemed to refer to the Examining Authority.
The term "Examining Authority" shall refer to the regulatory body having
responsibility for inspecting or examining the Organization for compliance with
financial responsibility requirements under Section 9(c) of SIPA and Section
17(d) of the Act.
13. UPON WHOM BINDING - The provisions of this agreement shall be
binding upon the Lender, his or its heirs, executors, administrators,
successors and assigns and upon the Organization.
14. ARBITRATION - Any controversy arising out of or relating to
this agreement shall be submitted to and settled by arbitration pursuant to the
Constitution and Rules of the Exchange. The Organization and the Lender shall
be conclusively bound by such arbitration.
15. EFFECTIVE DATE - This agreement shall be effective from the
date on which it is approved by the Exchange and shall not be modified or
amended without prior written approval of the Exchange.
16. ENTIRE AGREEMENT - This instrument embodies the entire
agreement between the Organization and the Lender and no other evidence of such
agreement has been or will be executed without the prior written consent of the
Exchange.
17. GOVERNING LAW - This agreement shall be deemed to have been
made under, and shall be governed by, the laws of the State of New York in all
respects.
18. CANCELLATION - This agreement shall not be subject to
cancellation by either party.
6
<PAGE> 7
IN WITNESS WHEREOF the parties hereto have set their hands and seals
this 29th day of September, 1988.
Charles Schwab & Co., Inc.
-----------------------------------
(Name of Organization)
By /s/ A. John Gambs
--------------------------------
A. John Gambs
Executive Vice President -
Finance and Chief Financial Officer
The Charles Schwab Corporation
-----------------------------------
(Lender)
By /s/ Lawrence J. Stupski
--------------------------------
Lawrence J. Stupski
President
7
<PAGE> 8
REVOLVING NOTE
Date: September 29, 1988
$100,000,000.00
For value received, the undersigned Charles Schwab & Co., Inc.
("Organization") hereby promises to pay to the order of The Charles Schwab
Corporation ("Lender") the principal amount of each advance made by the Lender
to the Organization under the terms of a Revolving Subordinated Loan Agreement
between the Organization and the Lender, dated as of September 29, 1988 (the
"Agreement"), as shown in the schedule attached hereto and any continuation
thereof, on the last day of the Interest Period (as defined in the Agreement)
for such advance. The undersigned also promises to pay interest on the unpaid
principal amount of each advance from the date of such advance until such
principal amount is paid, at the rates per annum, and payable at such times, as
are specified in the Agreement. This Note shall be subject to the Agreement,
and all principal and interest payable hereunder shall be due and payable in
accordance with the terms of the Agreement. Terms defined in the Agreement are
used herein with the same meanings.
The maturity date of this revolving note shall be September 29, 1991.
The maturity date shall in each year, without further action by either the
Lender or the Organization, be extended to September 29 of the following year,
unless on or before the day eight months preceding the maturity date, the
Lender shall notify the Organization in writing with a written copy to the New
York Stock Exchange, Inc., that such maturity date shall not be extended.
IN WITNESS WHEREOF, the undersigned has caused this Note to be
executed by its officers or employees thereunto duly authorized and directed by
appropriate corporate authority
Charles Schwab & Co., Inc.
By /s/ A. John Gambs
--------------------------------
A. John Gambs
Executive Vice President - Finance and
Chief Financial Officer
8
<PAGE> 9
SCHEDULE
Advances Referred to in the Foregoing
Revolving Note and Payments on Account of the
Principal Thereof and Interest Thereon
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNT DATE OF AMOUNT OF
DATE OF AMOUNT APPLICABLE MATURITY OF INTEREST DATE OF REPAID OR PAYMENT OF INTEREST NOTATION
ADVANCE ADVANCED RATE ADVANCE RATE PREPAYMENT PREPAID INTEREST PAID MADE BY
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 1
Exhibit 10.130
ANNUAL EXECUTIVE BONUS PLAN
The Company's Annual Executive Bonus Plan provides for the
payment of annual cash bonuses to executive officers of the Company, based
solely upon the Company's attainment of certain performance targets. The
participants in the plan are the Chairman, Vice Chairman, President, Senior
Executive Vice Presidents, Executive Vice Presidents, and from time to time,
certain other officers having comparable positions. The plan specifies a
target bonus for each executive officer, which is expressed as a percentage
(between 25% and 100%) of that executive's annual base salary and depends upon
that executive officer's roles and responsibilities. The amount of base salary
included in the computation of the target bonus amount for each executive
officer in any year may not exceed 250% of the base salary, determined as of
March 31, 1994, payable to the executive officer holding the same or
substantially similar position on March 31, 1994. The amount of the target
bonus is then multiplied by a percentage, which can range from 0% to 200%,
which is determined by the Company's performance for the year relative to its
goals of net revenue growth of 20% and after-tax profit margin of 10%.
Amounts payable pursuant to the plan are generally paid
quarterly in the year in which they are earned or during the following year;
however, a recipient who is eligible to participate in The Charles Schwab
Corporation Deferred Compensation Plan may defer payments pursuant to the terms
of that plan. The plan is administered by the Committee, which makes all
decisions regarding the operation of the plan and payments thereunder. The
Committee may amend or terminate the plan at any time and for any reason
without stockholder approval.
<PAGE> 1
Exhibit 10.131
THE CHARLES SCHWAB CORPORATION
1992 STOCK INCENTIVE PLAN
(AS AMENDED ON SEPTEMBER 16, 1992,
AND AMENDED AND RESTATED ON JANUARY 1, 1994)
Article 1. Introduction.
The Plan was adopted by the Board of Directors on March 26, 1992. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of incremental stockholder value by (a) encouraging Non-Employee
Directors and Key Employees to focus on long-range objectives, (b) encouraging
the attraction and retention of Non-Employee Directors and Key Employees with
exceptional qualifications and (c) linking Non-Employee Directors and Key
Employees directly to stockholder interests. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares, Performance
Share Awards or Options, which may constitute incentive stock options or
nonstatutory stock options. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
Article 2. Administration.
2.1 The Committee. The Plan shall be administered by the Committee.
The Committee shall consist of two or more disinterested directors of the
Company, who shall be appointed by the Board. A member of the Committee shall
not be eligible to receive any award under the Plan, other than Options granted
under Section 4.2.
2.2 Disinterested Directors. A member of the Board shall be deemed
to be "disinterested" only if he or she satisfies such requirements as the
Securities and Exchange Commission may establish for disinterested
administrators acting under plans intended to qualify for exemption under Rule
16b-3 (or its successor) under the Exchange Act.
2.3 Committee Responsibilities. The Committee shall select the Key
Employees who are to receive Awards under the Plan, determine the amount,
vesting requirements and other conditions of such Awards, may interpret the
Plan, and make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.
Article 3. Limitation on Awards.
The aggregate number of Restricted Shares, Performance Share Awards
and Options awarded under the Plan shall not exceed 6,550,000 (including those
shares awarded prior to the amendment of the Plan). If any Restricted Shares,
Performance Share Awards or Options are forfeited, or if any Performance Share
Awards terminate for any other reason without the associated Common Shares
being issued, or if any Options terminate for any other reason before being
exercised, then such Restricted Shares, Performance Share Awards or Options
shall again become available for Awards under the Plan. The limitation of this
Article 3 shall be subject to adjustment pursuant to Article 10. Any Common
Shares issued pursuant to the Plan may be authorized but unissued shares or
treasury shares.
<PAGE> 2
Subject to the overall limit on the aggregate shares set forth above,
the following limitations shall apply: (a) The maximum number of Common Shares
which may be granted subject to an Option to any one Participant in any one
fiscal year shall be 500,000; and (b) The maximum number of Restricted Shares
or Performance Share Awards which may be granted to any one Participant in any
one fiscal year shall be 200,000.
Article 4. Eligibility.
4.1 General Rule. Except as provided in Section 4.2, only Key
Employees shall be eligible for designation as Participants by the Committee.
4.2 Non-Employee Directors. Non-Employee Directors shall be entitled
to receive the NSOs described in this Section 4.2 (and no other Awards).
(a) Each Non-Employee Director shall receive an NSO covering 1,000
Common Shares for each Award Year with respect to which he or
she serves as a Non-Employee Director on the grant date
described in subsection (b) below;
(b) The NSO for a particular Award Year shall be granted to each
Non-Employee Director as of May 15 of each Award Year, and if
May 15 is not a business day, then the grant shall be made on
and as of the next succeeding business day;
(c) Each NSO shall be exercisable in full at all times during its
term;
(d) The term of each NSO shall be 10 years; provided, however,
that any unexercised NSO shall expire on the date that the
Optionee ceases to be a Non-Employee Director or a Key
Employee for any reason other than death or disability. If an
Optionee ceases to be a Non-Employee Director or Key Employee
on account of death or disability, any unexercised NSO shall
expire on the earlier of the date 10 years after the date of
grant or one year after the date of death or disability of
such Director; and
(e) The Exercise Price under each NSO shall be equal to the Fair
Market Value on the date of grant and shall be payable in any
of the forms described in Article 6.
4.3 Ten-Percent Stockholders. A Key Employee who owns more than 10
percent of the total combined voting power of all classes of outstanding stock
of the Company or any of its Subsidiaries shall not be eligible for the grant
of an ISO unless (a) the Exercise price under such ISO is at least 110 percent
of the Fair Market Value of a Common Share on the date of grant and (b) such
ISO by its terms is not exercisable after the expiration of five years from the
date of grant.
4.4 Attribution Rules. For purposes of Section 4.3, in determining
stock ownership, a Key Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his or her brothers, sisters, spouse,
ancestors or lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which the Key Employee holds an option shall not be counted.
2
<PAGE> 3
4.5 Outstanding Stock. For purposes of Section 4.3, "outstanding
stock" shall include all stock actually issued and outstanding immediately
after the grant of the ISO to the Key Employee. "Outstanding stock" shall not
include treasury shares or shares authorized for issuance under outstanding
options held by the Key Employee or by any other person.
Article 5. Options.
5.1 Stock Option Agreement. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms and conditions
of the Plan, and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in a Stock Option Agreement. The provisions of the various Stock
Option Agreements entered into under the Plan need not be identical. The
Committee may designate all or any part of an Option as an ISO, except for
Options granted to Non-Employee Directors under Section 4.2.
5.2 Options Nontransferability. No Option granted under the Plan
shall be transferable by the Optionee other than by will or the laws of descent
and distribution. An Option may be exercised during the lifetime of the
Optionee only by him or her. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his or her lifetime,
whether by operation of law or otherwise, or be made subject to execution,
attachment or similar process.
5.3 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Each Stock Option
Agreement shall also specify whether the Option is an ISO or an NSO.
5.4 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price. The Exercise Price under an Option shall not be less than 100
percent of the Fair Market Value of a Common Share on the date of grant, except
as otherwise provided in Section 4.3. Subject to the preceding sentence, the
Exercise Price under any Option shall be determined by the Committee. The
Exercise Price shall be payable in accordance with Article 6.
5.5 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. The term of an ISO shall in no event exceed 10 years from the date of
grant, and Section 4.3 may require a shorter term. Subject to the preceding
sentence, the Committee shall determine when all or any part of an Option is to
become exercisable and when such Option is to expire. A Stock Option Agreement
may provide for accelerated exercisability in the event of the Optionee's
death, disability or retirement and may provide for expiration prior to the end
of its term in the event of the termination of the Optionee's employment.
Except as provided in Section 4.2, NSOs may also be awarded in combination with
Restricted Shares, and such an Award may provide that the NSOs will not be
exercisable unless the related Restricted Shares are forfeited. In addition,
NSOs granted under this Article 5 may be granted subject to forfeiture
provisions which provide for forfeiture of the Option upon the exercise of
tandem awards, the terms of which are established in other programs of the
Company.
3
<PAGE> 4
5.6 Limitation on Amount of ISOs. The aggregate fair market value
(determined at the time the ISO is granted) of the Common Shares with respect
to which ISOs are exercisable for the first time by the Optionee during any
calendar year (under all incentive stock option plans of the Company) shall not
exceed $100,000; provided, however, that all or any portion of an Option which
cannot be exercised as an ISO because of such limitation shall be treated as an
NSO.
5.7 Effect of Change in Control. The Committee (in its sole
discretion) may determine, at the time of granting an Option, that such Option
shall become fully exercisable as to all Common Shares subject to such Option
immediately preceding any Change in Control with respect to the Company.
5.8 Restrictions on Transfer of Common Shares. Any Common Shares
issued upon exercise of an Option shall be subject to such special forfeiture
conditions, rights of repurchase, rights of first refusal and other transfer
restrictions as the Committee may determine. Such restrictions shall be set
forth in the applicable Stock Option Agreement and shall apply in addition to
any general restrictions that may apply to all holders of Common Shares.
5.9 Authorization of Replacement Options. Concurrently with the
grant of any Option to a Participant (other than NSOs granted pursuant to
Section 4.2), the Committee may authorize the grant of Replacement Options. If
Replacement Options have been authorized by the Committee with respect to a
particular award of Options (the "Underlying Options"), the Option Agreement
with respect to the Underlying Options shall so state, and the terms and
conditions of the Replacement Options shall be provided therein. The grant of
any Replacement Options shall be effective only upon the exercise of the
Underlying Options through the use of Common Shares pursuant to Section 6.2 or
Section 6.3. The number of Replacement Options shall equal the number of
Common Shares used to exercise the Underlying Options, and, if the Option
Agreement so provides, the number of Common Shares used to satisfy any tax
withholding requirements incident to the exercise of the Underlying Options in
accordance with Section 13.2. Upon the exercise of the Underlying Options, the
Replacement Options shall be evidenced by an amendment to the Underlying Option
Agreement. Notwithstanding the fact that the Underlying Option may be an ISO,
a Replacement Option is not intended to qualify as an ISO. The Exercise Price
of a Replacement Option shall be no less than the Fair Market Value of a Common
Share on the date the grant of the Replacement Option becomes effective. The
term of each Replacement Option shall be equal to the remaining term of the
Underlying Option. No Replacement Options shall be granted to Optionees when
Underlying Options are exercised pursuant to the terms of the Plan and the
Underlying Option Agreement following termination of the Optionee's employment.
The Committee, in its sole discretion, may establish such other terms and
conditions for Replacement Options as it deems appropriate.
Article 6. Payment for Option Shares.
6.1 General Rule. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable
Stock Option Agreement. However, the Committee may specify in
the Stock Option Agreement that payment may be made pursuant
to Section 6.2 or 6.3.
4
<PAGE> 5
(b) In the case of an NSO, the Committee may at any time accept
payment pursuant to Section 6.2 or 6.3.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which are surrendered to the Company; provided, however, that
such Common Shares which are surrendered must have been beneficially owned by
the Participant for at least six (6) months prior to the date such shares are
surrendered. Such Common Shares shall be valued at their Fair Market Value on
the date when the new Common Shares are purchased under the Plan. In the event
that the Common Shares being surrendered are Restricted Shares that have not
yet become vested, the same restrictions shall be imposed upon the new Common
Shares being purchased.
6.3 Exercise/Sale. To the extent this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares
(including the Common Shares to be issued upon exercise of the Options) and to
deliver all or part of the sales proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes; provided, however, that
certain restrictions may be imposed by the Committee on persons who are
considered a director or officer of the Company, to the extent required by
Section 16 of the Exchange Act or any rule thereunder.
Article 7. Restricted Shares and Performance Share Awards.
7.1 Time, Amount and Form of Awards. The Committee may grant
Restricted Shares or Performance Share Awards with respect to an Award Year
during such Award Year or at any time thereafter. Each such Award shall be
evidenced by a Stock Award Agreement between the Award recipient and the
Company. The amount of each Award of Restricted Shares or Performance Share
Awards shall be determined by the Committee. Awards under the Plan may be
granted in the form of Restricted Shares or Performance Share Awards or in any
combination thereof, as the Committee shall determine at its sole discretion at
the time of the grant. Restricted Shares or Performance Share Awards may also
be awarded in combination with NSOs, and such an Award may provide that the
Restricted Shares or Performance Share Awards will be forfeited in the event
that the related NSOs are exercised.
7.2 Payment for Restricted Share Awards. To the extent that an Award
is granted in the form of Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the Company in
cash an amount equal to the par value of such Restricted Shares.
7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. Common Shares shall be
issued pursuant to Performance Share Awards in full or in installments upon
satisfaction of the issuance conditions specified in the Stock Award Agreement.
The Committee shall select the vesting conditions in the case of Restricted
Shares, or issuance conditions in the case of Performance Share Awards, which
may be based upon the Participant's service, the Participant's performance, the
Company's performance or such other criteria as the Committee may adopt. A
Stock Award Agreement may also provide for accelerated vesting or issuance, as
the case may be, in the event of the Participant's death, disability or
retirement. The Committee, in its sole discretion, may determine, at the time
of making an Award of Restricted
5
<PAGE> 6
Shares, that such Award shall become fully vested in the event that a Change in
Control occurs with respect to the Company. The Committee, in its sole
discretion, may determine, at the time of making a Performance Share Award,
that the issuance conditions set forth in such Award shall be waived in the
event that a Change in Control occurs with respect to the Company.
The Committee shall have the discretion to adjust the payouts
associated with Awards downward. Unless and until (i) the rules set forth
under Code Section 162(m) permit discretionary adjustments to increase payouts;
or (ii) the Committee determines that compliance with Code Section 162(m) is
not desired with respect to some or all Named Executive Officers, no payout
associated with an Award held by a Named Executive Officer shall be
discretionarily adjusted upward in a manner that would eliminate the ability of
the Award to satisfy the "performance-based" exception under Treasury
Regulation Section 1.162-27(e)(2).
7.4 Form of Settlement of Performance Share Awards. Settlement of
Performance Share Awards shall only be made in the form of Common Shares.
Until a Performance Share Award is settled, the number of Performance Share
Awards shall be subject to adjustment pursuant to Article 10.
7.5 Death of Recipient. Any Common Shares that are to be issued
pursuant to a Performance Share Award after the recipient's death shall be
delivered or distributed to the recipient's beneficiary or beneficiaries. Each
recipient of a Performance Share Award under the Plan shall designate one or
more beneficiaries for this purpose by filing the prescribed form with the
Company. A beneficiary designation may be changed by filing the prescribed
form with the Company at any time before the Award recipient's death. If no
beneficiary was designated or if no designated beneficiary survives the Award
recipient, then any Common Shares that are to be issued pursuant to a
Performance Share Award after the recipient's death shall be delivered or
distributed to the recipient's estate. The Committee, in its sole discretion,
shall determine the form and time of any distribution(s) to a recipient's
beneficiary or estate.
Article 8. Claims Procedures.
Claims for benefits under the Plan shall be filed in writing with the
Committee on forms supplied by the Committee. Written notice of the
disposition of a claim shall be furnished to the claimant within 90 days after
the claim is filed. If the claim is denied, the notice of disposition shall set
forth the specific reasons for the denial, citations to the pertinent
provisions of the Plan, and, where appropriate, an explanation as to how the
claimant can perfect the claim. If the claimant wishes further consideration
of his or her claim, the claimant may appeal a denied claim to the Committee
(or to a person designated by the Committee) for further review. Such appeal
shall be filed in writing with the Committee on a form supplied by the
Committee, together with a written statement of the claimant's position, no
later than 90 days following receipt by the claimant of written notice of the
denial of his or her claim. If the claimant so requests, the Committee shall
schedule a hearing. A decision on review shall be made after a full and fair
review of the claim and shall be delivered in writing to the claimant no later
than 60 days after the Committee's receipt of the notice of appeal, unless
special circumstances (including the need to hold a hearing) require an
extension of time for processing the appeal, in which case a written decision
on review shall be delivered to the claimant as soon as possible but not later
than 120 days after the Committee's receipt of the appeal notice. The claimant
shall be notified in writing of any such extension of time. The written
decision on review shall include specific reasons for the decision, written in
a manner calculated to be understood by the claimant, and shall specifically
refer to the pertinent
6
<PAGE> 7
Plan provisions on which it is based. All determinations of the Committee
shall be final and binding on Participants and their beneficiaries.
Article 9. Voting Rights and Dividends.
9.1 Restricted Shares.
(a) All holders of Restricted Shares who are not Named Executive
Officers shall have the same voting, dividend, and other
rights as the Company's other stockholders.
(b) During the period of restriction, Named Executive Officers
holding Restricted Shares granted hereunder shall be credited
with all regular cash dividends paid with respect to all
Restricted Shares while they are so held. If a dividend is
paid in the form of cash, such cash dividend shall be credited
to Named Executive Officers subject to the same restrictions
on transferability and forfeitability as the Restricted Shares
with respect to which they were paid. If any dividends or
distributions are paid in shares of Common Stock, the shares
of Common Stock shall be subject to the same restrictions on
transferability and forfeitability as the Restricted Shares
with respect to which they were paid. Subject to the
succeeding paragraph, and to the restrictions on vesting and
the forfeiture provisions, all dividends credited to a Named
Executive Officer shall be paid to the Named Executive Officer
within forty-five (45) days following the full vesting of the
Restricted Shares with respect to which such dividends were
earned.
In the event that any dividend constitutes a "derivative
security" or an "equity security" pursuant to Rule 16(a) under
the Exchange Act, such dividend shall be subject to a vesting
period equal to the longer of: (i) the remaining vesting
period of the Restricted Shares with respect to which the
dividend is paid; or (ii) six (6) months. The Committee shall
establish procedures for the application of this provision.
Named Executive Officers holding Restricted Shares shall have
the same voting rights as the Company's other stockholders.
9.2 Performance Share Awards. The holders of Performance Share
Awards shall have no voting or dividend rights until such time as any Common
Shares are issued pursuant thereto, at which time they shall have the same
voting, dividend and other rights as the Company's other stockholders.
Article 10. Protection Against Dilution; Adjustment of Awards.
10.1 General. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall make
appropriate adjustments in one or more of (a) the number of Options, Restricted
Shares and Performance Share Awards available for future Awards under Article
3, (b) the number of Performance Share Awards included in any prior Award which
has not yet been settled, (c) the number of Common Shares covered by each
outstanding Option or (d) the Exercise Price under each outstanding Option.
7
<PAGE> 8
10.2 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, Restricted Shares and
Performance Share Awards shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent,
for their continuation by the Company (if the Company is a surviving
corporation), for accelerated vesting or for settlement in cash.
10.3 Reservation of Rights. Except as provided in this Article 10, a
Participant shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class. Any issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or Exercise Price of Common
Shares subject to an Option. The grant of an Award pursuant to the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
Article 11. Limitation of Rights.
11.1 Employment Rights. Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain employed by
the Company or any Subsidiary. The Company and its Subsidiaries reserve the
right to terminate the employment of any employee at any time, with or without
cause, subject only to a written employment agreement (if any).
11.2 Stockholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of a stock
certificate for such Common Shares. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date when
such certificate is issued, except as expressly provided in Articles 7, 9 and
10.
11.3 Creditors' Rights. A holder of Performance Share Awards shall
have no rights other than those of a general creditor of the Company.
Performance Share Awards represent unfunded and unsecured obligations of the
Company, subject to the terms and conditions of the applicable Stock Award
Agreement.
11.4 Government Regulations. Any other provision of the Plan
notwithstanding, the obligations of the Company with respect to Common Shares
to be issued pursuant to the Plan shall be subject to all applicable laws,
rules and regulations, and such approvals by any governmental agencies as may
be required. The Company reserves the right to restrict, in whole or in part,
the delivery of Common Shares pursuant to any Award until such time as:
(a) Any legal requirements or regulations have been met relating
to the issuance of such Common Shares or to their
registration, qualification or exemption from registration or
qualification under the Securities Act of 1933, as amended, or
any applicable state securities laws; and
8
<PAGE> 9
(b) Satisfactory assurances have been received that such Common
Shares, when issued, will be duly listed on the New York Stock
Exchange or any other securities exchange on which Common
Shares are then listed.
Article 12. Limitation of Payments.
12.1 Basic Rule. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer
in the nature of compensation to or for the benefit of a Participant, whether
paid or payable (or transferred or transferable) pursuant to the terms of this
Plan or otherwise (a "Payment"), would be nondeductible for federal income tax
purposes because of the provisions concerning "excess parachute payments" in
Section 280G of the Code, then the aggregate present value of all Payments
shall be reduced (but not below zero) to the Reduced Amount; provided, however,
that the Committee, at the time of making an Award under this Plan or at any
time thereafter, may specify in writing that such Award shall not be so reduced
and shall not be subject to this Article 12. For purposes of this Article 12,
the "Reduced Amount" shall be the amount, expressed as a present value, which
maximizes the aggregate present value of the Payments without causing any
Payment to be nondeductible by the Company because of Section 280G of the Code.
12.2 Reduction of Payments. If the Auditors determine that any
Payment would be nondeductible because of Section 280G of the Code, then the
Company shall promptly give the Participant notice to that effect and a copy of
the detailed calculation thereof and of the Reduced Amount, and the Participant
may then elect, in his or her sole discretion, which and how much of the
Payments shall be eliminated or reduced (as long as after such election, the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 12,
present value shall be determined in accordance with section 280G(d)(4) of the
Code. All determinations made by the Auditors under this Article 12 shall be
binding upon the Company and the Participant and shall be made within 60 days
of the date when a Payment becomes payable or transferable. As promptly as
practicable following such determination and the elections hereunder, the
Company shall pay or transfer to or for the benefit of the Participant such
amounts as are then due to him or her under the Plan, and shall promptly pay or
transfer to or for the benefit of the Participant in the future such amounts as
become due to him or her under the Plan.
12.3 Overpayments and Underpayments. As a result of uncertainty in
the application of Section 280G of the Code at the time of an initial
determination by the Auditors hereunder, it is possible that Payments will have
been made by the Company which should not have been made (an "Overpayment") or
that additional Payments which will not have been made by the Company could
have been made (an "Underpayment"), consistent in each case with the
calculation of the Reduced Amount hereunder. In the event that the Auditors,
based upon the assertion of a deficiency by the Internal Revenue Service
against the Company or the Participant which the Auditors believe has a high
probability of success, determine that an Overpayment has been made, such
Overpayment shall be treated for all purposes as a loan to the Participant
which he or she shall repay to the Company on demand, together with interest at
the applicable federal rate
9
<PAGE> 10
provided in Section 7872(f)(2) of the Code; provided, however, that no amount
shall be payable by the Participant to the Company if and to the extent that
such payment would not reduce the amount which is subject to taxation under
Section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to or for the benefit of the Participant, together
with interest at the applicable federal rate provided in section 7872(f)(2) of
the Code.
12.4 Related Corporations. For purposes of this Article 12, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with Section 280G(d)(5) of the Code.
Article 13. Withholding Taxes.
13.1 General. To the extent required by applicable federal, state,
local or foreign law, the recipient of any payment or distribution under the
Plan shall make arrangements satisfactory to the Company for the satisfaction
of any withholding tax obligations that arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied.
13.2 Nonstatutory Options, Restricted Shares or Performance Share
Awards. The Committee may permit an Optionee who exercises NSOs, or who
receives Awards of Restricted Shares, or who receives Common Shares pursuant to
the terms of a Performance Share Award, to satisfy all or part of his or her
withholding tax obligations by having the Company withhold a portion of the
Common Shares that otherwise would be issued to him or her under such Awards.
Such Common Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. The payment of withholding taxes by
surrendering Common Shares to the Company, if permitted by the Committee, shall
be subject to such restrictions as the Committee may impose, including any
restrictions required by rules of the Securities and Exchange Commission.
Article 14. Assignment or Transfer of Award.
Any Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor's
process, whether voluntarily, involuntarily or by operation of law. Any act in
violation of this Article 14 shall be void. However, this Article 14 shall not
preclude (i) a Participant from designating a beneficiary who will receive any
undistributed Awards in the event of the Participant's death, or (ii) a
transfer by will or the laws of descent and distribution.
Article 15. Future of Plans.
15.1 Term of the Plan. The Plan, as set forth herein, shall become
effective on May 8, 1992. The Plan shall remain in effect until it is
terminated under Section 15.2, except that no ISOs shall be granted after May
7, 2002.
15.2 Amendment or Termination. The Committee may, at any time and
for any reason, amend or terminate the Plan; provided, however, that any
amendment of the Plan shall be subject to the approval of the Company's
stockholders to the extent required by applicable laws, regulations or rules;
and provided further, that Section 4.2 shall not be amended more than once
every six months, other than to comport with changes in the Code or ERISA, or
the rules thereunder.
10
<PAGE> 11
15.3 Effect of Amendment or Termination. No Award shall be made
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Option, Restricted Share or
Performance Share Award previously granted under the Plan.
Article 16. Definitions.
16.1 "Award" means any award of an Option, a Restricted Share or a
Performance Share Award under the Plan.
16.2 "Award Year" means a fiscal year beginning January 1 and ending
December 31 with respect to which an Award may be granted.
16.3 "Board" means the Company's Board of Directors, as constituted
from time to time.
16.4 "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan as set out in Section 15.1:
(a) A change in control required to be reported pursuant to Item
6(e) of Schedule 14A of Regulation 14A under the Exchange Act;
(b) A change in the composition of the Board, as a result of which
fewer than two-thirds of the incumbent directors are directors
who either (i) had been directors of the Company 24 months
prior to such change or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at least
a majority of the directors who had been directors of the
Company 24 months prior to such change and who were still in
office at the time of the election or nomination;
(c) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20
percent or more of the combined voting power of the Company's
then outstanding securities ordinarily (and apart from rights
accruing under special circumstances) having the right to vote
at elections of directors (the "Base Capital Stock");
provided, however, that any change in the relative beneficial
ownership of securities of any person resulting solely from a
reduction in the aggregate number of outstanding shares of
Base Capital Stock, and any decrease thereafter in such
person's ownership of securities, shall be disregarded until
such person increases in any manner, directly or indirectly,
such person's beneficial ownership of any securities of the
Company.
16.5 "Code" means the Internal Revenue Code of 1986, as amended.
11
<PAGE> 12
16.6 "Committee" means the Compensation Committee of the Board,
as constituted from time to time.
16.7 "Common Share" means one share of the common stock of the
Company.
16.8 "Company" means The Charles Schwab Corporation, a Delaware
corporation.
16.9 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
16.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
16.11 "Exercise Price" means the amount for which one Common Share
may be purchased upon exercise of an Option, as specified by the Committee in
the applicable Stock Option Agreement.
16.12 "Fair Market Value" means the market price of a Common Share,
determined by the committee as follows:
(a) If the Common Share was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite-
transactions report for such date;
(b) If the Common Share was traded over-the-counter on the date in
question and was classified as a national market issue, then
the Fair Market Value shall be equal to the last transaction
price quoted by the NASDAQ system for such date;
(c) If the Common Share was traded over-the-counter on the date in
question but was not classified as a national market issue,
then the Fair Market Value shall be equal to the mean between
the last reported representative bid and asked prices quoted
by the NASDAQ system for such date; and
(d) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
16.13 "ISO" means an incentive stock option described in section
422(b) of the Code.
16.14 "Key Employee" means a key common-law employee of the Company
or any Subsidiary, as determined by the Committee.
16.15 "Named Executive Officer" means a Participant who, as of the
date of vesting of an Award is one of a group of "covered employees," as
defined in the Regulations promulgated under Code Section 162(m), or any
successor statute.
16.16 "Non-Employee Director" means a member of the Board who is not
a common-law employee.
12
<PAGE> 13
16.17 "NSO" means an employee stock option not described in sections
422 through 424 of the Code.
16.18 "Option" means an ISO or NSO, including a Replacement Option,
granted under the Plan and entitling the holder to purchase one Common Share.
16.19 "Optionee" means an individual, or his or her estate, legatee
or heirs at law that holds an Option.
16.20 "Participant" means a Non-Employee Director or Key Employee who
has received an Award.
16.21 "Performance Share Award" means the conditional right to
receive in the future one Common Share, awarded to a Participant under the
Plan.
16.22 "Plan" means this 1992 Stock Incentive Plan of The Charles
Schwab Corporation, as it may be amended from time to time.
16.23 "Replacement Option" means an Option that is granted when a
Participant uses a Common Share held or to be acquired by the Participant to
exercise an Option and/or to satisfy tax withholding requirements incident to
the exercise of an Option.
16.24 "Restricted Share" means a Common Share awarded to a
Participant under the Plan.
16.25 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Performance Share Award which
contains the terms, conditions and restrictions pertaining to such Restricted
Share or Performance Share Award.
16.26 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her option.
16.27 "Subsidiary" means any corporation, if the Company and/or one
or more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.
13
<PAGE> 1
Exhibit 10.132
CHARLES SCHWAB & CO., INC.
LONG-TERM INCENTIVE PLAN III, AS AMENDED
1. Purpose
The purpose of the Charles Schwab & Co. Inc. Long-Term Incentive Plan III, as
amended (the "LTIP") is to provide contingent financial incentives to selected
management employees to contribute to the long-term success of Charles Schwab &
Co., Inc. and its affiliated companies ("the Company").
2. Objectives
The specific objectives of the LTIP are to:
o Encourage participants to work to maximize the financial
success of the Company and its stockholders over the long-term.
o Recognize high potential managers based on their current
individual contribution.
o Provide an opportunity for managers to share in the Company's
growth and increased value.
o Encourage continued employment with the Company.
3. Administration
a. The LTIP will be administered by the Compensation Committee of
the Board of Directors (the "Committee") of The Charles Schwab
Corporation.
b. Subject to the provisions of the LTIP, the Committee will have
authority to interpret the LTIP, to prescribe, amend and
rescind rules and regulations relating to the LTIP, and to
make all other determinations deemed necessary or advisable in
administering the LTIP.
c. The Committee will determine grants to all executive officers.
d. The Committee may designate the Chairman and President of The
Charles Schwab Corporation to select participants at or below
the Senior Vice President level.
e. Any determinations made by a majority of the Committee on all
matters referred to in the LTIP, except those subject to the
approval of the entire Board of Directors, will be conclusive
and binding.
<PAGE> 2
4. Eligibility
a. Participation in this LTIP is limited to selected management
employees whose responsibilities have a significant effect on
the long-term performance of the Company, as determined by the
Committee in its sole discretion.
b. Participants shall normally be selected at the beginning of
the LTIP term.
1.) Participants may be added to the LTIP, provided they
will complete at least two (2) consecutive calendar
quarters during the LTIP term; and/or additional
units may be awarded to LTIP participants on January
1 or July 1 of each LTIP year by the Committee in its
sole discretion.
2.) Units granted after January 1, 1991, shall have a
"cost basis" equal to the value of a unit on the
valuation date immediately preceding the grant.
5. Plan Term
a. The plan term shall consist of four consecutive calendar years.
b. The effective date of this LTIP is January 1, 1991.
c. The LTIP shall continue in effect for four years unless it is
terminated earlier by the Committee.
6. Award Units
a. A maximum of 1.5 million units may be granted during the plan
term. No participant may be granted more than 100,000 units.
Any forfeited units will be returned to the LTIP.
b. An award unit shall entitle the holder thereof to receive a
payment equal to the cash value of the unit determined in
accordance with the schedule incorporated into this document
as Exhibit I, less the cost basis at the time of the grant.
Unit values falling between those shown on Exhibit I shall be
calculated according to the following formula: Unit Value =
Cumulative Pretax Pre-LTIP Income times the Funding Rate
divided by 1.5 million units.
c. The Compensation Department will calculate and publish a unit
price every six months during the plan term. The first
valuation date shall be July 1, 1991.
d. The Committee may, in its sole discretion, adjust the
performance goals at any time during the plan term to reflect
the impact of unusual unforeseen events such as a corporate
restructuring or change in tax law or other regulations
affecting the Company's business.
<PAGE> 3
7. Unit Vesting
a. Units will vest at a rate of twenty (20) percent every twelve
months following the date of the grant.
b. All remaining units will vest on December 31, 1994.
8. Payment of Awards
Payment of awards will be by check, unless deferred as provided in
Paragraph C, below, as soon as practicable after the end of the plan
term, but not prior to certification of the Company's results by its
independent auditors for all years of the plan term.
a. The Company will withhold from payments applicable taxes as
required by law.
b. Payment of actual tax liabilities is the responsibility of the
participant.
c. Notwithstanding the foregoing, awards may be deferred pursuant
to an eligible participant's election to defer receipt of
payment under The Charles Schwab Corporation Deferred
Compensation Plan.
9. Termination of Employment
If a participant's employment is terminated for any reason during the
plan term after the participant has vested in any units, the
participant shall be entitled to a cash payment equal to the most
recent published value of units less the price of the participant's
units (if any) multiplied times the number of vested units. All units
are 100% vested as of December 31, 1994.
a. Such award will be paid in one lump sum as soon as possible
following termination.
b. Awards made of behalf of a deceased participant shall be paid
to the participant's heirs or estate in the same manner as
unpaid salary.
10. Employment Rights
Designation of an employee as a participant for any performance cycle
or the receipt of an award shall not give any employee any right to
continued employment by the Company, and the right to dismiss any
employee is specifically reserved by the Company.
11. Amendment and Termination
The Committee may terminate, modify or amend this LTIP at any time,
provided that such action shall not affect the rights of any LTIP
participants to awards that were granted prior to the date of such
termination, modification or amendment.
<PAGE> 4
12. Governing Law
The LTIP shall be construed and its provisions enforced and
administered in accordance with the laws of the State of California.
<PAGE> 5
EXHIBIT I
CHARLES SCHWAB & CO., INC.
LONG-TERM INCENTIVE PLAN III, AS AMENDED
UNIT VALUATION SCHEDULE (1)
<TABLE>
<CAPTION>
CUMULATIVE
PRETAX
PRE-LTIP
INCOME (IN MILLIONS) RETURN ON EQUITY (2) FUNDING RATE
- -------------------- -------------------- ------------
<S> <C> <C>
MORE THAN $349.7 18.3% 8.0%
317.9 17.4% 7.0%
244.8 14.6% 6.0%
</TABLE>
(1) Unit Value = Cumulative Pretax Pre-LTIP Income times the Funding Rate
divided by the 1.5 million units in the LTIP.
(2) ROE assumes beginning equity basis of $160 million.
<PAGE> 1
Exhibit 10.133
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
<PAGE> 2
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
Article I. Purpose
------------------
1.1 Establishment of the Plan 1
1.2 Purpose of the Plan 1
Article II. Definitions
-----------------------
2.1 Definitions 2
2.2 Gender and Number 3
Article III. Administration
---------------------------
3.1 Committee and Administrator 4
Article IV. Participants
------------------------
4.1 Participants 5
Article V. Deferrals
--------------------
5.1 Salary Deferrals 6
5.2 Deferrals of Bonuses and Other Cash Incentive Compensation 6
5.3 Deferral Procedures 7
5.4 Election of Time and Manner of Payment 7
5.5 Accounts and Earnings 9
5.6 Maintenance of Accounts 10
5.7 Change in Control 11
5.8 Payment of Deferred Amounts 14
5.9 Acceleration of Payment 14
Article VI. General Provisions
------------------------------
6.1 Unfunded Obligation 16
6.2 Informal Funding Vehicles 16
6.3 Beneficiary 17
6.4 Incapacity of Participant or Beneficiary 17
6.5 Nonassignment 18
6.6 No Right to Continued Employment 18
6.7 Tax Withholding 18
6.8 Claims Procedure and Arbitration 19
6.9 Termination and Amendment 20
6.10 Applicable Law 21
</TABLE>
<PAGE> 3
THE CHARLES SCHWAB CORPORATION
DEFERRED COMPENSATION PLAN
Article I. Purpose
1.1 Establishment of the Plan. Effective as of July 1, 1994, The
Charles Schwab Corporation (hereinafter, the "Company") hereby establishes The
Charles Schwab Corporation Deferred Compensation Plan (the "Plan"), as set
forth in this document.
1.2 Purpose of the Plan. The Plan permits participating employees
to defer the payment of certain cash compensation that they may earn. The
opportunity to elect such deferrals is provided in order to help the Company
attract and retain key employees. This Plan is unfunded and is maintained
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees. It is accordingly intended to
be exempt from the participation, vesting, funding, and fiduciary requirements
set forth in Title I of the Employee Retirement Income Security Act of 1974.
<PAGE> 4
Article II. Definitions
2.1 Definitions. The following definitions are in addition to any
other definitions set forth elsewhere in the Plan. Whenever used in the Plan,
the capitalized terms in this section shall have the meanings set forth below
unless otherwise required by the context in which they are used:
(a) "Administrator" the administrator described in section 3.1
that is selected by the Committee to assist in the
administration of the Plan.
(b) "Beneficiary" means a person entitled to receive any benefit
payments that remain to be paid after a Participant's death,
as determined under section 6.3.
(c) "Board" means the Board of Directors of the Company.
(d) "Company" means The Charles Schwab Corporation, a Delaware
corporation.
(e) "Category 1 Participant" and "Category 2 Participant" each
refer to a specific Participant group and have the meaning set
forth in section 4.1.
(f) "Committee" means the Compensation Committee of the Board.
(g) "Deferral Account" means the account representing deferrals of
cash compensation, plus investment adjustments, as described
in sections 5.5 and 5.6.
(h) "Participant" means any employee who meets the eligibility
requirements of the Plan, as set forth in Article 4, and
includes, where appropriate to the context, any former
employee who is entitled to benefits under this Plan.
(i) "Plan" means The Charles Schwab Corporation Deferred
Compensation Plan, as in effect from time to time.
(j) "Plan Year" means the calendar year.
(k) "Retirement" shall mean any termination of employment with the
Company and its Subsidiaries for a reason other than death
after the Participant has attained age 55.
(l) "Subsidiary" means a corporation or other business entity in
which the Company owns, directly or indirectly, securities
with more than 80 percent of the total voting power.
(m) "Valuation Date" means each December 31 and any other date
designated from time to time by the Committee for the purpose
of determining the value of a Participant's Deferral Account
balance pursuant to section 5.5.
2.2 Gender and Number. Except when otherwise indicated by the
context, any masculine or feminine terminology shall also include the neuter
and other gender, and the use of any term in the singular or plural shall also
include the opposite number.
<PAGE> 5
Article III. Administration
3.1 Committee and Administrator. The Committee shall administer
the Plan and may select one or more persons to serve as the Administrator. The
Administrator shall perform such administrative functions as the Committee may
delegate to it from time to time. Any person selected to serve as the
Administrator may, but need not, be a Committee member or an officer or
employee of the Company. However, if a person serving as Administrator or a
member of the Committee is a Participant, such person may not vote on a matter
affecting his interest as a Participant.
The Committee shall have discretionary authority to construe and interpret the
Plan provisions and resolve any ambiguities thereunder; to prescribe, amend,
and rescind administrative rules relating to the Plan; to select the employees
who may participate and to terminate the future participation of any such
employees; to determine eligibility for benefits under the Plan; and to take
all other actions that are necessary or appropriate for the administration of
the Plan. Such interpretations, rules, and actions of the Committee shall be
final and binding upon all concerned and, in the event of judicial review,
shall be entitled to the maximum deference allowable by law. Where the
Committee has delegated its responsibility for matters of interpretation and
Plan administration to the Administrator, the actions of the Administrator
shall constitute actions of the Committee.
<PAGE> 6
Article IV. Participants
4.1 Participants. Officers and other key employees of the Company
and each of its Subsidiaries shall be eligible to participate in this Plan upon
selection by the Committee. To be nominated for participation, an employee
must be highly compensated or have significant responsibility for the
management, direction and/or success of the Company as a whole or a particular
business unit thereof. Directors of the Company who are full-time employees of
the Company shall be eligible to participate in the Plan. Participating
employees of the Company in the position of executive vice president or above
shall be "Category 1 Participants." All other participating employees shall be
"Category 2 Participants."
<PAGE> 7
Article V. Deferrals
5.1 Salary Deferrals. Each Category 2 Participant selected under
section 4.1 may elect to defer up to 50 percent of his regular base salary
(subject to the provisions of this Article V). Any such election must be made
by entering a deferred compensation agreement with the employer, as evidenced
by a form approved by and filed with the Administrator on or before the
deadline specified by the Committee (which shall be no earlier than one month
prior to the beginning of the election period for which the deferred salary is
to be earned). For this purpose, the election period shall be the calendar
year; provided, however, that during periods in which the Plan is not in effect
for a full calendar year or an employee is not a Participant for a full
calendar year, the election period shall be the portion of the calendar year
during which the Plan is in effect and the employee is an eligible Participant.
Notwithstanding the foregoing, a person who is not a Participant at the
beginning of a calendar year shall not be allowed to elect a deferral of
compensation that takes effect during that year without the consent of the
Committee. Salary deferrals that have been elected shall occur throughout the
election period in equal increments for each payroll period.
5.2 Deferrals of Bonuses and Other Cash Incentive Compensation.
Each Category 1 Participant and each Category 2 Participant may elect to defer
all or any portion (subject to the provisions of this Article V) of any amount
that he subsequently earns under an annual cash bonus program and/or a
long-term cash incentive compensation program of the Company or a participating
Subsidiary. Any such election must be made by entering a deferred compensation
agreement with the employer, as evidenced by a form approved by the Committee
that is filed with the Administrator on or before the deadline specified by the
Committee. For annual cash bonuses, this deadline shall be no earlier than one
month prior to the beginning of year (or portion thereof) for which the bonus
will be earned. For other cash incentive compensation, this deadline shall be
a date no later than six months before the end of the year or other period for
which the incentive compensation will be earned. Rules similar to those in
section 5.1 shall apply in cases where the Plan is not in existence or an
employee is not a Participant for the full period in which an annual cash bonus
or long-term incentive compensation award is earned.
5.3 Deferral Procedures. Participants eligible to elect salary
deferrals under section 5.1 shall have an opportunity to do so each year.
Participants eligible to elect deferrals under section 5.2 shall have a
separate opportunity to do so for each cash bonus under an annual bonus program
and for each other cash bonus or incentive payment under a long-term incentive
plan that they may earn. Unless the Committee specifies other rules for the
deferrals that may be elected, the minimum deferral shall be 20 percent of the
compensation to which a deferral election applies; and, subject to the maximum
percentage allowed under section 5.1 or 5.2, as applicable, deferrals in excess
of the minimum allowable percentage may be made only in increments of 10
percent.
If a deferral is elected, the election shall be irrevocable with respect to the
particular compensation that is subject to the election. Deferral elections
shall be made on a form prescribed by the Committee or the Administrator. As
provided in section 6.7, any deferral is subject to appropriate tax withholding
measures and may be reduced to satisfy tax withholding requirements.
<PAGE> 8
5.4 Election of Time and Manner of Payment. At the time a
Participant makes a deferral election under section 5.1 or 5.2, the Participant
shall also designate the manner of payment and the date on which payments from
his Deferral Account shall begin. The manner of payment may be either: (i) a
lump sum, or (ii) substantially equal, annual installments, payable each year
on or before the end of February, over a period of five, ten, or fifteen years,
as designated by the Participant; provided that an election of installments
shall apply only if the payments will commence following the Participant's
Retirement. If a Participant elects installments and then terminates
employment for a reason other than Retirement, the payment of the Participant's
Deferral Account shall be made in a lump sum by the end of February in the year
next following the year in which the Participant terminates employment,
notwithstanding the election of installments.
A Participant may elect to have installment payments begin by the end of
February in the year immediately after the end of the year of his Retirement
and may elect to receive a lump sum by the end of February in the year next
following the year in which he terminates employment. Alternatively, in the
case of a lump sum, a Participant may elect to receive the payment by the end
of February of any year that he specifies, and such lump sum shall be paid by
the specified date even if the Participant has not yet terminated employment.
However, any such election of a specified payment date shall be subject to any
restrictions that the Committee, in its sole discretion, may choose to
establish in order to limit the number of different payment dates that a
Participant may have in effect at one time. Moreover, if the Participant
terminates employment prior to a specified date that he has been permitted to
elect, the payment shall be made by the end of February in the year next
following the year of his termination of employment, notwithstanding any later
date that might apply under his election.
If payment is due in the form of a lump sum, the payment shall equal the
balance of the Deferral Account being paid, determined as of the Valuation Date
coincident with or immediately preceding the payment date. If payment is due
in the form of installments, the balance of the Deferral Account to be paid in
that form, determined as of the Valuation Date coincident with or immediately
preceding the date such payments begin, shall be converted by the Committee so
as to provide the equivalent present value of such balance in the form of fixed
annual installments for the payment period elected by the Participant, based on
current commercial annuity rates applicable to similar payments. Thereafter,
the fixed installment amounts shall not be adjusted unless an acceleration of
all remaining payments is required under other provisions of this Plan, in
which case the accelerated payment of the remaining payments shall be
calculated based on the same conversion factors that were used in originally
determining the installment amounts.
Notwithstanding the foregoing, however, if earnings or any other amounts
credited to a Participant's Deferral Account are not considered
performance-based compensation and do not otherwise meet Internal Revenue Code
conditions allowing the Company and its Subsidiaries to receive a federal
income tax deduction for such amounts upon paying them at the time provided
under the Participant's election, the Committee, in its sole discretion, may
determine that the payment of such amounts, to the extent in excess of the
amount that would be currently tax deductible, shall be deferred until the
earliest year that the payment can be deducted.
<PAGE> 9
5.5 Accounts and Earnings. The Company shall establish a Deferral
Account for each Participant who has elected a deferral under section 5.1 or
5.2 above, and its accounting records for the Plan with respect to each such
Participant shall include a separate Deferral Account or subaccount for each
deferral election of the Participant that could cause a payment made at a
different time or in a different form from other payments of deferrals elected
by the same Participant. Each Deferral Account balance shall reflect the
Company's obligation to pay a deferred amount to a Participant or Beneficiary
as provided in this Article V. Under procedures approved by the Committee and
communicated to Participants, a Participant's Deferral Account balance shall be
increased periodically (not less frequently than annually) to reflect an
assumed earnings increment, based on an interest rate or other benchmark
selected by the Committee and in effect at the time. Until the time for
determining the amount to be paid to the Participant or Beneficiary, such
assumed earnings shall accrue from each Valuation Date on the Deferral Account
balance as of that date and shall be credited to the account as of the next
Valuation Date.
The rate of earnings may, but need not, be determined with reference to the
actual rate of earnings on assets held under any existing grantor trust or
other informal funding vehicle that is in effect pursuant to section 6.2. Any
method of crediting earnings that is followed from time to time may, with
reasonable advance notice to affected Participants, be revoked or revised
prospectively as of the beginning of any new Plan Year. Earnings that have
been credited for any Plan Year, like deferred amounts that have been
previously credited to a Participant, shall not be reduced or eliminated
retroactively unless they were credited in error. The crediting of assumed
earnings shall not mean that any deferred compensation promise to a Participant
is secured by particular investment assets or that the Participant is actually
earning interest or any other form of investment income under the Plan.
Consistent with the foregoing authority to exercise flexibility in establishing
a method for crediting assumed earnings on account balances, the Committee may,
but need not, consult with Participants about their investment preferences and
may, but need not, institute a program of assumed earnings that tracks the
investment performance in a Participant's qualified defined contribution plan
account or in an assumed participant-directed investment arrangement.
5.6 Maintenance of Accounts. The Accounts of each Participant
shall be entered on the books of the Company and shall represent a liability,
payable when due under this Plan, out of the general assets of the Company.
Prior to benefits becoming due hereunder, the Company shall expense the
liability for such accounts in accordance with policies determined appropriate
by the Company's auditors. Except to the extent provided pursuant to the
second paragraph of this section 5.6, the Accounts created for a Participant by
the Company shall not be funded by a trust or an insurance contract; nor shall
any assets of the Company be segregated or identified to such account; nor
shall any property or assets of the Company be pledged, encumbered, or
otherwise subjected to a lien or security interest for payment of benefits
hereunder.
Notwithstanding that the amounts to be paid hereunder to Participants
constitute an unfunded obligation of the Company, the Company may direct that
an amount equal to any portion of the Accounts shall be invested by the Company
as the Company, in its sole discretion, shall determine. The Committee may in
its sole discretion determine that all or any portion of an amount equal to the
Accounts shall be paid into one or more grantor trusts that may be established
by the Company for the purpose of providing a potential source of funds to pay
Plan benefits. The Company may designate an investment advisor to direct the
investment of funds that may be used to pay benefits, including the investment
of the assets of any grantor trusts hereunder.
<PAGE> 10
5.7 Change in Control. In the event of a Change in Control (as
defined below), the following rules shall apply:
(a) All Participants shall continue to have a fully vested,
nonforfeitable interest in their Deferral Accounts.
(b) Deferrals of amounts for the year that includes the Change in
Control shall cease beginning with the first payroll period
that follows the Change in Control.
(c) A special allocation of earnings on all Deferral Accounts
shall be made under section 5.5 as of the date of the Change
in Control on a basis no less favorable to Participants than
the method being followed prior to the Change in Control.
(d) All payments of deferred amounts following a Change in
Control, whether or not they have previously begun, shall be
made in a cash lump sum no later than 30 days following the
Change in Control and, except as provided in section 5.4 with
respect to installment payments in progress, shall be in an
amount equal to the full Deferral Account balance, as adjusted
pursuant to paragraph (c) above, as of the date of the Change
in Control.
(e) Nothing in this Plan shall prevent a Participant from
enforcing any rules in a contract or another plan of the
Company or any Subsidiary concerning the method of determining
the amount of a bonus, incentive compensation, or other form
of compensation to which a Participant may become entitled
following a change in control, or the time at which that
compensation is to be paid in the event of a change in
control.
For purposes of this Plan, a "Change in Control" means of any of the following:
(1) Any "person" who, alone or together with all
"affiliates" and "associates" of such person, is or
becomes (1) an "acquiring person" or (2) the
"beneficial owner" of 35% of the outstanding voting
securities of the Company (the terms "person",
"affiliates", "associates" and "beneficial owner" are
used as such terms are used in the Securities
Exchange Act of 1934 and the General Rules and
Regulations thereunder); provided, however, that a
"Change in Control" shall not be deemed to have
occurred if such "person" is Charles R. Schwab, the
Company, any subsidiary or any employee benefit plan
or employee stock plan of the Company or of any
Subsidiary, or any trust or other entity organized,
established or holding shares of such voting
securities by, for or pursuant to, the terms of any
such plan; or
(2) Individuals who at the beginning of any period of two
consecutive calendar years constitute the Board cease
for any reason, during such period, to constitute at
least a majority thereof, unless the election, or the
nomination for election by the Company's
Shareholders, of each new Board Member was approved
by a vote of at least three-quarters (3/4) of the
Board members then still in office who were Board
members at the beginning of such period; or
<PAGE> 11
(3) Approval by the shareholders of the Company of: (A)
the dissolution or liquidation of the Company; (B)
the sale or transfer of substantially all of the
Company's business and/or assets to a person or
entity which is not a "subsidiary" (any corporation
or other entity a majority or more of whose
outstanding voting stock or voting power is
beneficially owned directly or indirectly by the
Company); or (C) an agreement to merge or
consolidate, or otherwise reorganize, with one or
more entities which are not subsidiaries (as defined
in (B) above), as a result of which less than 50% of
the outstanding voting securities of the surviving or
resulting entity are, or are to be, owned by former
shareholders of the Company; or
(4) The Board agrees by a majority vote that an event has
or is about to occur that, in fairness to the
Participants, is tantamount to a Change in Control.
A Change of Control shall occur on the first day on which any
of the preceding conditions has been satisfied. However,
notwithstanding the foregoing, this section 5.7 shall not
apply to any Participant who alone or together with one or
more other persons acting as a partnership, limited
partnership, syndicate, or other group for the purpose of
acquiring, holding or disposing of securities of the Company,
triggers a "Change in Control" within the meaning of
paragraphs (1) and (2) above.
5.8 Payment of Deferred Amounts. A Participant shall have a fully
vested, nonforfeitable interest in his or her Deferral Account balance at all
times. However, vesting does not confer a right to payment other than in the
manner elected by the Participant pursuant to section 5.4 (subject to any
modification that may occur pursuant to section 5.5, 5.7 or 5.9). Upon the
expiration of a deferral period selected by the Participant in one or more
deferral elections, the Company shall pay to such Participant (or to the
Participant's Beneficiary, in the case of the Participant's death) an amount
equal to the balance of the Participant's Account attributable to such expiring
deferral elections, plus assumed earnings (determined by the Company pursuant
to section 5.5) thereon.
5.9 Acceleration of Payment. The Committee, in its discretion,
upon receipt of a written request from a Participant, may accelerate the
payment of all or any portion of the unpaid balance of a Participant's Deferral
Account in the event of the Participant's Retirement, death, permanent
disability, resignation or termination of employment, or upon its determination
that the Participant (or his Beneficiary in the case of his death) has incurred
a severe, unforeseeable financial hardship creating an immediate and heavy need
for cash that cannot reasonably be satisfied from sources other than an
accelerated payment from this Plan. The Committee in making its determination
may consider such factors and require such information as it deems appropriate.
<PAGE> 12
Article VI. General Provisions
6.1 Unfunded Obligation. The deferred amounts to be paid to
Participants pursuant to this Plan constitute unfunded obligations of the
Company. Except to the extent specifically provided hereunder, the Company is
not required to segregate any monies from its general funds, to create any
trusts, or to make any special deposits with respect to this obligation. Title
to and beneficial ownership of any investments, including any grantor trust
investments which the Company has determined and directed the Administrator to
make to fulfill obligations under this Plan shall at all times remain in the
Company. Any investments and the creation or maintenance of any trust or
Accounts shall not create or constitute a trust or a fiduciary relationship
between the Administrator or the Company and a Participant, or otherwise create
any vested or beneficial interest in any Participant or his or her Beneficiary
or his or her creditors in any assets of the Company whatsoever. The
Participants shall have no claim for any changes in the value of any assets
which may be invested or reinvested by the Company in an effort to match its
liabilities under this Plan.
6.2 Informal Funding Vehicles. Notwithstanding section 6.1, the
Company may, but need not, arrange for the establishment and use of a grantor
trust or other informal funding vehicle to facilitate the payment of benefits
and to discharge the liability of the Company and participating Affiliates
under this Plan to the extent of payments actually made from such trust or
other informal funding vehicle.
Any investments and any creation or maintenance of memorandum accounts or a
trust or other informal funding vehicle shall not create or constitute a trust
or a fiduciary relationship between the Committee or the Company or an
affiliate and a Participant, or otherwise confer on any Participant or
Beneficiary or his or her creditors a vested or beneficial interest in any
assets of the Company or any Affiliate whatsoever. Participants and
Beneficiaries shall have no claim against the Company or any Affiliate for any
changes in the value of any assets which may be invested or reinvested by the
Company or any Affiliate with respect to this Plan.
6.3 Beneficiary. The term "Beneficiary" shall mean the person or
persons to whom payments are to be paid pursuant to the terms of the Plan in
the event of the Participant's death. A Participant may designate a
Beneficiary on a form provided by the Administrator, executed by the
Participant, and delivered to the Administrator. The Administrator may require
the consent of the Participant's spouse to a designation if the designation
specifies a Beneficiary other than the spouse. Subject to the foregoing, a
Participant may change a Beneficiary designation at any time. Subject to the
property rights of any prior spouse, if no Beneficiary is designated, if the
designation is ineffective, or if the Beneficiary dies before the balance of
the Account is paid, the balance shall be paid to the Participant's surviving
spouse, or if there is no surviving spouse, to the Participant's estate.
<PAGE> 13
6.4 Incapacity of Participant or Beneficiary. Every person
receiving or claiming benefits under the Plan shall be conclusively presumed to
be mentally competent and of age until the date on which the Administrator
receives a written notice, in a form and manner acceptable to the
Administrator, that such person is incompetent or a minor, for whom a guardian
or other person legally vested with the care of his person or estate has been
appointed; provided, however, that if the Administrator finds that any person
to whom a benefit is payable under the Plan is unable to care for his or her
affairs because of incompetency, or because he or she is a minor, any payment
due (unless a prior claim therefor shall have been made by a duly appointed
legal representative) may be paid to the spouse, a child, a parent, a brother
or sister, or to any person or institution considered by the Administrator to
have incurred expense for such person otherwise entitled to payment. To the
extent permitted by law, any such payment so made shall be a complete discharge
of liability therefor under the Plan.
If a guardian of the estate of any person receiving or claiming benefits under
the Plan is appointed by a court of competent jurisdiction, benefit payments
may be made to such guardian provided that proper proof of appointment and
continuing qualification is furnished in a form and manner acceptable to the
Administrator. In the event a person claiming or receiving benefits under the
Plan is a minor, payment may be made to the custodian of an account for such
person under the Uniform Gifts to Minors Act. To the extent permitted by law,
any such payment so made shall be a complete discharge of any liability
therefor under the Plan.
6.5 Nonassignment. The right of a Participant or Beneficiary to
the payment of any amounts under the Plan may not be assigned, transferred,
pledged or encumbered nor shall such right or other interests be subject to
attachment, garnishment, execution, or other legal process.
6.6 No Right to Continued Employment. Nothing in the Plan shall
be construed to confer upon any Participant any right to continued employment
with the Company, nor shall the Plan interfere in any way with the right of the
Company to terminate the employment of such Participant at any time without
assigning any reason therefor.
6.7 Tax Withholding. Appropriate taxes shall be withheld from
cash payments made to Participants pursuant to the Plan. To the extent tax
withholding is payable in connection with the Participant's deferral of income
rather than in connection with the payment of deferred amounts, such
withholding may be made from other wages and salary currently payable to the
Participant, or, as determined by the Administrator, the amount of the deferral
elected by the Participant may be reduced in order to satisfy required tax
withholding for employment taxes and any other taxes.
6.8 Claims Procedure and Arbitration. The Company shall establish
a reasonable claims procedure consistent with the requirements of the Employee
Retirement Income Security Act of 1974, as amended. Following a Change in
Control of the Company (as determined under section 5.8) the claims procedure
shall include the following arbitration procedure.
<PAGE> 14
Since time will be of the essence in determining whether any payments are due
to the Participant under this Plan following a Change in Control, a Participant
may submit any claim for payment to arbitration as follows: On or after the
second day following the termination of the Participant's employment or other
event triggering a right to payment), the claim may be filed with an arbitrator
of the Participant's choice by submitting the claim in writing and providing a
copy to the Company. The arbitrator must be:
(a) a member of the National Academy of Arbitrators or one who
currently appears on arbitration panels issued by the Federal
Mediation and Conciliation Service or the American Arbitration
Association; or
(b) a retired judge of the State in which the claimant is a
resident who served at the appellate level or higher. The
arbitration hearing shall be held within 72 hours (or as soon
thereafter as possible) after filing of the claim unless the
Participant and the Company agree to a later date. No
continuance of said hearing shall be allowed without the
mutual consent of the Participant and the Company. Absence
from or nonparticipation at the hearing by either party shall
not prevent the issuance of an award. Hearing procedures
which will expedite the hearing may be ordered at the
arbitrator's discretion, and the arbitrator may close the
hearing in his or her sole discretion upon deciding he or she
has heard sufficient evidence to satisfy issuance of an award.
In reaching a decision, the arbitrator shall have no authority
to ignore, change, modify, add to or delete from any provision
of this Plan, but instead is limited to interpreting this
Plan. The arbitrator's award shall be rendered as
expeditiously as possible, and unless the arbitrator rules
within seven days after the close of the hearing, he will be
deemed to have ruled in favor of the Participant. If the
arbitrator finds that any payment is due to the Participant
from the Company, the arbitrator shall order the Company to
pay that amount to the Participant within 48 hours after the
decision is rendered. The award of the arbitrator shall be
final and binding upon the Participant and the Company.
Judgment upon the award rendered by the arbitrator may be
entered in any court in any State of the United States. In
the case of any arbitration regarding this Agreement, the
Participant shall be awarded the Participant's costs,
including attorney's fees. Such fee award may not be offset
against the deferred compensation due hereunder. The Company
shall pay the arbitrator's fee and all necessary expenses of
the hearing, including stenographic reporter if employed.
6.9 Termination and Amendment. The Committee may from time to
time amend, suspend or terminate the Plan, in whole or in part, and if the Plan
is suspended or terminated, the Committee may reinstate any or all of its
provisions. Except as otherwise required by law, the Committee may delegate to
the Administrator all or any of its foregoing powers to amend, suspend, or
terminate the Plan. Any such amendment, suspension, or termination may affect
future deferrals without the consent of any Participant or Beneficiary.
However, with respect to deferrals that have already occurred, no amendment,
suspension or termination may impair the right of a Participant or a designated
Beneficiary to receive payment of the related deferred compensation in
accordance with the terms of the Plan prior to the effective date of such
amendment, suspension or termination, unless the affected Participant or
Beneficiary gives his express written consent to the change.
<PAGE> 15
6.10 Applicable Law. The Plan shall be construed and governed in
accordance with applicable federal law and, to the extent not preempted by such
federal law, the laws of the State of California.
<PAGE> 1
Exhibit 10.134
ANNUAL EXECUTIVE INDIVIDUAL PERFORMANCE PLAN
The Annual Executive Individual Performance Plan provides for discretionary
bonuses to executive officers (other than the Chairman, Vice Chairman and
President) based on their individual contribution to the attainment of the
Company's performance objectives. Such payments will be determined by the
Committee upon the recommendation of the Chairman, Vice Chairman and President.
The amount available for payments under the new plan will be equal to 105% of
the aggregate bonuses payable under the Annual Executive Bonus Plan to all
executive officers other than the Chairman, Vice Chairman and President.
<PAGE> 1
Exhibit 10.135
THIRD AMENDMENT
TO THE RESTATED
CHARLES SCHWAB PROFIT SHARING AND
EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to the authority reserved to the Board of Directors
of Charles Schwab & Co., Inc. under Section 21.01 of The Charles Schwab Profit
Sharing and Employee Stock Ownership Plan (the "Plan"), as amended and restated
effective January 1, 1992, the Plan is hereby further amended effective as of
January 1, 1993, as follows:
1. The first sentence of Section 1.01 is hereby deleted and
replaced with the following:
The Charles Schwab Corporation, a Delaware
corporation (the "Plan Sponsor"), is the plan sponsor of The Charles
Schwab Profit Sharing and Employee Stock Ownership Plan. The Plan is
intended to enable each Participant to benefit, in accordance with the
terms of the Plan, from contributions made by the Employer and from
any increases in the value of the Plan assets through investment of
such assets.
2. Section 19.01 is hereby amended in its entirety to read
as follows:
Sec. 19.01 Authority and Responsibilities of Employer.
The Employer shall serve as a "Named Fiduciary" having the
following (and only the following) authority and responsibility:
(a) to establish and communicate to the
Trustee a funding policy for the Plan;
(b) to appoint the Trustee and the Plan
Administrator and to monitor the performance of each of them;
(c) to communicate such information to
the Plan Administrator and to the Trustee as each needs for
proper performance of its duties; and
(d) to provide channels and mechanisms
through which the Plan Administrator and/or the Trustee can
communicate with Participants and their Beneficiaries.
In addition, the Employer shall perform such duties
as are imposed by law or by regulation and shall serve as Plan
Administrator in the absence of an appointed Plan Administrator.
<PAGE> 2
3. Section 21.02(a) is hereby amended in its entirety to read as
follows:
Right Reserved. The Plan Sponsor reserves the right,
at any time, to terminate the Plan, in whole or in part, pursuant to a
resolution of its board of directors. Whole or partial termination of
the Plan shall result in full and immediate vesting in each affected
Participant of the entire amount standing to his credit in his
Account, and there shall not thereafter be any forfeitures with
respect to any such affected Participant for any reason. Plan
termination shall be effective as of the date specified by resolution
of the board of directors of the Plan Sponsor, subject, however, to
the provisions of Section 21.04 hereof.
4. Section 21.03 is hereby amended in its entirety to read as
follows:
Complete Discontinuance of Employer Contribution.
The Plan Sponsor reserves the right, at any time, to completely
discontinue Employer contributions. Such complete discontinuance
shall be established by resolution of the board of directors of the
Plan Sponsor and shall have the effect of a termination of the Plan,
as set forth in Section 21.02, except that the Trustee shall not have
the authority to dissolve the Fund except upon adoption of a further
resolution by the board of directors of the Plan Sponsor to the effect
that the Plan is terminated and upon receipt from the Employer of
instructions to dissolve the Fund pursuant to Section 21.02(c) hereof.
Executed this 29th day of December, 1993.
CHARLES SCHWAB & CO., INC.
By: /s/ Evelyn S. Dilsaver
-------------------------------
Evelyn S. Dilsaver
Senior Vice President and
Controller
2
<PAGE> 1
Exhibit 10.136
FOURTH AMENDMENT
TO THE RESTATED
CHARLES SCHWAB PROFIT SHARING AND
EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to the authority reserved to the Board of Directors
of Charles Schwab and Co., Inc. ("Employer") under Section 21.01 of the Charles
Schwab Profit Sharing and Employee Stock Ownership Plan ("Plan"), as amended
and restated effective January 1, 1992, the Plan is hereby further amended
effective immediately unless otherwise stated:
1. Effective from its inception, the first sentence of
Section 1.02 is hereby amended to read as follows:
Sec. 1.02 Qualification Under the Internal Revenue
Code. It is intended that this Plan be in part a qualified profit
sharing plan within the meaning of section 401(a)(27) of the Code (as
hereinafter defined), that the employee stock ownership plan be a
stock bonus plan and an "employee stock ownership plan" within the
meaning of both section 407(d)(6) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and section 4975(e)(7) of
the Code.
2. Effective October 1, 1992, Section 2.14 is hereby
amended to read in full as follows:
Sec. 2.14 "Compensation" shall mean a Participant's
total compensation as reported on his Form W-2 excluding (i) living
allowances, (ii) travel or commuting allowances, (iii) reimbursements
for financial planning, (iv) amounts that are paid as a result of
participation in the Employer's Long-Term Incentive Plan, (v) employee
referral awards, (vi) special incentive awards (other than regular
bonus programs), (vii) reimbursements for relocation expenses, (viii)
commissions (other than "dual commissions," commissions based on
trading results that are paid to traders who are also salaried and
commissions where the Participant's only form of remuneration is
commissions) and (ix) any compensation in excess of $200,000 or,
effective January 1, 1994, $150,000 (or such higher amount as is
allowed by the Secretary of the Treasury under cost-of-living
adjustments to such dollar limitation pursuant to section 401(a)(17)
of the Code). Compensation shall also include all amounts that a
Participant elected to defer in the Plan Year under a Salary Deferral
Agreement entered into pursuant to this Plan and, effective as of the
first date on which the Employer maintained a cafeteria plan, all
elective contributions made by the Employer on behalf of the
Participant in the Plan Year that are not includable in gross income
under Code Section 125. For a Participant who first becomes eligible
to participate in the Plan on an ESOP/Profit Sharing Entry Date other
than January 1, it shall mean for the Plan Year in which such
ESOP/Profit Sharing Entry Date occurs only that portion of the
Compensation paid to a Participant from his Entry Date to the end of
such Plan Year.
- 1 -
<PAGE> 2
3. Section 2.20 is hereby amended to read in full as
follows:
Sec. 2.20 "Disregarded Prior Service" shall mean
Years of Service completed prior to any Break in Service, where
(a) the Participant had no vested interest in
that portion of his ESOP/Profit Sharing Account under the Plan
attributable to Employer contributions prior to such Break In Service;
and
(b) the number of consecutive one-year Breaks in
Service experienced by the Participant (including in such series of
consecutive one-year Breaks in Service the Break in Service with
regard to which a determination is being made as to whether prior
Years of Service are Disregarded Prior Service hereunder) equals or
exceeds five (5).
4. Section 2.27 is hereby amended to read in full as follows:
Sec. 2.27 "ESOP/Profit Sharing Entry Date" shall
mean January 1 and July 1 of each year; provided, however, that for
the employees of Mayer & Schweitzer, Inc. "ESOP/Profit Sharing Entry
Date" shall also mean October 1, 1992.
5. Effective October 1, 1992, Section 2.60(c) is hereby
amended to read in full as follows:
(c) For the purposes of Subsections (a) and (b)
hereof, Hours of Service credited with respect to service with any
Affiliated Company shall be considered Hours of Service credited with
respect to service with the Employer, provided, however, that except
as may otherwise be specifically provided under the Plan, Hours of
Service with any entity prior to the date on which it became an
Affiliated Company and Hours of Service with any entity subsequent to
the date on which it ceased to be an Affiliated Company shall not be
considered to be Hours of Service with the Employer. Notwithstanding
the foregoing, for purposes of Subsections (a) and (b) hereof, (i)
Hours of Service credited with respect to an individual's service with
BankAmerica Corporation or a related corporation during the time it
was an Affiliated Company shall be considered Hours of Service
credited with respect to service with the Employer only if such
individual was employed by the Employer prior to November 24, 1993 and
(ii) Hours of Service credited with respect to an individual's service
with BankAmerica Corporation or a related corporation prior to the
date on which it became an Affiliated Company shall be considered
Hours of Service credited with respect to service with the Employer
only if such individual was employed by the Employer prior to April 1,
1987.
Furthermore, effective October 1, 1992, Hours of Service
credited with respect to service with Mayer & Schweitzer, Inc. prior
to July 1, 1991 shall be considered Hours of Service credited with
respect to service with the Employer for all purposes under the Plan.
- 2 -
<PAGE> 3
6. Section 3.03 is hereby amended to read in full as follows:
Sec. 3.03 Readmission after Breaks in Service and
Employment Termination.
(a) For the purposes of determining eligibility to be an
Active Participant, service prior to the occurrence of a Break in
Service shall be combined with service subsequent to such Break in
Service except where the service prior to the Break in Service is
Disregarded Prior Service.
(b) Any person who satisfied the service requirements for
Active Participant status, who experienced a termination of employment
prior to the Entry Date on which he would have assumed Active
Participant status and was not in the employ of the Employer on that
Entry Date, and who subsequently again becomes an Employee without
experiencing a Break in Service shall be admitted to Active
Participant status as of the date on which he resumes his status as an
Employee.
(c) Any individual who experiences a Break in Service,
whose prior service is not protected under the provisions of paragraph
(a) of this Section 3.03, and who thereafter regains or resumes a
status as an Employee shall be considered a new employee upon
performance of one (1) Hour of Service subsequent to such Break in
Service, and shall be required to satisfy the minimum service
requirements of Section 3.01 hereof.
7. Section 5.02 is hereby amended to read in full as follows:
Sec. 5.02 Salary Deferral Contributions. The Employer
shall contribute for each payroll period on behalf of each
Participant who has a Salary Deferral Agreement in effect for such
payroll period a salary deferral contribution equal to the amount by
which the Participant's Compensation has been reduced for such payroll
period pursuant to such Agreement. Such contributions shall be paid
to the Trustee as of the earliest date on which such contributions can
reasonably be segregated from the Employer's general assets, but in
any event within ninety (90) days from the date on which such amounts
would otherwise have been payable to the Participant in cash. The
provisions of Department of Labor regulations 2510.3-102 are
incorporated herein by reference.
8. Section 6.01 is hereby amended to read in full as follows:
Sec. 6.01 Employer Salary Deferral and Matching
Contributions. The Employer shall contribute for each payroll period
on behalf of each Participant who has a Salary Deferral Agreement in
effect for such payroll period a Salary Deferral Contribution equal to
the amount by which the Participant's Compensation has been reduced
for such payroll period pursuant to such Agreement. Furthermore,
effective April 1, 1992, for each Participant who remains employed by
the Employer on the last day of the Plan Year and for whom a Salary
Deferral Contribution has been made by the Employer pursuant to this
Section, the Employer shall also contribute a Matching Contribution to
the Participant's Account equal to a percentage of such Salary
Deferral Contribution for each such
- 3 -
<PAGE> 4
Participant as determined under Section 5.03, provided, however, with
respect to any Plan Year the requirement that a Participant remain
employed by the Employer on the last day of such Plan Year shall not
be imposed if the Plan Administrator determines that the imposition of
such condition may cause the Plan to fail to meet the
nondiscrimination requirements imposed pursuant to section 401(a)(4)
of the Code or the eligibility requirements of section 410(b) of the
Code.
9. Section 10.05 is hereby amended to read in full as
follows:
Sec. 10.05 Diversification of Investments. Effective
March 1, 1990, upon both attaining age 50 and completing five Years of
Service, a Participant shall be permitted to direct the Plan to
transfer all or any portion of his vested ESOP Account to his Profit
Sharing Contribution Account. Under rules prescribed by the Plan
Administrator, such directions shall be permitted during March and
September of each year, effective as of the first day of the month
next following the month in which such direction is given (except
that, in the case of an individual who is subject to section 16 of the
Securities Exchange Act of 1934, such direction shall be effective as
of the first day of the seventh month next following the month in
which such direction is given), and shall be made in 10% increments of
the Participant's ESOP Account. In the event the Participant's Profit
Sharing Contribution Account does not provide at least three
investment options to the Participant other than investment in stock
of the Employer, the Plan Administrator shall provide diversification
options to any Participant required to be given such diversification
options under section 401(a)(28)(B) of the Code and in a manner
consistent with such section of the Code. Notwithstanding the
foregoing, the ability to make transfers may be restricted by the Plan
Administrator to the extent necessary to comply with any applicable
Federal securities laws (including Rule 144) provided, however, that
in no event shall a Participant be restricted in transferring any
amount necessary in order to meet the diversification requirements set
forth in section 401(a)(28)(B) of the Code.
10. Section 10.06 is hereby amended to read in full as
follows:
Sec. 10.06 Voting Rights/Tender Offers. Each
Participant shall be entitled to direct the Purchasing Agent as to the
manner in which to vote Employer Securities that are either allocated
to his ESOP Account or in which he has a proportionate interest under
the profit sharing plan as reflected in his Account. Each Participant
shall also be entitled to direct the Purchasing Agent as to whether
any such Employer Securities should be tendered in response to a
tender offer. Such directions shall be achieved through the use of
proxy or similar statements delivered to the Participants with respect
to such Employer Securities. The Plan Administrator shall provide any
information requested by the Purchasing Agent that is necessary or
convenient in connection with obtaining and preserving the
confidentiality of the Participants' directions. Any shares of such
Employer Securities with respect to which Participants are entitled to
issue directions pursuant to the foregoing and for which such
directions are not received by the Purchasing Agent shall not be voted
or tendered by the Purchasing Agent. With respect to all other shares
of Employer Securities held by the Trustee, (i) the Purchasing Agent
shall vote such shares in
- 4 -
<PAGE> 5
the same proportions as the shares of Employer Securities for which
Participant voting instructions have been received; and (ii) in the
event of a tender offer, the Purchasing Agent shall tender a
proportion of such shares equal to the ratio of (A) the number of
shares with respect to which Participant instructions in favor of the
tender have been received to (B) the number of shares with respect to
which Participant instructions for or against the tender have been
received. With respect to either voting or tendering of shares of
Employer Securities, the Purchasing Agent shall only vote or tender
such shares in the manner set forth in the preceding sentence if the
Purchasing Agent determines that to do so is consistent with its
fiduciary obligations under ERISA.
11. Section 10.09 is hereby amended to read in full
as follows:
Sec. 10.09 Rollover Contributions. A Participant
may, subject to such rules as are approved by the Plan Administrator,
contribute a roll-over contribution to the Plan by filing a written
request with the Plan Administrator. In addition, under such
guidelines as are established by the Plan Administrator, a direct
roll-over in the form of a trust-to-trust transfer may occur on behalf
of a Participant. In any event, any such roll-over or transfer shall
not involve an asset other than cash. The Plan Administrator shall
determine that any amount accepted under the Plan constitutes a
roll-over contribution within the meaning set forth below. Any
roll-over contribution contributed to the Plan shall be credited to a
Roll-Over Contribution Account established by the Trustee, and shall
be fully vested and non-forfeitable at all times. For purposes of
this Section, "roll-over contribution" shall mean any roll-over amount
or roll-over contribution as defined in section 402(a)(5) or section
403(a)(4) of the Code (relating to certain lump sum distributions from
an employer trust or employee annuity plan), section 408(d)(3) of the
Code (relating to certain distributions from an individual retirement
account or individual retirement annuity) or a direct trust-to-trust
transfer from another plan qualified under section 401(a) of the Code.
In no event shall any assets be transferred to this
Plan from any profit sharing, pension or retirement plan that would
cause this Plan to become a "transferee" plan (within the meaning set
forth in section 401(a)(11)(B) of the Code).
12. Effective January 1, 1993, the following new Section
10.10 is hereby added to read in full as follows:
Sec. 10.10 Direct Transfers of Eligible Rollover
Distributions. Subject to the provisions of this Section, the Plan
Administrator shall direct the Trustee to effect the direct transfer
of an eligible rollover distribution (within the meaning of section
402(f)(2)(A) of the Code) provided:
(a) The distributee who is otherwise eligible for
the distribution is a Participant or Spouse (including a Spouse or
former spouse pursuant to a Quadro);
- 5 -
<PAGE> 6
(b) the distributee elects to have the eligible
rollover distribution paid directly to an "eligible retirement plan"
(within the meaning of section 401(a)(31)(D) of the Code); and
(c) The distributee furnishes such information as is
necessary to effect the transfer.
The distributee may elect to have the above provision
apply to all or a portion of the eligible rollover distribution.
The Plan Administrator shall establish reasonable
procedures consistent with regulations promulgated under sections
401(a)(31) and 402(c) of the Code to effect the provisions of this
Section.
13. Section 15.01 is hereby amended to read in full as
follows:
Sec. 15.01. Form of Benefit Payments. All benefits
payable under the Plan shall be paid in the form of a single-sum
distribution. Distributions from the Plan shall be made in cash,
except that Employer Securities shall be distributed in kind (with
such additional cash as is necessary to reflect the value of any
fractional shares of such Employer Securities) to the extent that
Employer Securities are either allocated to a Participant's Account or
to the extent that a Participant has a proportionate interest under
the profit sharing plan as reflected in his Account. When a
distribution consists in whole or in part of such Employer Securities,
and if such Employer Securities consist of more than one class of
securities, the distribution of such Employer Securities shall consist
of substantially the same proportion of each such class of Employer
Securities as such classes of Employer Securities represent
proportions of the Participant's Account.
14. The last paragraph of Plan Section 16.01 is hereby
amended to read as follows:
In the event of a hardship withdrawal, the
Participant shall not be able to make any Deferrals to the Plan for
the twelve (12) month period beginning on the first day of the month
following the date of the withdrawal.
Executed this 22nd day of March, 1994.
CHARLES SCHWAB & CO., INC.
By: /s/ Charles R. Schwab
-------------------------------
Charles R. Schwab
- 6 -
<PAGE> 1
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
COMPUTATION OF EARNINGS PER COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
-------- ------- -------
<S> <C> <C> <C>
Income before extraordinary charge $124,368 $81,228 $49,468
Extraordinary charge - early retirement of debt 6,700
-------- ------- -------
NET INCOME $117,668 $81,228 $49,468
======== ======= =======
SHARES*
Weighted average number of common
shares outstanding 57,558 57,369 57,356
Common stock equivalent shares
related to option plans 1,892 1,199 1,269
-------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 59,450 58,568 58,625
======== ======= =======
EARNINGS PER COMMON EQUIVALENT SHARE
Income before extraordinary charge $ 2.09 $ 1.39 $ .84
Extraordinary charge - early retirement of debt .11
-------- ------- -------
Earnings per common equivalent share $ 1.98 $ 1.39 $ .84
======== ======= =======
</TABLE>
* Reflects the 1993 three-for-two common stock split.
<PAGE> 1
EXHIBIT 12.1
THE CHARLES SCHWAB CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands, unaudited)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS BEFORE EXTRAORDINARY CHARGE
AND INCOME TAXES $206,272 $146,228 $ 88,097 $ 29,109 $ 33,191
-------- -------- -------- -------- --------
FIXED CHARGES:
Interest expense 132,552 159,531 225,558 238,497 207,347
Interest portion of rental expense 15,428 13,314 10,531 8,855 6,951
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES (A) 147,980 172,845 236,089 247,352 214,298
-------- -------- -------- -------- --------
EARNINGS BEFORE EXTRAORDINARY CHARGE,
INCOME TAXES AND FIXED
CHARGES (B) $354,252 $319,073 $324,186 $276,461 $247,489
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED
CHARGES (B) DIVIDED BY (A)* 2.4 1.8 1.4 1.1 1.2
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES
AS ADJUSTED** 7.2 5.6 3.9 2.2 2.5
======== ======== ======== ======== ========
</TABLE>
* The ratio of earnings to fixed charges is calculated in a manner consistent
with SEC requirements. For such purposes, "earnings" consist of earnings
before extraordinary charge, income taxes and fixed charges. "Fixed charges"
consist of interest expense incurred on payables to customers, subordinated
borrowings, term debt, capitalized interest, and one-third of rental expense,
which is estimated to be representative of the interest factor.
** Because interest expense incurred in connection with the customer cash
balances is completely offset by interest revenue on related investments and
margins loans, the Company considers such interest to be an operating
expense. Accordingly, the ratio of earnings to fixed charges as adjusted
reflects the elimination of such interest expense as a fixed charge.
<PAGE> 1
EXHIBIT 13.1
The Charles Schwab Corporation
1993 Annual Report to Stockholders
(only those portions specifically incorporated by reference
into The Charles Schwab Corporation 1993 Annual Report on Form 10-K)
The Charles Schwab Corporation
SELECTED FINANCIAL DATA
(In Millions, Except Per Share Amounts and Percentages)
<TABLE>
<CAPTION>
Growth Rates (1)
------------------
Compound Annual
5-Year 1992-93 1993 1992 1991 1990 1989 1988
-------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS (FOR THE YEAR)
Revenues:
Commissions 24% 25% $ 552 $ 441 $ 349 $ 244 $ 229 $ 186
Principal transactions (2) 30% 169 130 63 4 2 1
Interest revenue, net of interest expense (3) 23% 31% 120 92 77 71 66 43
Mutual fund service fees 35% 55% 99 63 54 46 29 22
Other 10% 9% 25 24 27 22 20 15
-- -- ------ ------ ------ ------ ------ ------
Total 29% 29% 965 750 570 387 346 267
-- -- ------ ------ ------ ------ ------ ------
Expenses excluding interest:
Compensation and benefits 33% 28% 393 307 234 155 131 95
Communications 25% 24% 94 76 57 42 37 32
Occupancy and equipment 19% 18% 77 65 51 43 34 32
Depreciation and amortization 10% 44 40 52 49 53 44
Other 24% 31% 150 116 88 69 58 51
-- -- ------ ------ ------ ------ ------ ------
Total 25% 26% 758 604 482 358 313 254
-- -- ------ ------ ------ ------ ------ ------
Income before taxes on income and extraordinary
charge 73% 41% 207 146 88 29 33 13
Taxes on income 69% 26% 82 65 39 12 14 6
-- -- ------ ------ ------ ------ ------ ------
Income before extraordinary charge 76% 53% 125 81 49 17 19 7
Extraordinary charge - early retirement of debt 7
-- -- ------ ------ ------ ------ ------ ------
Net income 74% 45% $ 118 $ 81 $ 49 $ 17 $ 19 $ 7
== == ====== ====== ====== ====== ====== ======
Earnings per common equivalent share (4):
Income before extraordinary charge 77% 50% $ 2.09 $ 1.39 $ .84 $ .28 $ .30 $ .12
Extraordinary charge - early retirement of debt .11
-- -- ------ ------ ------ ------ ------ ------
Earnings per common equivalent share 75% 42% $ 1.98 $ 1.39 $ .84 $ .28 $ .30 $ .12
== == ====== ====== ====== ====== ====== ======
Dividends declared per common share (4) 29% .190 .147 .085 .058 .040
== ====== ====== ====== ====== ====== ======
OTHER (AT YEAR END)
Total assets 22% 17% $6,897 $5,905 $5,026 $4,188 $3,480 $2,533
Long-term and subordinated borrowings 7% 22% 185 152 119 126 131 132
Stockholders' equity 19% 47% 379 259 200 154 172 159
Book value per common share (4) 19% 44% 6.56 4.57 3.46 2.80 3.01 2.78
OTHER (FOR THE YEAR)
Return on stockholders' equity 37% 35% 29% 10% 12% 5%
Revenue growth (decline) 29% 32% 47% 12% 30% (28%)
After-tax profit margin 12% 11% 9% 4% 5% 3%
Weighted average number of common and
common equivalent shares outstanding (4) 59 59 59 61 62 62
====== ====== ====== ====== ====== ======
</TABLE>
(1) Growth rates are not presented in cases where change is not meaningful.
(2) On July 1, 1991, the Company acquired Mayer & Schweitzer, Inc., whose
operating results have been consolidated with those of the Company since
the acquisition.
(3) Interest revenue is presented net of interest expense. Interest expense
for 1988 through 1993 was (in millions): $125, $207, $238, $225, $159 and
$132, respectively.
(4) All share and per share data have been restated to reflect the 1993 and
1991 three-for-two common stock splits.
Certain prior years' revenues and expenses have been reclassified to conform to
the 1993 presentation.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DESCRIPTION OF BUSINESS
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide brokerage and related investment services
to 2.5 million active(a) investors, whose assets entrusted to the Company
totaled $95.8 billion at December 31, 1993. The Company's principal subsidiary,
Charles Schwab & Co., Inc. (Schwab), serves an estimated 44% of the discount
brokerage market. Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities acquired by CSC in July 1991, provides trade execution services to
institutional clients and broker-dealers. During 1993, customer orders handled
by M&S totaled over 4 billion shares, or over 6% of the total shares traded on
Nasdaq.
With a network of 198 branch offices, Schwab is physically represented in 46
states and in the United Kingdom. Schwab maintains four regional customer
telephone service centers that handle customer calls and orders. Schwab's
touch-tone telephone trading service, TeleBroker (registered trademark),
provides customers access to Schwab on a 24-hour basis. These complementary
customer service delivery systems -- branches, telephone centers and on-line
services -- allow Schwab to achieve its customer service quality standards in a
cost-competitive manner. Collectively, these systems handled over 62 million
calls and over 9 million trades during 1993.
The Company has historically used discount pricing as a tactic in its
efforts to gain market share and enhance the value of its services. In recent
years, Schwab has introduced additional price-competitive product offerings
such as its No-Annual-Fee IRA account and its Mutual Fund OneSource (trademark)
service. Management expects to continue to use competitive pricing in the
marketing of new products and services. While in the short term this may
negatively impact the Company's profit margins, management believes that this
value-pricing philosophy will continue to result in gains in market share that
will, over the long term, offset the impact of lower short-term profit margins.
Environmental factors influencing the Company's performance include
fundamentally cyclical financial markets and heavy competition from full
commission and discount brokerage firms. Increasingly, competition has come
from institutions other than brokerage firms as banks, insurance companies,
mutual fund companies and others expand their product lines. Such competition
may negatively impact the Company's ability to maintain historic profit margins
and increase market share.
Transaction-based revenues represent the majority of the Company's revenues.
Since these revenues are heavily influenced by fluctuations in volumes and
price levels of securities transactions, it is not unusual for the Company to
experience significant variations in quarterly revenue levels. Most of the
Company's expenses do not vary directly, at least in the short term, with
fluctuations in securities trading volume. This combination of variable revenue
streams and a primarily nonvariable cost structure, which lags revenue changes,
can result in increased profitability with rapid increases in revenue and
reduced profitability (or losses) with rapid reductions in revenue. These
factors, along with the environmental factors discussed above, subject the
Company's future earnings and common stock price to significant volatility.
(CHART OMITTED)
The Company's long-term performance objectives call for profitable growth
within several markets of the financial services industry -- retail brokerage,
mutual funds, support services for institutions and Nasdaq securities
market-making. The Company's strategy for achieving its objectives continues to
be effective investment in technology, product development, marketing programs
and customer service delivery systems. It is management's goal to increase the
value of the Company by achieving over the long term a 20% annual revenue
growth rate while maintaining an after-tax profit margin of 10% and a return on
stockholders' equity of 20%.
(CHART OMITTED)
Management expects market volumes and investor trading activity to continue
to fluctuate as in the past. While this environment impacts the Company's
short-term results significantly, management believes the firm has demonstrated
sound fundamental growth over the long term based on its commitment to its
customer service strategy. The Company will continue to use its internally
generated cash flows to invest in new services, delivery systems, marketing and
technology. Management intends to continue such investments, even during
periods of reduced short-term profitability, in order to gain market share and
achieve the Company's long-term growth objectives.
RESULTS OF OPERATIONS
SUMMARY
Trading activity at Schwab reached record levels during 1993, with average
daily trades, which include Mutual Fund OneSource (trademark) trades, reaching
37,000, an increase of 50% over 1992. The combined average daily share volume
of the New York Stock Exchange and Nasdaq increased 34% over 1992 levels as
investors, faced with continued low yields on interest-bearing investments,
continued to focus attention on the equities markets. Overall, market values of
equity securities increased modestly as measured by the 7%
__________________________________
(a) Accounts with balances or activity within the preceding twelve months.
2
<PAGE> 3
increase in the S&P 500 Index. Other indicators of the Company's strong
performance include the opening of a record 706,000 new accounts, 26% more than
1992, and a $30.2 billion, or 46%, increase in customer assets.
Earnings in 1993 were $118 million, or $1.98 per share, up from $81 million,
or $1.39 per share, in 1992 and $49 million, or $.84 per share, in 1991.
Reflected in 1993's operating results is an extraordinary charge of $.11 per
share relating to CSC's prepayment of its Junior and Senior Subordinated
Debentures. The $11 million prepayment premium, net of its related $4 million
tax benefit, is presented as a $7 million extraordinary charge to income for
1993. Share information throughout this report has been restated to reflect the
three-for-two common stock split, effected in the form of a 50% stock dividend
declared in March 1993 and distributed in June 1993. The after-tax profit
margin for 1993 was 12%, which exceeded the Company's long-term goal of 10%.
Return on stockholders' equity was 37% in 1993, well above the Company's
long-term goal of 20%. Reflecting these strong results, the Company's Board of
Directors declared a cash dividend increase during January 1994, raising the
effective annual dividend rate 40% to $.28 per share from the $.20 per share
rate established in March 1993.
For 1993, the Company achieved record revenues of $965 million. This 29%
increase over 1992 revenues exceeded management's long-term goal of 20% and
reflects significant gains in all major revenue categories. The 29% overall
growth in revenues for 1993 follows 1992's growth in revenues of 32%. Because
the acquisition of M&S was accounted for as a purchase, M&S's revenues are
included in consolidated results from its July 1, 1991 acquisition date
forward. Revenue attributable to M&S represented five percentage points of the
1993 increase and 13 percentage points of the 1992 increase.
(CHART OMITTED)
During 1993, the Company continued to invest in technology, product and
service enhancements, marketing programs and new branches critical to its
growth. This contributed to a 26% increase in noninterest expenses, which
totaled $758 million. With customer trading activity up 50% over 1992, the
Company increased its servicing capacity by opening 23 branch offices,
completing its new primary data center and opening its fourth regional customer
telephone service center in January 1994.
(CHART OMITTED)
REVENUES
COMMISSIONS
Commission revenues grew 25% in 1993 to $552 million. This compares to
commission revenues of $441 million in 1992 and $349 million in 1991.
Commission revenues are affected by the number of customer accounts trading,
the average number of transactions per account and the average commission per
transaction. These, in turn, are heavily influenced by general market
conditions and the growth in individual investor activity, as well as internal
factors such as Schwab's pricing, marketing and promotional efforts, and the
introduction of new products and services. Schwab operates in an agency
capacity when executing commission transactions. The following table sets forth
the revenue factors discussed above:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Number of customer accounts
that traded during the year
(in thousands) 1,230 1,048 833
Average number of agency transactions
per account that traded 6.06 5.56 5.52
Total number of agency transactions
(in thousands) 7,449 5,831 4,599
Average commission per agency transaction $74.13 $75.71 $75.88
Total commission revenues
(in millions) $ 552 $ 441 $ 349
====== ====== ======
</TABLE>
The total number of agency transactions executed by Schwab has increased
from 1991 to 1993 as Schwab's customer base has grown and market conditions
have generally improved. Schwab's average daily agency trade level was 29,400
during 1993 compared to 23,000 in 1992 and 18,200 in 1991.
(CHART OMITTED)
From 1991 to 1993, average commission per agency transaction decreased $1.75
(2%) primarily due to a higher proportion of mutual fund transactions, which
carry a lower average commission, and a higher proportion of trades placed
through TeleBroker (registered trademark), which provides users a 10%
commission discount.
Attracting new customer accounts is important in generating commission
revenues. Schwab opened 706,000 new customer accounts during 1993, bringing
total active accounts to a record 2.5 million. Account openings in 1993 were up
26% and 84%, respectively, over account openings of 562,000 in 1992 and 384,000
in 1991.
During July 1992, Schwab introduced nationally its no-transaction-fee mutual
fund service, known as the Mutual Fund OneSource (trademark) service, which by
December 31, 1993, enabled customers to trade over 200 mutual funds in 25
well-known fund families without incurring transaction fees. The service is
particularly attractive to investors who execute mutual fund trades directly
with multiple mutual fund companies to avoid brokerage transaction fees and
achieve investment diversity among fund families. Mutual fund trades placed
through the Mutual Fund OneSource service grew from an average of 1,000 per day
in July 1992,
3
<PAGE> 4
including 500 trades per day in Schwab's proprietary funds, to an average of
9,800 per day in December 1993, including 1,200 trades per day in Schwab's
proprietary funds.
While Schwab does not receive transaction fees (commissions) on customer
trades in the Mutual Fund OneSource (trademark) participating mutual funds, it
is compensated directly by the participating funds or their sponsors via fees
received for providing record keeping and shareholder services. Such
compensation is ongoing, based on daily balances of customer assets invested in
the participating funds through Schwab. These revenues are reported as mutual
fund service fees.
The Mutual Fund OneSource program is intended to increase the proportion of
the Company's revenues that are asset-based, thereby providing more consistent
revenue streams than transaction-based revenues provide. Customer assets held
by Schwab that have been purchased through the Mutual Fund OneSource service,
excluding Schwab's proprietary funds, totaled $8.3 billion at December 31,
1993.
PRINCIPAL TRANSACTIONS
Principal transactions include net gains from market-making activities in
Nasdaq securities and markups on customer fixed income security trades. Factors
that influence principal transaction revenues include the volume of customer
trades and market price volatility. During 1993, the demand for Nasdaq
securities reached record levels as evidenced by the 15% increase in the Nasdaq
Composite Index and the record 67 billion shares traded on Nasdaq.
Revenues from principal transactions increased to $169 million in 1993, from
$130 million in 1992 and $63 million in 1991. The 30% increase from 1992 to
1993 was primarily due to an increase in trading volume handled by M&S. The
substantial growth from 1991 to 1992 reflects the addition of principal
transaction revenues from M&S since its July 1991 acquisition.
As a market maker in Nasdaq securities, M&S generally executes customer
trades as principal. M&S business practices call for quality service and
competitively priced customer executions, generally defined as the highest bid
price on a sell order and the lowest offered price on a buy order available
through National Association of Securities Dealers member firms. Customer
trades exceeding certain sizes are executed on a negotiated basis. Since its
acquisition in July 1991, M&S has executed essentially all Nasdaq security
trades originated by the customers of Schwab.
INTEREST REVENUE, NET OF INTEREST EXPENSE
The Company presents interest revenue net of interest expense in its
financial statements. This presentation eliminates the impact of market
interest rate fluctuations on total revenues thereby providing a clear
representation of the results of the Company's investment activities.
In performing its role as clearing broker for its customers' trading
activity, Schwab holds cash balances payable to customers. In most cases,
Schwab pays its customers interest on such cash balances awaiting investment,
and may invest these funds and earn interest revenue. Schwab also may lend
these funds to customers on a secured basis to purchase qualified securities --
a practice commonly known as "margin lending." Pursuant to Securities and
Exchange Commission (SEC) regulations, customer cash balances that are not used
for margin lending are segregated into investment accounts that are maintained
for the exclusive benefit of customers.
When investing segregated customer cash balances, the Company must adhere to
SEC regulations that restrict investments to U.S. government securities,
participation certificates and mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by
U.S. banks and thrifts and resale agreements collateralized by qualified
securities. The Company's investment policies set credit quality and maximum
maturity requirements for such investments. As a result, the Company's policies
regarding such investing are more stringent than the related SEC regulations.
Investment information for the last three years is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
INVESTMENT COMPOSITION
(in billions at year end)
Resale agreements $3.3 $3.0 $2.2
U.S. Treasuries .1 .3 .7
Certificates of deposit .2 .2 .5
AVERAGE MATURITY OF INVESTMENTS
(in days)
During the year 71 78 67
At year end 69 53 73
---- ---- ----
</TABLE>
Interest revenue net of interest expense reached a record $120 million in
1993 compared to $92 million in 1992 and $77 million in 1991 as shown in the
following table (in millions):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
INTEREST REVENUE
Investments, customer-related $113 $140 $208
Margin loans to customers 132 104 88
Other 7 7 6
---- ---- ----
Total 252 251 302
---- ---- ----
INTEREST EXPENSE
Customer cash balances 115 141 206
Long-term and subordinated
borrowings 12 13 12
Other 5 5 7
---- ---- ----
Total 132 159 225
---- ---- ----
INTEREST REVENUE, NET OF INTEREST EXPENSE $120 $ 92 $ 77
==== ==== ====
</TABLE>
4
<PAGE> 5
The Company's interest-earning assets (principally investments and margin
loans to customers) are financed primarily by interest-bearing cash balances in
customer accounts. Other funding sources include noninterest bearing customer
cash balances, proceeds from stock lending activities, long-term borrowings and
stockholders' equity. Average daily balances and interest rates on
customer-related, interest-earning assets and related funding sources are
summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
EARNING ASSETS (CUSTOMER-RELATED):
Investments:
Average balance outstanding $3,469 $3,460 $3,370
Average interest rate 3.25% 4.05% 6.16%
Margin loans to customers:
Average balance outstanding $2,212 $1,619 $1,011
Average interest rate 5.99% 6.45% 8.72%
Average yield on earning assets 4.32% 4.82% 6.75%
FUNDING SOURCES (CUSTOMER-RELATED AND OTHER):
Interest-bearing customer cash balances:
Average balance outstanding $4,693 $4,313 $3,844
Average interest rate 2.44% 3.27% 5.36%
Other interest-bearing sources:
Average balance outstanding $ 275 $ 206 $ 106
Average interest rate 3.30% 4.93% 6.16%
Average noninterest bearing portion $ 713 $ 560 $ 431
Average interest rate on funding sources 2.18% 2.97% 4.85%
SUMMARY:
Average yield on earning assets 4.32% 4.82% 6.75%
Average interest rate on funding sources 2.18% 2.97% 4.85%
------ ------ ------
Average net interest margin 2.14% 1.85% 1.90%
====== ====== ======
</TABLE>
Interest revenue from customer-related investments decreased $27 million
from 1992 to 1993 due to an 80 basis point decline in the average rate earned
on such investments. This decline was greater than the 67 basis point decline
in the Donoghue Taxable Money Fund Average (the Donoghue Average) during 1993.
Interest revenue from customer-related investments decreased $68 million from
1991 to 1992 as a result of a 211 basis point decline in the average rate
earned on such investments. This decline was less than the 225 basis point
decline in the Donoghue Average during 1992.
Despite a 46 basis point decline in the average rate earned on margin loans
to customers during 1993, interest earned on such balances increased $28
million as average margin loan balances increased 37%. Despite a 227 basis
point decline in the average rate earned on margin loans to customers during
1992, interest earned on such balances increased $16 million as average margin
loan balances increased 60%. The growth in margin balances is attributable to a
more active trading environment, an increase in the number of customer margin
accounts and a general decline in margin interest rates.
During 1993, interest expense on customer cash balances decreased by $26
million due to an 83 basis point decline in interest rates paid on these
balances, partially offset by a 9% increase in the average balance outstanding.
Interest expense on customer cash balances decreased $65 million during 1992 as
a result of a 209 basis point decline in interest rates paid on such balances,
partially offset by a 12% increase in the average balance outstanding.
MUTUAL FUND SERVICE FEES
The Company earns mutual fund service fees for providing services, such as
reporting of share ownership and dividend activity, administration and
investment management, to its proprietary and certain third-party mutual funds.
These fees are based upon asset balances invested in the funds. Revenues
received from customer purchase and sale transactions of mutual funds that are
not included in Schwab's Mutual Fund OneSource (trademark) service are included
in commission revenues. The Company currently does not charge commissions on
purchases and sales of its proprietary funds.
Mutual fund service fees were $99 million in 1993, compared to $63 million
in 1992 and $54 million in 1991. Growth in customer assets is the principal
reason for the increase in mutual fund service fees between 1991 and 1993.
Schwab's Mutual Fund OneSource service, introduced in July 1992, has also
contributed to the increase in mutual fund service fees. Schwab is compensated
by participating funds or their sponsors for providing record keeping and
shareholder services relating to customer assets received through this service.
Customer assets held by Schwab that have been purchased through the Mutual Fund
OneSource service, excluding Schwab's proprietary funds, totaled $8.3 billion
at December 31, 1993 and $1.8 billion at December 31, 1992.
Schwab's proprietary funds, collectively referred to as the SchwabFunds
(registered trademark), include money market funds, bond funds and equity index
funds. Schwab customers may elect to have cash balances in their brokerage
accounts automatically invested in proprietary money market mutual funds.
Customer balances invested in the SchwabFunds were $16 billion at the end of
1993, $11 billion at the end of 1992 and $8 billion at the end of 1991.
To help attract customer assets in a highly competitive environment, the
Company previously agreed to absorb all or part of the operating expenses of
many of the SchwabFunds during their first months of operations and waive
certain fees. In certain cases, the Company continues to waive fees and absorb
expenses beyond the original agreement. Although this action does not ensure
that fund balances will continue to grow at historic rates, management believes
the long-term benefits derived from the growth in fund balances will outweigh
the unfavorable
5
<PAGE> 6
impact on current earnings caused by reducing management and transfer agency
fees and absorbing certain expenses.
OTHER REVENUES
Other revenues include IRA account maintenance fees, other brokerage fees,
revenues relating to Schwab's affinity credit card arrangement and sales and
usage fees. These revenues totaled $25 million during 1993, up 9% from $24
million in 1992. Substantially all of this increase is due to a fee received by
Schwab for the termination of its affinity credit card arrangement with a bank
service provider. During 1993, Schwab entered into a new affinity credit card
arrangement with another bank service provider. From 1991 to 1992, other
revenues declined 13% primarily due to a decline in other brokerage fees and to
a reduction in IRA account fees charged (see below). Since the July 1991
acquisition of M&S, the majority of other brokerage fees, previously received
by Schwab from unrelated parties for directing customer trades to market makers
for execution, are now paid to Schwab by M&S and are eliminated in the
Company's consolidated results.
During 1992, the Company introduced its No-Annual-Fee IRA which was
available to existing and prospective customers with IRA balances of $10,000 or
more. The Company had previously charged an annual account fee of $22 on
virtually all IRAs. Management believes that, over the long term, increases in
commissions, principal transaction revenues, and mutual fund service fee
revenues generated by new customer accounts and assets attracted by the IRA
program will eventually exceed the related foregone annual-fee revenue. IRA
openings increased 43% in 1993 and 105% in 1992 over the respective preceding
year's level. At December 31, 1993, the Company had over 760,000 active IRAs,
of which over two-thirds were included in the no-annual-fee program.
(CHART OMITTED)
EXPENSES
COMPENSATION AND BENEFITS
Compensation and benefits expense includes salaries, incentive compensation,
bonuses and related employee benefits and taxes. The Company provides its
employees with compensation programs that contain substantial variable pay
components that are tied to the achievement of the Company's financial
objectives -- 20% annual revenue growth, a 10% after-tax profit margin and a
return on stockholders' equity of 20% -- and growth in client assets and,
therefore, a portion of compensation expense will fluctuate with these
measures.
Compensation and benefits expense was $393 million for 1993, compared to
$307 million in 1992 and $234 million in 1991. Increases in compensation and
benefits expense between 1991 and 1993 were generally the result of the larger
number of employees necessary to support expansion of the Company's branch
office network, regional customer telephone service centers, technology and
marketing programs, and the development of new products and services. Higher
variable compensation due to increased profitability, and the growth in revenue
and in customer assets, also contributed to the increases in 1993 and 1992. The
Company had approximately 6,500 employees at the end of 1993, 4,500 at the end
of 1992 and 3,800 at the end of 1991. These amounts include full-time,
part-time and temporary employees, as well as persons employed on a contract
basis.
The Company encourages and provides mechanisms for employee ownership of the
Company's common stock through its employee stock ownership plan, its stock
option plans and an automatic investment plan. The Company's overall
compensation structure is intended to attract, retain and reward highly
qualified employees and to align the interest of employees with those of
stockholders. Management, employees and their families collectively owned more
than 47% of the Company's outstanding common shares at December 31, 1993.
(CHART OMITTED)
COMMUNICATIONS
Communications expense, including telephone, postage, and news and quotation
charges, was $94 million for 1993, $76 million in 1992 and $57 million in 1991.
The increase in communications expense between 1991 and 1993 primarily resulted
from higher customer transaction volumes. Increases in customer use of
toll-free telephone numbers, reflecting a higher proportion of incoming calls
handled by TeleBroker (registered trademark) and Schwab's customer telephone
service centers also contributed to higher telephone expenses over this period.
The addition of M&S communications expense since its July 1991 acquisition also
contributed to the 1992 increase.
OCCUPANCY AND EQUIPMENT
Occupancy and equipment expense includes the costs of leasing and
maintaining the Company's headquarters, customer telephone service centers and
branch office network. It also includes lease and rental expenses on computer
and other equipment. Occupancy and equipment expense was $77 million for 1993,
compared to $65 million in 1992 and $51 million in 1991, a trend which reflects
the Company's continued growth and expansion. The Company leased additional
computer equipment during 1993 and 1992 to meet its customer service and data
processing requirements. During 1993, the Company opened its new primary data
center in Phoenix and completed construction on its fourth customer telephone
service center, which opened in January 1994. In addition to completing a
customer telephone service center in each of 1993, 1992 and
6
<PAGE> 7
1991, Schwab opened 69 new branch offices -- 23 in 1993, 17 in 1992 and 29 in
1991.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $44 million for 1993, compared to
$40 million in 1992 and $52 million in 1991. The 10% increase from 1992 to 1993
is primarily due to newly acquired data processing related assets and leasehold
improvements which increased the Company's fixed asset base from a year ago.
The decrease in 1992 from 1991 is primarily due to a portion of customer lists
acquired in the 1987 acquisition of Schwab becoming fully amortized in March
1992.
COMMISSIONS, CLEARANCE AND FLOOR BROKERAGE
Commissions, clearance and floor brokerage expense includes fees paid to
stock and options exchanges for trade executions, fees paid by M&S to
institutional clients for orders received for execution and fees paid to
clearing entities for trade processing. Commissions, clearance and floor
brokerage expense was $43 million in 1993, $32 million in 1992 and $21 million
in 1991. The increases from 1991 to 1993 are primarily attributable to the
addition of such fees paid by M&S since its July 1991 acquisition and to
increases in the number of trades processed by Schwab and M&S.
ADVERTISING AND MARKET DEVELOPMENT
Advertising builds the image and awareness of the firm and plays a crucial
role in obtaining new customers, which have represented an important source of
revenue and revenue growth for the Company. Advertising and market development
expense includes television, print and direct mail advertising expenses and
related production, printing and postage costs. Such expenses totaled $41
million in 1993, $34 million in 1992 and $25 million in 1991. The 20% increase
from 1992 to 1993 is due primarily to the Company's continued promotion of its
brand image and to costs relating to new product offerings such as Schwab's
No-Annual-Fee IRA and Mutual Fund OneSource (trademark) service. The increase
in expenses between 1991 and 1992 is due primarily to the Company's national
network television advertising campaign launched in the fourth quarter of 1991.
Since the campaign's inception, investor awareness of the Schwab brand has
increased significantly, enabling Schwab to open 706,000 new accounts in 1993,
562,000 in 1992 and 384,000 in 1991.
PROFESSIONAL SERVICES
Professional services expense was $22 million in 1993, $14 million in 1992
and $12 million in 1991. This category includes the cost of consultants
engaged to support product, service and systems development, and legal and
accounting fees. The 55% increase in professional services expense from 1992 to
1993 was primarily due to increases in consulting fees relating to various
company development projects -- including those involving data processing,
business processes and marketing research. The 20% increase in professional
services expense from 1991 to 1992 was primarily due to increased systems,
product and service consulting costs and to higher legal fees, partially offset
by a decrease in sub-advisory fees paid to third parties.
OTHER EXPENSES
Other expenses were $44 million for 1993, $35 million in 1992 and $29
million in 1991. Other expenses include travel and entertainment, bank service
charges (primarily relating to customer check processing), registration fees
for employees, errors and bad debts, regulatory fees and other miscellaneous
expenses. The increases in these expenses during 1992 and 1993 are primarily
attributable to a combination of higher staffing levels required to support the
Company's growth and higher transaction volumes.
EXTRAORDINARY CHARGE
During 1993, the Company prepaid its 10% Senior and 9% Junior Subordinated
Debentures totaling $116 million, and paid a related prepayment premium of
approximately $11 million. The $11 million premium, net of its related $4
million tax benefit, is presented as a $7 million extraordinary charge to
income for 1993. The Company prepaid the debentures using proceeds received
from the issuance of medium-term notes with an average interest rate of 5.91%.
The Company's interest expense will be reduced initially by approximately $4
million annually.
TAXES ON INCOME
The Company's effective tax rate was 39.7% in 1993, 44.5% in 1992 and 43.8%
in 1991. This decline in the effective tax rate during 1993 is primarily due to
changes in the way the Company has accounted for the anticipated tax effects of
the amortization of certain intangible assets (see discussion below).
In January 1992, the Company filed a petition in U.S. Tax Court refuting a
claim for additional Federal income tax asserted by the Internal Revenue
Service (IRS) in December 1991. The asserted additional tax of $28 million,
excluding interest, arises from the IRS's audit of the tax periods ended March
31, 1988 and December 31, 1988. Substantially all the asserted additional tax
relates to the deductions claimed by the Company for depreciation and
amortization of tangible and intangible assets received in the Company's 1987
acquisition of Schwab. The issues being contested in the Tax Court by the
Company with respect to the periods audited by the IRS extend to the Company's
tax years ended December 31, 1989 through 1993.
Of the $28 million additional tax asserted by the IRS against the Company,
approximately $11 million relates to deductions derived from the amortization
of customer lists. In April 1993, the U. S. Supreme Court ruled in Newark
Morning Ledger Co. v. U.S. that in appropriate circumstances a taxpayer may
amortize the cost of certain intangible assets (such as customer lists) over
the useful life of such assets. While the Supreme Court's decision in
7
<PAGE> 8
Newark Morning Ledger confirms the Company's ability to amortize for tax
purposes certain of its intangible assets, issues involving the valuation of
these intangible assets remain unresolved in the Company's case with the IRS.
Management believes that these matters will be resolved without a material
adverse effect on the Company's financial position.
NEW ACCOUNTING AND FEDERAL INCOME TAX LAW DEVELOPMENTS
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Financial Accounting Standards Board required adoption of Statement No.
106 -- Employers' Accounting for Postretirement Benefits Other Than Pensions --
in 1993. Currently, the Company does not provide postretirement benefits to its
employees and, therefore, this new accounting standard has no current financial
impact.
ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 -- Accounting for Income Taxes. The adoption of
this accounting standard did not have a material impact on the Company's
financial position or results of operations. The Company has reflected the
impact of the 1993 Omnibus Budget Reconciliation Act, which increased the
corporate income tax rate from 34% to 35%, in its 1993 operating results.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS
The Financial Accounting Standards Board requires adoption of Statement No.
112 -- Employers' Accounting for Postemployment Benefits -- in 1994. Due to the
nature of the Company's benefit plans, this new accounting standard will not
have a material impact on the Company's financial position or results of
operations.
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6 -- Employers' Accounting for Employee
Stock Ownership Plans (the Statement). The Statement requires income statement
recognition of the fair value of common stock released for allocation to
employees through an Employee Stock Ownership Plan (ESOP). As shares are
released for allocation to employees, the shares become outstanding for
earnings per share computations. Previously, the accounting rules provided for
the cost basis of shares released for allocation through ESOP plans to be
recognized as expense and all ESOP shares to be considered outstanding for
earnings per share computations. The Company adopted the Statement on January
1, 1994. Under the "grandfather" provisions of the new Statement, the Company
will not apply the Statement to shares purchased by the ESOP prior to December
31, 1992. Management believes the adoption of the new Statement will not have a
material impact on the Company's financial position, results of operations or
earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
CSC is operated as a holding company, conducting virtually all business
through its wholly owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity
consistent with its operating plan. A description of significant aspects of
this structure for CSC and its two principal subsidiaries, Schwab and M&S,
follows.
LIQUIDITY
SCHWAB
Most of Schwab's assets are liquid, consisting primarily of short-term
(i.e., less than 90 days) investment-grade, interest-earning investments (a
substantial portion of which are segregated for the exclusive benefit of
customers pursuant to regulatory requirements) and receivables from customers
and brokers. Customer margin loans are demand loan obligations secured by
readily marketable securities. Receivables from and payables to other brokers,
dealers and clearing organizations primarily represent current open
transactions, which usually settle or can be closed out within a few business
days.
Liquidity needs relating to customer trading and margin borrowing activities
are met primarily through cash balances in customer accounts, which totaled
$5.7 billion in 1993, $5.1 billion in 1992 and $4.4 billion in 1991. Earnings
from Schwab's operations are the primary source of liquidity for capital
expenditures and investments in new services, marketing and technology.
Management believes that customer cash balances and operating earnings will
continue to be the primary sources of liquidity for Schwab in the future.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$180 million subordinated revolving credit facility maturing in September 1995,
of which $108 million was outstanding at December 31, 1993. At year end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
maturing in 1995. In January 1994, the maturity date for $15 million of the $25
million debt scheduled to mature in 1995 was extended to 1996. Borrowings under
these subordinated lending arrangements qualify as regulatory capital for
Schwab.
For use in its brokerage operations, Schwab maintains uncommitted bank
credit lines totaling $390 million, of which $310 million is available on an
unsecured basis. The need for short-term borrowings arises primarily from
timing differences between: cash flow requirements, the scheduled liquidation
of interest-bearing investments, or, if applicable, the release of funds from
required regulatory reserves. Schwab used such borrowings for 25 days in 1993,
42 days
8
<PAGE> 9
in 1992 and 41 days in 1991, with the daily amounts borrowed averaging $19
million, $24 million and $29 million, respectively. These lines were unused at
December 31, 1993.
M&S
M&S's liquidity needs are generally met through earnings generated by its
operations. Most of M&S's assets are liquid, consisting primarily of
receivables from brokers, dealers and clearing organizations, cash and
equivalents and marketable securities. M&S may borrow up to $10 million under a
subordinated lending arrangement with CSC. Borrowings under this arrangement
qualify as regulatory capital for M&S. This facility has never been used.
THE CHARLES SCHWAB CORPORATION
CSC's liquidity needs are generally met through cash generated by its
subsidiaries. Schwab and M&S are the principal sources of this liquidity and
are subject to regulatory requirements that are intended to ensure the general
financial soundness and liquidity of broker-dealers. These regulations would
prohibit Schwab and M&S from repaying subordinated borrowings to CSC, paying
cash dividends, or making unsecured advances or loans to their parent or
employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of their minimum dollar amount
requirement of $1 million. At December 31, 1993, Schwab had $260 million of net
capital (10% of aggregate debit balances), which was $207 million in excess of
its minimum required net capital. At December 31, 1993, M&S had $13 million of
net capital (163% of aggregate debit balances), which was $12 million in excess
of its minimum required net capital. Management believes that funds generated
by Schwab's and M&S's operations will continue to be the primary funding source
in meeting CSC's liquidity needs and maintaining Schwab's and M&S's net
capital.
In addition to the liquidity needs of its broker-dealer subsidiaries, CSC
has individual liquidity needs that arise from its $150 million of Senior
Medium-Term Notes, Series A (Medium-Term Notes), which were issued during 1993.
CSC used proceeds of these issuances to prepay its 10% Senior and 9% Junior
Subordinated Debentures totaling $116 million and to pay a related prepayment
premium of $11 million. The 10% Senior and 9% Junior Subordinated Debentures
had been due in 1998 and 2002, respectively. The remaining proceeds were used
for general corporate purposes. The Medium-Term Notes have maturities ranging
from three to ten years and fixed interest rates ranging from 4.95% to 6.30%
with interest payable semiannually.
In November 1993, CSC filed a Registration Statement with the SEC covering
the issuance of up to $100 million aggregate principal amount of debt
securities, which may be issued by CSC from time to time as senior or senior
subordinated debt securities, and may carry fixed or variable interest rates.
The net proceeds of the sale of the debt securities may be used for general
corporate purposes. There were no securities issued under this Registration
Statement at December 31, 1993.
If necessary for general corporate purposes, CSC may borrow under its $225
million committed unsecured credit facility with a group of twelve banks
through June 1994. The facility requires CSC to pay a commitment fee on the
unused balance, and includes an option to borrow $125 million of the $225
million at any time during the term, for a period of up to 364 days from the
date of borrowing. The terms of this facility require CSC to maintain minimum
levels of stockholders' equity and Schwab to maintain minimum levels of net
capital as defined. This facility has never been used.
CSC has a $35 million Senior Term Loan due in March 1995. An interest rate
exchange arrangement has been used to convert the loan's variable interest rate
to a fixed rate of 6.9%. The loan contains covenants, among others, that
require the Company to maintain minimum levels of stockholders' equity, and
require Schwab and M&S to maintain minimum levels of net capital as defined.
CASH FLOWS
Cash provided by operating activities was $132 million during 1993, up from
$121 million in 1992, allowing the Company to finance the majority of its
growth with internally generated funds. During 1993, the Company invested $77
million in various capital expenditures including a new primary data center, a
fourth regional customer telephone service center, which opened in January
1994, and enhancements to its data processing and telecommunications systems.
The Company also opened 23 branch offices and made improvements to certain
existing office facilities.
During 1993, the Company completed the following:
o Repaid $128 million of long-term and subordinated borrowings with
proceeds received from the issuance of $150 million in Medium-Term
Notes.
o Declared an increase in the quarterly cash dividend, which raised the
indicated annual dividend 25% from $.16 to $.20 per share. Total
dividends declared and paid on common stock were $11 million, or $.19
per share, during 1993.
During 1993, the Company did not repurchase any shares of its common stock.
As of December 31, 1993, authorization granted by the Company's Board of
Directors allowed for the potential repurchase of up to 1.3 million shares, of
which 500,600 shares were repurchased for $13.7 million from January 1, 1994
through February 25, 1994. The Company will continue to monitor opportunities
to repurchase common stock in cases where stockholder value would be enhanced.
CAPITAL ADEQUACY
The Company's stockholders' equity at December 31, 1993 totaled $379
million. In addition to its equity, the
9
<PAGE> 10
Company has long-term borrowings of $185 million that bear interest at a
weighted average rate of 6.0%. These borrowings, together with the Company's
equity, provided total financial capital of $564 million at December 31, 1993.
The Company monitors its financial leverage and the adequacy of its capital
base relative to the level and composition of its assets using various
financial measures. One of these measures is the ratio of total assets to total
stockholders' equity. At December 31, 1993, the ratio of total assets to
stockholders' equity was 18 to 1 compared to a ratio of 23 to 1 at December 31,
1992. Of the Company's total assets, 95% are held in cash and cash equivalents,
interest-earning investments or secured receivables. Given the quality and
liquidity of these assets and the Company's intention of continuing to maintain
an appropriate capital base, management believes that the Company's ratio of
assets to equity could be increased to a level approaching 30 to 1.
LOOKING AHEAD
The recent general financial success within the securities industry has
strengthened existing competitors and attracted new competitors such as banks
and insurance companies. Management expects competition to continue to
intensify in 1994, which is likely to place downward pressure on profit
margins. The Company will respond to such competition by continuing to invest
heavily in service quality, technology, customer service delivery systems and
product development. To help ensure effective use of resources, the Company
will continue to focus on improving internal business processes with the goal
of enhancing customer service quality and the Company's cost structure.
The Company will continue to leverage cross-marketing opportunities within its
existing customer base and develop new products and services consistent with
evolving customer needs and its competitive-pricing philosophy. The Company
will continue to support its products and services with aggressive marketing
and promotional efforts. In 1993's challenging environment, the Company added
over $30 billion in customer assets and plans to do as well in 1994. The
Company intends to enhance customer service capacity by adding 20 to 30 branch
offices and by adding additional staff and equipment to existing customer
telephone service centers and branches.
While these activities require significant operating expense outlays and,
during certain years, significant capital expenditures, they are important
investments for the Company's long-term profitable growth. Management's
financial goals are to achieve over the long term a 20% annual revenue growth
rate while maintaining a 10% after-tax profit margin and a return on
stockholders' equity of 20%.
10
<PAGE> 11
The Charles Schwab Corporation
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Commissions $552,206 $441,429 $348,920
Principal transactions 169,081 130,013 63,421
Interest revenue, net of interest expense of $132,382 in
1993, $159,491 in 1992 and $225,558 in 1991 119,849 91,540 76,640
Mutual fund service fees 98,554 63,391 54,152
Other 25,323 23,139 26,494
-------- -------- --------
Total 965,013 749,512 569,627
-------- -------- --------
EXPENSES EXCLUDING INTEREST
Compensation and benefits 392,768 306,615 234,364
Communications 94,348 75,854 57,272
Occupancy and equipment 76,668 65,241 51,203
Depreciation and amortization 44,433 40,490 51,930
Commissions, clearance and floor brokerage 43,039 32,116 20,679
Advertising and market development 40,726 33,810 25,249
Professional services 22,385 14,448 12,037
Other 44,374 34,710 28,796
-------- -------- --------
Total 758,741 603,284 481,530
-------- -------- --------
Income before taxes on income and extraordinary charge 206,272 146,228 88,097
Taxes on income 81,904 65,000 38,629
-------- -------- --------
Income before extraordinary charge 124,368 81,228 49,468
Extraordinary charge - early retirement of debt 6,700
-------- -------- --------
NET INCOME $117,668 $ 81,228 $ 49,468
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding* 59,450 58,568 58,625
======== ======== ========
EARNINGS PER COMMON EQUIVALENT SHARE*:
Income before extraordinary charge $ 2.09 $ 1.39 $ .84
Extraordinary charge - early retirement of debt .11
-------- -------- --------
Earnings per Common Equivalent Share $ 1.98 $ 1.39 $ .84
======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE* $ .190 $ .147 $ .085
======== ======== ========
</TABLE>
* Reflects the 1993 three-for-two common stock split.
See Notes to Consolidated Financial Statements.
(Chart Omitted) (Chart Omitted)
11
<PAGE> 12
The Charles Schwab Corporation
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, 1993 1992
------------ ---------- ----------
<S> <C> <C>
ASSETS
Cash and equivalents (including resale agreements of $120,000 in 1993) $ 279,828 $ 204,290
Cash and investments required to be segregated under Federal or other regulations
(including resale agreements of $3,267,440 in 1993 and $2,989,516 in 1992) 3,676,319 3,510,149
Receivable from brokers, dealers and clearing organizations 71,616 48,366
Receivable from customers (less allowance for doubtful accounts
of $2,229 in 1993 and $3,449 in 1992) 2,553,255 1,903,487
Equipment, office facilities and property (less accumulated depreciation
and amortization of $143,339 in 1993 and $120,685 in 1992) 136,440 89,534
Customer lists (less accumulated amortization of $130,434 in 1993
and $118,113 in 1992) 37,114 49,481
Other assets 141,945 99,929
---------- ----------
Total $6,896,517 $5,905,236
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Drafts payable $ 123,384 $ 102,332
Payable to brokers, dealers and clearing organizations 303,981 198,498
Payable to customers 5,745,783 5,075,507
Accrued expenses 158,866 118,412
Long-term and subordinated borrowings 185,330 151,679
---------- ----------
Total liabilities 6,517,344 5,646,428
---------- ----------
Stockholders' equity:
Preferred stock -- 10,000,000 shares authorized; $.01 par value
per share; none issued
Common stock -- 200,000,000 shares authorized; $.01 par value per share;
59,486,680 shares in 1993 and 58,761,013 shares in 1992* 595 392
Additional paid-in capital 161,052 141,946
Retained earnings 253,692 147,168
Treasury stock -- 1,649,478 shares in 1993 and 2,086,315 shares in 1992, at cost* (23,153) (26,444)
Note receivable from Profit Sharing Plan (13,013) (4,254)
---------- ----------
Stockholders' equity 379,173 258,808
---------- ----------
Total $6,896,517 $5,905,236
========== ==========
</TABLE>
* Reflects the 1993 three-for-two common stock split.
See Notes to Consolidated Financial Statements.
(Chart Omitted) (Chart Omitted)
12
<PAGE> 13
The Charles Schwab Corporation
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 117,668 $ 81,228 $ 49,468
Noncash items included in net income:
Depreciation and amortization 44,433 40,490 51,930
Deferred income taxes (5,352) (7,141) (629)
Other (1,074) 1,370 2,584
Extraordinary charge - early retirement of debt 11,205
Change in accrued expenses 43,653 20,616 47,018
Change in other assets (37,625) (11,163) (5,679)
--------- --------- ---------
Net cash provided before change in customer-related balances 172,908 125,400 144,692
--------- --------- ---------
Change in customer-related balances (excluding the effects of the
1991 acquisition of Mayer & Schweitzer, Inc.):
Payable to customers 670,276 693,737 666,873
Receivable from customers (648,548) (601,352) (479,960)
Drafts payable 21,052 23,891 19,228
Payable to brokers, dealers and clearing organizations 105,483 73,389 38,674
Receivable from brokers, dealers and clearing organizations (23,250) (757) (16,158)
Cash and investments required to be segregated under
Federal or other regulations (166,170) (193,574) (266,109)
--------- --------- ---------
Net change in customer-related balances (41,157) (4,666) (37,452)
--------- --------- ---------
Net cash provided by operating activities 131,751 120,734 107,240
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment, office facilities and property - net (77,127) (53,538) (27,428)
Collection on note receivable from Profit Sharing Plan 6,241 3,925 1,821
Cash payments for business acquired, net of cash received (11,489)
--------- --------- ---------
Net cash used by investing activities (70,886) (49,613) (37,096)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings 150,000 35,000
Repayment of long-term and subordinated borrowings (128,032) (2,676) (6,745)
Dividends paid (10,946) (8,411) (4,864)
Purchase of treasury stock (23,227) (6,205)
Proceeds from (repayment of) short-term borrowings (20,000) 20,000
Payment for surrendered contingent payment rights (15,951)
Exercise of warrants on common stock 1,861
Other 3,651 2,007 1,826
--------- --------- ---------
Net cash provided (used) by financing activities 14,673 (17,307) (10,078)
--------- --------- ---------
INCREASE IN CASH AND EQUIVALENTS 75,538 53,814 60,066
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 204,290 150,476 90,410
--------- --------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 279,828 $ 204,290 $ 150,476
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE> 14
The Charles Schwab Corporation
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Note
Receivable
Common Stock Additional from Profit
--------------- Paid-In Retained Treasury Sharing
Shares* Amount Capital Earnings Stock Plan Total
------- ------ --------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1990 54,978 $261 $141,887 $ 44,798 $(22,810) $(10,000) $154,136
------ ---- -------- -------- -------- -------- --------
Net income 49,468 49,468
Dividends declared on common stock (4,864) (4,864)
Purchase of treasury stock (821) (6,205) (6,205)
Exercise of warrants on common stock 3,055 (16,742) 18,603 1,861
Stock options exercised 552 409 3,187 3,596
Three-for-two stock split effected in the
form of a 50% stock dividend 131 (131)
Collection on note receivable from
Profit Sharing Plan 1,821 1,821
Other (6) (6)
------ ---- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1991 57,764 392 141,881 72,938 (7,225) (8,179) 199,807
------ ---- -------- -------- -------- -------- --------
Net income 81,228 81,228
Dividends declared on common stock (8,411) (8,411)
Purchase of treasury stock (1,660) (23,227) (23,227)
Stock options exercised 571 1,413 4,008 5,421
Collection on note receivable from
Profit Sharing Plan 3,925 3,925
Other 65 65
------ ---- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1992 56,675 392 141,946 147,168 (26,444) (4,254) 258,808
------ ---- -------- -------- -------- -------- --------
Net income 117,668 117,668
Dividends declared on common stock (10,946) (10,946)
Stock options and restricted stock
awards exercised 436 4,005 3,291 7,296
Three-for-two stock split effected in the
form of a 50% stock dividend 198 (198)
Common stock issued to Profit
Sharing Plan for a note receivable 726 5 14,995 (15,000)
Collection on note receivable from
Profit Sharing Plan 6,241 6,241
Other 106 106
------ ---- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1993 57,837 $595 $161,052 $253,692 $(23,153) $(13,013) $379,173
====== ==== ======== ======== ======== ======== ========
</TABLE>
* Share amounts are presented net of treasury shares and have been restated to
reflect the 1993 and 1991 three-for-two common stock splits.
See Notes to Consolidated Financial Statements.
14
<PAGE> 15
THE CHARLES SCHWAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The consolidated financial statements include The Charles Schwab Corporation
(CSC) and its subsidiaries (collectively the Company) including Charles Schwab
& Co., Inc. (Schwab), a securities broker-dealer, Mayer & Schweitzer, Inc.
(M&S), a market maker in Nasdaq securities, and other subsidiaries.
Revenues are presented net of interest expense. Prior years' financial
statements have been reclassified to conform to the 1993 presentation. All
material intercompany balances and transactions have been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
Securities transactions recorded by Schwab and the related revenues and
expenses are recorded on settlement date, which is generally five business days
after trade date. Revenues and expenses on a settlement date basis for Schwab
are not materially different from trade date. M&S records principal
transactions and the related revenues and expenses on a trade date basis.
Cash and investments required to be segregated under Federal or other
regulations consist primarily of securities purchased under agreements to
resell (Resale Agreements), U.S. Treasury securities, certificates of deposit
and commercial paper. Resale Agreements are accounted for as collateralized
financing transactions and are recorded at the amount for which the securities
will be resold. U.S. Treasury securities are stated at market. Certificates of
deposit and commercial paper are stated at cost, which approximates market.
Depreciation and amortization -- Equipment and office facilities are
depreciated on a straight-line basis over their estimated useful lives,
generally three to seven years. Property is depreciated on a straight-line
basis over twenty years. Leasehold improvements are amortized over the lesser
of their useful life or the life of the lease. Customer lists and other
intangibles are amortized on a straight-line basis over periods from four to
fifteen years.
Earnings per common equivalent share are calculated by dividing net income by
the sum of the weighted average number of common shares outstanding during the
period plus common share equivalents. Common share equivalents result from the
dilutive effect of stock options and warrants. Information presented in the
Consolidated Financial Statements and notes thereto regarding share and per
share amounts, stock option data and market prices give effect to the 1993 and
1991 three-for-two common stock splits, effected in the form of 50% stock
dividends.
Cash equivalents -- For purposes of reporting cash flows, the Company considers
all highly liquid investments (including Resale Agreements) with original
maturities of three months or less that are not required to be segregated under
Federal or other regulations to be cash equivalents.
Income taxes -- Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 -- Accounting for Income Taxes --
on a prospective basis. The adoption of SFAS No. 109 changes the Company's
method of accounting for income taxes from the deferred method previously
required by APB Opinion No. 11 to an asset and liability approach, which
requires the recognition of deferred tax assets and liabilities at tax rates
expected to be in effect when these balances reverse. Future tax benefits
attributable to temporary differences are recognized currently to the extent
that realization of such benefits is more likely than not. The adoption of this
accounting standard did not have a material impact on the Company's financial
position or results of operations.
Estimated fair value of financial instruments -- The Company considers the
amounts presented for financial instruments on the consolidated balance sheet
to be reasonable estimates of fair value except for long-term and subordinated
borrowings and certain off-balance sheet financial instruments. Disclosure of
the fair value of these instruments, determined by the Company using available
market information and appropriate valuation methodologies, is presented under
the "Long-Term and Subordinated Borrowings" note. Considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value and accordingly, the estimates are not necessarily indicative of the
amounts that the Company could realize in a current market transaction.
ACQUISITION
On July 1, 1991, CSC acquired M&S for $28 million. Because the transaction was
accounted for as a purchase, the operating results of M&S are included in the
consolidated results of the Company beginning July 1, 1991, and therefore, the
historic results of M&S are not included in prior periods. M&S reported
operating revenues of $28 million for the six-month period ended June 30, 1991.
SHORT-TERM FUNDING
The principal source of financing for Schwab's margin lending is cash
balances in customer Schwab One (registered trademark) brokerage accounts. At
December 31, 1993, Schwab was paying interest at 2.4% on $5.0 billion of cash
balances in Schwab One brokerage accounts, which were included in
15
<PAGE> 16
amounts payable to customers. For use in its brokerage operations, Schwab
maintains uncommitted bank credit lines totaling $390 million, of which $310
million is available on an unsecured basis. There were no borrowings
outstanding under these lines at December 31, 1993 and 1992.
LONG-TERM AND SUBORDINATED BORROWINGS
Long-term and subordinated borrowings at December 31, 1993 and 1992 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Senior Medium-Term Notes $150,000
Senior Term Loan 35,000 $ 35,000
Senior Subordinated Debentures 50,000
Junior Subordinated Debentures 65,728
Other (principally equipment financing) 330 951
-------- --------
Total $185,330 $151,679
======== ========
</TABLE>
During 1993, CSC issued $150 million aggregate principal amount of Senior
Medium-Term Notes, Series A (Medium-Term Notes), with fixed interest rates
ranging from 4.95% to 6.30% and maturities as follows: 1996 -- $26 million;
1997 -- $28 million; 1998 -- $30 million; and thereafter -- $66 million. The
Medium-Term Notes carry a weighted average interest rate of 5.82%. Proceeds
from the issuance of the Medium-Term Notes were used to prepay CSC's $50
million 10% Senior Subordinated Debentures and $66 million 9% Junior
Subordinated Debentures, which were due in 1998 and 2002, respectively, and to
pay a related prepayment premium of approximately $11 million. The $11 million
premium, net of its related $4 million tax benefit, is presented as a $7
million extraordinary charge to income for 1993. The remaining proceeds were
used for general corporate purposes.
The fair value of the Medium-Term Notes is estimated to be $148 million at
December 31, 1993 based on estimates of market rates for debt with similar
terms and remaining maturities. The fair value of the Senior and Junior
Subordinated Debentures was estimated to be $120 million at December 31, 1992.
In November 1993, CSC filed a Registration Statement with the SEC covering
the issuance of up to $100 million aggregate principal amount of debt
securities, which may be issued by CSC from time to time as senior or senior
subordinated debt securities, and may carry fixed or variable interest rates.
The net proceeds of the sale of the debt securities may be used for general
corporate purposes. There were no securities issued under this Registration
Statement at December 31, 1993.
CSC has a $35 million Senior Term Loan due in March 1995. An interest rate
exchange arrangement has been used to convert the loan's variable interest rate
to a fixed rate of 6.9%. The loan contains covenants, among others, that
require the Company to maintain minimum levels of stockholders' equity, and
require Schwab and M&S to maintain minimum levels of net capital as defined.
The fair value of the interest rate exchange arrangement is estimated to be
$1 million at December 31, 1993 and 1992 based on the estimated amount that CSC
would need to pay to terminate the exchange arrangement.
CSC maintains a $225 million committed unsecured credit facility with a
group of twelve banks. The funds are available for general corporate purposes
and CSC pays a commitment fee on the unused balance. The terms of this facility
require the Company to maintain minimum levels of stockholders' equity and
Schwab to maintain minimum levels of net capital as defined. The facility
contains an option to borrow $125 million of the $225 million at any time
during the term, for a period of up to 364 days from the date of borrowing.
CONTINGENT PAYMENT RIGHTS
As part of its 1987 acquisition of Schwab, CSC issued Contingent Payment
Rights which entitled the holder to receive a cash payment upon surrender equal
to the appreciation in the market value of CSC's common stock over a designated
amount. Changes in the value of the Contingent Payment Rights resulted in
adjustments to the purchase price of Schwab. These adjustments were allocated
to the fixed and intangible assets acquired based on the assets' fair values at
the acquisition date. In 1991, the remaining Contingent Payment Rights were
redeemed.
TAXES ON INCOME
Income tax expense, including the tax benefit related to the extraordinary
charge, is as follows (in thousands):
16
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $72,362 $58,452 $29,935
State 14,894 13,689 9,323
------- ------- -------
Total current 87,256 72,141 39,258
------- ------- -------
Deferred:
Federal (4,477) (6,267) (785)
State (875) (874) 156
------- ------- -------
Total deferred (5,352) (7,141) (629)
------- ------- -------
Taxes on income before
extraordinary charge 81,904 65,000 38,629
Current tax benefit - extraordinary
charge (4,504)
------- ------- -------
Total taxes on income $77,400 $65,000 $38,629
======= ======= =======
</TABLE>
The temporary differences which created deferred tax assets and liabilities
are detailed below (in thousands):
<TABLE>
<CAPTION>
At At
December 31, January 1,
1993 1993
------- -------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation $13,389 $ 7,027
Reserves and allowances 5,336 4,309
Depreciation and amortization 3,602 5,636
State and local taxes 2,367 2,407
------- -------
Total deferred assets 24,694 19,379
------- -------
Deferred Tax Liabilities:
Asset valuation differences (7,177) (6,926)
Other (1,173) (1,461)
------- -------
Total deferred liabilities (8,350) (8,387)
------- -------
Net deferred tax asset $16,344 $10,992
======= =======
</TABLE>
Other assets include net deferred tax assets of $16 million at December 31,
1993 and $11 million at January 1, 1993.
There is no valuation allowance associated with deferred tax assets at
January 1, 1993 and December 31, 1993.
Deferred income tax expense is recorded when revenues and expenses are
recognized in different periods for financial statement and tax return
purposes. The principal components of deferred tax benefit are (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Deferred compensation $(6,362) $(3,899) $(2,574)
Depreciation and amortization 2,034 806 519
Reserves and allowances (1,027) 850 (2,442)
Asset valuation differences 251 (82) 2,320
State and local taxes 40 (514) (1,096)
Unrealized gains and losses
on investments held (2,500) 3,004
Other (288) (1,802) (360)
------- ------- -------
Total deferred income tax benefit $(5,352) $(7,141) $ (629)
======= ======= =======
</TABLE>
The effective income tax rate differs from the amount computed by applying
the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 35.0% 34.0% 34.0%
State income taxes, net of
Federal tax benefit 4.5 5.8 7.1
Amortization of intangibles 4.5 2.5
Other .2 .2 .2
---- ---- ----
Effective income tax rate 39.7% 44.5% 43.8%
==== ==== ====
</TABLE>
STOCK OPTIONS, RESTRICTED STOCK AWARDS AND WARRANTS
The Company's stock option plans provide for granting to officers, directors
and other key employees options for the purchase of shares of common stock at
not less than market value on the date of grant, restricted stock or
performance units. To date, the Company has issued options and restricted stock
under the plans. Certain options are immediately exercisable and all options
expire within either eight or ten years from the date of grant. The options and
shares acquired upon exercise of each option generally vest over a four or
five-year period from the date of grant of the option. The Company may
repurchase unvested shares related to certain options at the exercise price
from any participant who ceases to be an employee or director of CSC or any of
its subsidiaries. A summary of option activity follows:
17
<PAGE> 18
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1990 3,530,596 $ .56 - 7.06
--------- --------------
Granted 67,500 8.94
Exercised (552,430) .56 - 7.06
Canceled (137,478) .56 - 7.06
--------- --------------
Outstanding at December 31, 1991 2,908,188 .56 - 8.94
--------- --------------
Granted 2,937,930 13.08 - 24.33
Exercised (571,121) .56 - 6.56
Canceled (54,115) .56 - 6.56
--------- --------------
Outstanding at December 31, 1992 5,220,882 .56 - 24.33
--------- --------------
Granted 640,112 20.75 - 34.63
Exercised (436,841) .56 - 31.25
Canceled (143,608) 4.33 - 13.08
--------- --------------
Outstanding at December 31, 1993 5,280,545 $ .56 - 34.63
========= ==============
</TABLE>
At December 31, 1993, options to purchase 2,147,668 shares were vested,
513,950 shares were available for future grants and 3,132,877 shares were
unvested.
In September 1993, the Company granted 25,900 shares of common stock to
certain officers of the Company. Sale of the stock is restricted for four years
from the date of grant. The restricted shares are held in custody by the
Company until the expiration or termination of the restriction. The common
stock had an aggregate fair market value of $.8 million at the date of grant.
Warrants to purchase 3,055,500 shares of common stock at $.63 per share
became exercisable in January 1991 when the shares of common stock underlying
the warrants were registered under the Securities Act of 1933. Warrants to
purchase 3,055,062 shares were exercised for $1.9 million prior to termination
of the registration period. The warrantholders included certain officers and
stockholders of the Company.
EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and employee stock ownership plan for
eligible employees. The Company matches certain employee contributions;
additional contributions to this plan are at the discretion of the Company.
Total Company contribution expense was $16 million for 1993, $11 million for
1992 and $7 million for 1991. In 1992, The Charles Schwab Trust Company, a
subsidiary of CSC, became trustee of the plan.
In January 1993, the Company's profit sharing and employee stock ownership
plan borrowed $15 million from the Company to purchase 725,805 newly issued
shares of the Company's common stock. The note receivable from the plan bears
interest at 7.9% and is due in annual installments through 2007.
In January 1991, the Company implemented a long-term cash incentive plan for
officers and key employees. Payments under this plan are based upon return on
stockholders' equity and pretax income, as defined, over the four-year period
ending December 31, 1994. Related compensation expense, accrued as pretax
income reaches certain targeted levels, was $16 million for 1993, $11 million
for 1992 and $6 million for 1991.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6 -- Employers' Accounting for Employee
Stock Ownership Plans (the Statement). The Statement requires income statement
recognition of the fair value of common stock released for allocation to
employees through an Employee Stock Ownership Plan (ESOP). As shares are
released for allocation to employees, the shares become outstanding for
earnings per share computations. Previously, the accounting rules provided for
the cost basis of shares released for allocation through ESOP plans to be
recognized as expense and all ESOP shares to be considered outstanding for
earnings per share computations. The Company adopted the Statement on January
1, 1994. Under the "grandfather" provisions of the new Statement, the Company
will not apply the Statement to shares purchased by the ESOP prior to December
31, 1992. Management believes the adoption of the new Statement will not have a
material impact on the Company's financial position, results of operations or
earnings per share.
REGULATORY REQUIREMENTS
Schwab and M&S are subject to the Securities and Exchange Commission's (SEC)
Uniform Net Capital Rule and each compute net capital under the alternative
method permitted by this Rule, which requires the maintenance of minimum net
capital, as defined, of the greater of 2% of aggregate debit balances arising
from customer transactions or a minimum dollar amount, which is based on the
type of business conducted by the broker-dealer. The minimum dollar amount for
both Schwab and M&S is $1 million. Under the alternative method, a
broker-dealer may not repay subordinated borrowings, pay cash dividends, or
make any unsecured advances or loans to its parent or employees if such payment
would result in net capital of less than 5% of aggregate debit balances or less
than 120% of its minimum dollar amount requirement. At December 31, 1993,
Schwab's net capital was $260 million (10% of aggregate debit balances), which
was $207 million in excess of the minimum required net capital and $128 million
in excess of 5% of aggregate debit balances. At December 31, 1993, M&S's net
capital was $13 million (163% of aggregate debit balances), which was $12
million in excess of its minimum required net capital.
In accordance with the requirements of SEC Rule 15c3-3, Schwab had a portion
of its cash and investments
18
<PAGE> 19
segregated for the exclusive benefit of customers at December 31, 1993. Under
Rule 15c3-3, M&S had no cash reserve requirement on December 31, 1993.
COMMITMENTS, CONTINGENT LIABILITIES AND OTHER INFORMATION
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at December 31,
1993 are as follows (in thousands):
<TABLE>
<S> <C>
1994 $46,369
1995 36,681
1996 30,222
1997 25,284
1998 19,771
Thereafter 49,308
=======
</TABLE>
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was
$56 million for 1993, $48 million for 1992 and $37 million for 1991.
The Company has entered into certain agreements with its Chairman that
provide compensation for employment through 1995 and for the use of his name
and likeness subsequent to his employment. The agreements can be terminated
only under limited circumstances. Aggregate amounts paid pursuant to the name
and likeness agreement cannot exceed $2 million per year (subject to adjustment
for changes in the cost of living since 1987) for a maximum of 15 years after
compensation under the employment agreement ceases.
In the normal course of its margin lending activities, Schwab is
contingently liable to the Options Clearing Corporation for the margin
requirement of customer margin securities transactions. Such margin requirement
is secured by a pledge of customers' margin securities. This contingent
liability was $73 million at December 31, 1993.
Through its broker-dealer subsidiaries, the Company loans securities
temporarily to other brokers in connection with its security lending
activities. The Company receives cash as collateral for the securities loaned.
Increases in security prices may cause the market value of the securities
loaned to exceed the amount of cash received as collateral. In the event the
counterparty to these transactions does not return the loaned securities, the
Company may be exposed to the risk of acquiring the securities at prevailing
market prices in order to satisfy its customer obligations. The Company
controls this risk by requiring credit approvals for counterparties, by
monitoring the market value of securities loaned on a daily basis and by
requiring additional cash as collateral when necessary.
The Company is obligated to settle transactions with brokers and other
financial institutions even if its customers fail to meet their obligations to
the Company. Customers are required to complete their transactions on
settlement date, generally five business days after trade date. If customers do
not fulfill their contractual obligations, the Company may incur losses. The
Company has established procedures to reduce this risk by requiring deposits
from customers for certain types of trades.
As customers write option contracts or sell securities short, the Company
may incur losses if the customers do not fulfill their obligations and the
collateral in customer accounts is not sufficient to fully cover losses which
customers may incur from these strategies. To control this risk, the Company
monitors required margin levels daily and customers are required to deposit
additional collateral, or reduce positions, when necessary.
In its capacity as market maker, M&S maintains inventories in Nasdaq
securities on both a long and short basis. While long inventory positions
represent M&S ownership of securities, short inventory positions represent
obligations of M&S to deliver specified securities at a contracted price, which
may differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. To control the
risk of losses, long and short positions are continuously monitored to assure
compliance with limits established by the Company.
In January 1992, the Company filed a petition in U.S. Tax Court refuting a
claim for additional Federal income tax asserted by the Internal Revenue
Service (IRS) in December 1991. The asserted additional tax of $28 million,
excluding interest, arises from the IRS's audit of the tax periods ended March
31, 1988 and December 31, 1988. Substantially all the asserted additional tax
relates to deductions claimed by the Company for depreciation and amortization
of tangible and intangible assets received in the Company's 1987 acquisition of
Schwab. The contested issues extend to the Company's taxable years ended
December 31, 1989 through 1993.
Of the $28 million additional tax asserted by the IRS against the
Company, approximately $11 million relates to deductions derived from the
amortization of customer lists. In April 1993, the U.S. Supreme Court ruled in
Newark Morning Ledger Co. v. U.S. that in appropriate circumstances a taxpayer
may amortize the cost of certain intangible assets (such as customer lists)
over the useful life of such assets. While the Supreme Court's decision in
Newark Morning Ledger confirms the Company's ability to amortize for tax
purposes certain of its intangible assets, issues involving the valuation of
these intangible assets remain unresolved in the Company's case with the IRS.
19
<PAGE> 20
Management believes that these matters will be resolved without a material
adverse effect on the Company's financial position.
There are other various lawsuits pending against the Company which, in the
opinion of management, will be resolved with no material impact on the
Company's financial position or results of operations.
CONCENTRATIONS OF CREDIT RISK
Schwab enters into collateralized Resale Agreements which could result in
losses in the event the counterparty to the transaction does not purchase the
securities held as collateral for the cash advanced and the market value of
these securities declines. To control this risk, Schwab requires that the
counterparty deliver to a custodian securities to be held as collateral with a
market value in excess of the resale price. Schwab also sets standards for the
credit quality of the counterparty. Schwab also monitors the market value of
the underlying securities as compared to the related receivable, including
accrued interest, and requires additional collateral where deemed appropriate.
Certificates of deposit (CDs) included in cash and investments required to
be segregated under Federal or other regulations must comply with the
requirements of SEC Rule 15c3-3. Accordingly, such CDs are limited to domestic
banks and are subject to limitations based on the size of the issuing bank and
Schwab's net capital. In addition, Schwab has established procedures to reduce
the risk of loss by setting credit quality standards, monitoring issuers for
changes, and setting size and maturity limits. At December 31, 1993, CDs
represented 6% of total cash, cash equivalents and investments required to be
segregated, up from 5% at December 31, 1992. All CD issuers had an investment
grade rating at December 31, 1993 as determined by a Nationally Recognized
Statistical Rating Organization.
CASH FLOW INFORMATION
Certain investing and financing activities of the Company affect its
financial position but do not affect cash flows. The following table summarizes
those transactions (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Common stock issued to Profit
Sharing Plan for a note receivable $15,000
=======
Purchase of Mayer & Schweitzer, Inc.:
Assets acquired $ 46,261
Liabilities assumed (18,158)
--------
Cash payments 28,103
Cash received (16,614)
--------
Cash payments, net of cash received $ 11,489
========
Increase in assets and
Contingent Payment Rights liability $ 6,532
========
</TABLE>
Certain additional information affecting the cash flows of the Company follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Income taxes paid $ 86,453 $ 64,625 $ 29,999
======== ======== ========
Interest paid:
Customers $114,606 $141,135 $207,630
Long-term and subordinated
borrowings 13,584 13,134 12,616
Other 4,400 8,833 2,879
-------- -------- --------
Total interest paid $132,590 $163,102 $223,125
======== ======== ========
</TABLE>
SUBSEQUENT EVENT
From January 1, 1994 through February 25, 1994, the Company repurchased and
recorded as treasury stock a total of 500,600 shares of its common stock for
$13.7 million.
20
<PAGE> 21
MANAGEMENT'S REPORT
To Our Stockholders:
Management of the Company is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and the other financial
information presented in this report. To meet these responsibilities we
maintain a system of internal control that is designed to provide reasonable
assurance as to the integrity and reliability of the financial statements, the
protection of Company and customer assets from unauthorized use, and the
execution and recording of transactions in accordance with management's
authorization. The system is augmented by careful selection of our managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring that employees
adhere to the highest standards of personal and professional integrity. The
Company's internal audit function monitors and reports on the adequacy of and
compliance with our internal controls, policies and procedures. Although no
cost-effective internal control system will preclude all errors and
irregularities, we believe the Company's system of internal control is adequate
to accomplish the objectives set forth above.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and necessarily include some amounts
that are based on estimates and our best judgments. The financial statements
have been audited by the independent accounting firm of Deloitte & Touche,
whose audit included consideration of the internal control structure to the
extent necessary to render their opinion on the financial statements. We made
available to Deloitte & Touche all the Company's financial records and related
data. We believe that all representations made to Deloitte & Touche during
their audit were valid and appropriate.
The Board of Directors through its Audit Committee, which is comprised
entirely of nonmanagement directors, has an oversight role in the area of
financial reporting and internal control. The Audit Committee periodically
meets with Deloitte & Touche, our internal auditors, and Company management to
review accounting, auditing, internal control and financial reporting matters.
Charles R. Schwab
Chairman of the Board and Chief Executive Officer
A. John Gambs
Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of The Charles
Schwab Corporation:
We have audited the accompanying consolidated balance sheets of The Charles
Schwab Corporation and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Charles Schwab Corporation
and subsidiaries at December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
San Francisco, California
February 17, 1994
(February 25, 1994 as to Subsequent Event note)
21
<PAGE> 22
The Charles Schwab Corporation
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Millions, Except Per Share Data and Ratios)
<TABLE>
<CAPTION>
Weighted Earnings Dividends
Average per Declared Range Range
Expenses Common Common per of Common of Price/
Excluding Net Equivalent Equivalent Common Stock Price Earnings
Revenues(a) Interest Income Shares Share Share per Share(b) Ratio(c)
----------- --------- ------- ---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 by Quarter
Fourth $257.5 $212.3 $28.5 59.8 $.48 $.050 $38.38 - 28.75 19 - 15
Third 238.8 191.1 22.2(d) 59.7 .37(d) .050 37.13 - 26.75 18 - 13
Second 232.4 180.4 31.6 59.3 .53 .050 29.00 - 20.42 17 - 12
First 236.3 174.9 35.4 59.0 .60 .040 24.83 - 16.58 17 - 11
------ ------ ----- ---- ----- ----- -------------- -------
1992 by Quarter
Fourth $193.5 $148.2 $25.2 57.8 $.44 $.040 $18.58 - 11.08 13 - 8
Third 159.3 144.3 7.8 58.2 .13 .040 17.33 - 11.17 14 - 9
Second 176.8 143.8 18.5 59.1 .31 .040 23.08 - 13.58 18 - 10
First 219.9 167.0 29.7 59.2 .50 .027 25.17 - 19.42 22 - 17
------ ------ ----- ---- ----- ----- -------------- -------
1991 by Quarter
Fourth $167.3 $138.6 $16.1 59.0 $.27 $.027 $22.42 - 13.22 26 - 16
Third 147.4 122.9 13.2 58.7 .22 .022 13.89 - 11.06 23 - 19
Second 128.9 112.3 9.5 58.5 .16 .018 11.06 - 7.89 23 - 16
First 126.1 107.7 10.6 58.3 .18 .018 9.11 - 5.06 23 - 13
------ ------ ----- ---- ----- ----- -------------- -------
1990 by Quarter
Fourth $ 93.9 $ 92.1 $ 1.0 58.5 $.02 $.018 $ 6.06 - 5.06 22 - 18
Third 103.9 91.3 7.2 60.1 .12 .013 7.33 - 4.72 21 - 13
Second 96.7 88.4 4.8 61.9 .08 .013 7.72 - 6.56 25 - 21
First 92.9 86.5 3.7 61.7 .06 .013 7.94 - 5.89 26 - 20
------ ------ ----- ---- ----- ----- -------------- -------
1989 by Quarter
Fourth $ 93.0 $ 82.3 $ 6.1 62.1 $.10 $.013 $ 6.67 - 5.17 22 - 17
Third 88.2 80.2 4.6 62.3 .07 .013 7.56 - 4.89 35 - 23
Second 87.0 79.6 4.2 62.7 .07 .013 5.39 - 3.89 29 - 21
First 77.6 70.6 4.0 62.4 .06 4.72 - 3.00 31 - 20
====== ====== ===== ==== ===== ===== ============== =======
</TABLE>
All share and per share data has been restated to reflect the 1993 and 1991
three-for-two common stock splits.
(a) Revenues are presented net of interest expense.
(b) Represents New York Stock Exchange (NYSE) high and low range of common
stock price per share, as restated for the three-for-two common stock
splits.
(c) Price/Earnings Ratio is computed by dividing the high and low market
prices, as restated for the three-for-two common stock splits, by
earnings per share for the 12-month period ending on the last day of
the quarter presented. The extraordinary charge in 1993 has been
excluded.
(d) Net income and earnings per share are net of the effect of $6.7
million ($.11 per share) extraordinary charge on the early retirement
of debt.
COMMON STOCK DATA
The common stock of The Charles Schwab Corporation is listed on the New
York and Pacific Stock Exchanges under the ticker symbol SCH. The number of
record holders of common stock as of February 17, 1994 was 1,603. The last
reported sales price on that date was $26 1/4.
22
<PAGE> 23
THE CHARLES SCHWAB CORPORATION
CHART APPENDIX LIST
In this appendix, the following descriptions of certain charts in
portions of the Company's 1993 Annual Report to Stockholders that are omitted
from the EDGAR Version are more specific with respect to the actual numbers,
amounts and percentages than is determinable from the charts themselves. The
Company submits such more specific descriptions only for the purpose of
complying with the requirements for transmitting portions of this Annual Report
on Form 10-K electronically via EDGAR; such more specific descriptions are not
intended in any way to provide information that is additional to the
information otherwise provided in portions of the Annual Report.
<TABLE>
<CAPTION>
EDGAR Version
Page Number CHART DESCRIPTION
----------- -----------------
<S> <C>
2 Combination bar/line chart titled "Company Revenues vs. NYSE and Nasdaq Share Volume"
depicting revenues (shown on the right axis) for the fiscal years 1983, 1984, 1985, 1986,
1987, 1988, 1989, 1990, 1991, 1992 and 1993 (shown on the bottom axis) as follows (in
millions of dollars): $108, $112, $160, $257, $371, $267, $346, $387, $570, $750 and
$965, respectively. In addition, the chart shows NYSE & Nasdaq average daily share
volume combined (shown on the left axis) of (in millions of shares) 148, 151, 191, 255,
339, 284, 299, 289, 343, 393 and 528, respectively.
2 Stacked bar chart titled "Total Customer Assets at Schwab" depicting the composition of
customer assets (shown on the left axis) at year end 1989, 1990, 1991, 1992 and 1993
(shown on the bottom axis) as follows (in billions of dollars): Cash and Equivalents
$8.2, $10.6, $12.6, $15.6 and $20.1, respectively; Stocks (net of margin loans) $11.7,
$12.7, $22.1, $29.6 and $39.5, respectively; Mutual Fund Marketplace (registered mark)
(includes Mutual Fund OneSource (trademark) balances) $2.1, $2.6, $6.1, $11.5 and $24.9,
respectively; Schwab Equity and Bond Funds $0, $0, $.3, $.7 and $1.3, respectively; Fixed
Income Securities $3.3, $4.7, $6.4, $8.2 and $10.0, respectively.
3 Stacked bar chart titled "Schwab Daily Average Volume" depicting the composition of
Schwab's daily average volume (shown on the left axis) for the fiscal years 1989, 1990,
1991, 1992 and 1993 (shown on the bottom axis) as follows (in thousands of trades):
Commission and Other Trades 11.9, 13.1, 18.3, 23.2 and 29.6, respectively; Mutual Fund
OneSource (trademark) Trades 0, 0, .3, 1.4 and 7.4, respectively.
3 Pie chart titled "Composition of Revenues" depicting composition of revenues (percentage
of total) for the fiscal years 1991, 1992 and 1993 as follows: Commissions 61%, 60% and
57%, respectively; Principal Transactions 11%, 17% and 18%, respectively; Net Interest
Revenue 13%, 12% and 12%, respectively; Mutual Fund Service Fees 10%, 8% and 10%,
respectively; Other 5%, 3% and 3%, respectively.
3 Stacked bar chart titled "Commissions" depicting the composition of commissions (shown on
the left axis) for the fiscal years 1991, 1992 and 1993 (shown on the bottom axis) as
follows (in millions of dollars): Listed $203, $251 and $300, respectively; Options $31,
$32 and $37, respectively; Nasdaq $89, $122 and $169, respectively; Other $26, $36 and
$46, respectively.
</TABLE>
<PAGE> 24
<TABLE>
<S> <C>
6 Pie chart titled "Expenses Excluding Interest" depicting composition of expenses
excluding interest (percentage of total) for the fiscal years 1991, 1992 and 1993 as
follows: Compensation and Benefits 49%, 51% and 52%, respectively; Communications 12%,
13% and 12%, respectively; Occupancy and Equipment 11%, 11% and 10%, respectively;
Depreciation and Amortization 11%, 7% and 6%, respectively; Other 17%, 18% and 20%,
respectively.
6 Stacked bar chart titled "Compensation and Benefits" depicting the composition of
compensation and benefits (shown on the left axis) for the fiscal years 1991, 1992 and
1993 (shown on the bottom axis) as follows (in millions of dollars): Salary and Wages
$140, $183 and $225, respectively; Variable Compensation $58, $80 and $108, respectively;
Other Benefits $36, $44 and $60, respectively.
11 Bar chart titled "Revenues" depicting revenues (shown on the left axis) for the fiscal
years 1991, 1992 and 1993 (shown on the bottom axis) as follows (in millions of dollars):
$570, $750 and $965, respectively.
11 Bar chart titled "Net Income" depicting net income (shown on the left axis) for the fiscal
years 1991, 1992 and 1993 (shown on the bottom axis) as follows (in millions of dollars):
$49, $81 and $118, respectively.
12 Bar chart titled "Ratio of Assets to Equity" depicting the Company's ratio of assets to
equity (shown on the left axis) at year end 1991, 1992 and 1993 (shown on the bottom
axis) as follows: 25 to 1, 23 to 1 and 18 to 1, respectively.
12 Stacked bar chart titled "Composition of Assets" depicting the composition of the
Company's assets (shown on the left axis) at year end 1991, 1992 and 1993 (shown on the
bottom axis) as follows (in millions of dollars): Cash and Investments $3,467, $3,714
and $3,956, respectively; Secured Receivables $1,350, $1,952 and $2,625, respectively;
Other $208, $239 and $316, respectively.
</TABLE>
<PAGE> 1
EXHIBIT 21.1
THE CHARLES SCHWAB CORPORATION
SUBSIDIARIES OF THE REGISTRANT
SCHWAB HOLDINGS, INC., a Delaware corporation
CHARLES SCHWAB & CO., INC., a California corporation
CHARLES SCHWAB (HONG KONG) LIMITED, a Hong Kong corporation
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation
MAYER & SCHWEITZER, INC., a New Jersey corporation
THE CHARLES SCHWAB TRUST COMPANY, a California corporation
CHARLES SCHWAB LIMITED, a United Kingdom corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-21582 on Form S-8, in Registration Statement
No. 33-30260 on Form S-8, in Registration Statement No. 33-37485 on Form S-8,
in Registration Statement No. 33-45356 on Form S-8, in Registration Statement
No. 33-37842 on Form S-8, in Registration Statement No. 33-65342 on Form S-3
and in Registration No. 33-50923 on Form S-3 of The Charles Schwab Corporation
of our reports dated February 17, 1994 (February 25, 1994 as to Subsequent
Event note) appearing in and incorporated by reference in this Annual Report on
Form 10-K of The Charles Schwab Corporation for the year ended December 31,
1993.
DELOITTE & TOUCHE
San Francisco, California
March 30, 1994
