<PAGE>
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, 1995 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock - $0.01 par value New York Stock Exchange, Inc.
The Pacific Stock Exchange Incorporated
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 8, 1996, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $2,807,367,450. 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 8, 1996 was
174,823,199* shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II of this Form 10-K incorporate certain information contained in the
registrant's 1995 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 6, 1996 by reference to portions of that document.
* Reflects the March 1995 three-for-two common stock split and the September
1995 two-for-one common stock split.
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THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 1995
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TABLE OF CONTENTS
Part I
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Item 1. Business------------------------------------------------------- 1
Item 2. Properties----------------------------------------------------- 9
Item 3. Legal Proceedings---------------------------------------------- 10
Item 4. Submission of Matters to a Vote of Security Holders------------ 10
Item 4a. Executive Officers of the Registrant--------------------------- 10
Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters-------------------------------------------- 10
Item 6. Selected Financial Data---------------------------------------- 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations---------------------------- 10
Item 8. Financial Statements and Supplementary Data-------------------- 11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure------------------------- 11
Part III
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Item 10. Directors and Executive Officers of the Registrant------------- 11
Item 11. Executive Compensation----------------------------------------- 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management------------------------------------------------- 13
Item 13. Certain Relationships and Related Transactions----------------- 13
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K--------------------------------------------------- 13
Exhibit Index---------------------------------------------- 14
Signatures------------------------------------------------- 19
Index to Financial Statement Schedules--------------------- F-1
FORWARD-LOOKING STATEMENTS - In addition to the historical information contained
throughout this Annual Report on Form 10-K, there are forward-looking statements
that reflect management's expectations for the future. A variety of important
factors could cause results to differ materially from such statements. These
factors are noted throughout this Annual Report on Form 10-K and include: the
actions of both current and potential new competitors, rapid changes in
technology, financial market volatility, evolving industry regulation, customer
trading patterns, and new products and services.
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PART I
Item 1. Business
(a) General Development of Business. The Charles Schwab Corporation (CSC) is
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a holding company engaged, through its subsidiaries, in securities brokerage and
related investment services. CSC's principal operating subsidiary, Charles
Schwab & Co., Inc. (Schwab), serves an estimated 51% of the discount brokerage
market, up from 50% (a) in 1994. Another subsidiary, Mayer & Schweitzer, Inc.
(M&S), a market maker in Nasdaq securities, provides trade execution services to
broker-dealers and institutional customers. During 1995, orders handled by M&S
totaled over 7 billion shares, or approximately 7% of the total shares traded on
Nasdaq. As used herein, the "Company" refers to CSC and its 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 September 1987, the Company raised $123 million in its initial public
offering. Since becoming a publicly-owned entity, the Company has experienced
significant growth in revenues, net income and customer assets. 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 proprietary money market funds.
Substantially all of the balances previously invested by Schwab customers in
other money market funds having similar investment objectives were transferred
to these proprietary money market funds in January 1990. Schwab subsequently
introduced additional proprietary mutual funds. The Company refers to all funds
for which CSIM is the investment adviser as the SchwabFunds (registered
trademark).
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 substantially all the Nasdaq security trades
originated by the customers of Schwab, which in 1995 accounted for approximately
21% of Schwab's total trading volume.
During July 1992, Schwab introduced nationally its no-transaction-fee mutual
fund service, known as the Mutual Fund OneSource (registered trademark) service,
which at December 31, 1995, enabled customers to trade 370 mutual funds in 44
well-known fund families without incurring brokerage transaction fees.
In March 1992, CSC opened The Charles Schwab Trust Company (CSTC), which
provides custody services for independent investment managers and serves as
trustee for employee benefit plans (primarily 401(k) plans). CSTC's primary
focus is to provide services to fee-based independent investment managers and
401(k) plan record keepers and administrators.
Developments During 1995
During 1995, the Company experienced record revenues, net income and growth in
customer assets. Net income for 1995 was $173 million, or $.97 per share, up
from $135 million, or $.77 per share, in 1994, and $118 million, or $.66 per
share, in 1993. The Company's strong performance was due in part to the $59.1
billion, or 48%, increase in assets held in Schwab customer accounts.
The Company invested $166 million in various capital expenditures during 1995,
including the expansion of each of its regional customer telephone service
centers, and enhancements to its data processing and telecommunications systems.
The Company also opened 19 branch offices and made improvements to certain
existing office facilities. During 1995, the Company paid approximately
$68 million, net of cash received, for businesses acquired, the largest of which
was ShareLink Investment Services plc (ShareLink), a retail discount securities
brokerage firm located in the United Kingdom.
During 1995, the Company's Board of Directors declared two stock splits of the
Company's common stock effected in the form of stock dividends: a three-for-two
common stock split payable March 1995; and a two-for-one common stock split
payable September 1995. Share information throughout this report has been
restated to reflect these transactions. Also, the Board increased the Company's
quarterly cash dividend 29% in January 1995 to $.03 per share payable
February 1995, and 33% in July 1995 to $.04 per share payable August 1995.
During 1995, Schwab introduced e.Schwab (trademark), which provides customers
with online trading capability and significant discounts from Schwab's standard
commission rates for equity trades, along with discounts on other security
trades.
(b) Financial Information About Industry Segments. The Company operates in a
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single industry segment: securities brokerage and related investment services.
Fees received from the Company's proprietary mutual funds represented
(a) The Securities Industry Association revised its definition of discount
brokers in 1995. Schwab's share in 1994 was revised to 50% from 42%
under this new definition.
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approximately 12% of the Company's consolidated revenues in 1995. As of
December 31, 1995, approximately 28% 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 securities brokerage
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and related investment services to more than 3.4 million active (b) investor
accounts. These accounts held $181.7 billion in assets at December 31, 1995.
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, 1995. These revenue figures reflect developments in, and the
composition of, the Company's business.
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, however, Schwab offers a
variety of fee-based (primarily third-party) research and portfolio management
products and services. This segment of customers who want research and
portfolio management has become increasingly significant to Schwab's growth in
customer assets and accounts. During 1995, Schwab customer assets held in
accounts managed by approximately 5,600 active independent investment managers
increased $18.0 billion (55%) to a total of $50.6 billion.
As a market maker in Nasdaq securities, M&S generally executes customer trades
as principal. Revenues from M&S' market-making activities, along with revenues
from Schwab's specialist operations on the Pacific Stock Exchange, comprise
substantially all of the Company's principal transaction revenues.
The Company, through M&S and Schwab, maintains inventories of securities and
acts as principal in transactions with its customers primarily as a result of
its market-making activities in Nasdaq and exchange-listed securities, as well
as overnight positions in money market funds relating to the accommodation of
customer liquidity needs.
Schwab's customer service delivery systems reduce 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 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.
The securities brokerage industry is directly affected by 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, the
availability of credit and capital, legislation and regulation affecting the
United States and international business and financial communities, currency
values, and the level and volatility of interest rates. Sustained low volumes
of 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, which include commission and principal
transaction revenues.
In connection with its information processing systems, its branch office
network, its regional customer telephone service centers 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
volumes can result in increased profit and profit margin. 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. Additionally, during recent periods of high
transaction volumes and increased revenues, the Company has also made
substantial capital and operating expenditures to enhance future growth
prospects.
(b) Accounts with balances or activity within the preceding twelve months.
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Sources of Revenues
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
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1995 1994 1993
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Type of Revenue Amount Percent Amount Percent Amount Percent
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 356,069 25.1% $ 278,025 26.1% $ 299,153 31.0%
Nasdaq 283,024 19.9% 169,236 15.9% 168,855 17.5%
Mutual funds 58,470 4.1% 59,949 5.6% 47,265 4.9%
Options 53,333 3.8% 38,902 3.7% 36,933 3.8%
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Commissions 750,896 52.9% 546,112 51.3% 552,206 57.2%
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Mutual fund service fees 218,784 15.4% 156,812 14.7% 98,554 10.2%
Interest revenue
Investments, customer-related 283,031 19.9% 168,485 15.8% 112,944 11.7%
Margin loans to customers 264,025 18.6% 184,871 17.4% 132,471 13.7%
Other 21,064 1.5% 9,588 0.9% 6,816 0.7%
Interest expense (357,223) (25.1%) (198,236) (18.6%) (132,382) (13.7%)
- ---------------------------------------------------------------------------------------------------------------------
Interest revenue, net of
interest expense 210,897 14.9% 164,708 15.5% 119,849 12.4%
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Principal transactions 191,392 13.5% 162,595 15.3% 169,081 17.5%
Other 47,934 3.3% 34,370 3.2% 25,323 2.7%
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Total $1,419,903 100.0% $1,064,597 100.0% $ 965,013 100.0%
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This table should be read in connection with the Company's consolidated financial statements and notes in the
Company's 1995 Annual Report to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1 of
this report.
</TABLE>
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 general
financial success within the securities industry over the past several years has
strengthened existing competitors. Management believes that such success will
continue to attract additional competitors such as banks, software development
companies, insurance companies, providers of online financial and information
services, and others as they expand their product lines. Some of these
competitors are larger, more diversified, have greater capital resources, and
offer a wider range of services and financial products than the Company.
Particularly as financial services and products proliferate, to the extent such
competitors are able to attract and retain customers on the basis of the
convenience of one-stop shopping, the Company's business or its ability to grow
could be adversely affected. In many instances, the Company is competing with
such organizations for the same customers. 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
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offer discounted commissions to selected retail brokerage customers. Many
brokerage firms employ substantial funds in advertising and direct solicitation
of customers to increase their market share of commission dollars and other
securities-related income. If the well-capitalized brokerage firms pursue
these competitive strategies successfully, Schwab's customer asset growth,
commission revenues and profit margin could be adversely affected.
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, 1995, 1994 and 1993 was $53 million, $36 million and $41 million,
respectively. For the same years, the numbers of new accounts opened were
approximately 698,000, 688,000 and 644,000, respectively. Prior year amounts
are restated to reflect the $1,000 minimum opening balance requirement for basic
brokerage accounts implemented in July 1994. New account openings represent a
significant portion of the growth in customer assets, which the Company believes
is critical to growth in revenues. Accounts opened during 1995, 1994 and 1993
generated approximately 13%, 14% and 16% 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,
TeleBroker (registered trademark), StreetSmart (registered trademark) and
e.Schwab (trademark), branch personnel are able to focus a significant portion
of their time on business development.
Schwab advertises regularly in financially-oriented newspapers and periodicals
and occasionally in general circulation publications. Schwab advertisements
appear regularly on national and local cable television and periodically on
radio and independent television stations. Schwab also engages extensively in
targeted direct mail advertising through monthly statement "inserts" and special
mailings. Such efforts have increased Schwab's brand awareness among investors.
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. The Company has an
agreement with Mr. Schwab by which he, subject to certain limitations, has
assigned to the Company and Schwab all service mark, trademark, and trade name
rights in his name (and variations thereon) and likeness.
Products and Services
Accounts and Features. Each Schwab customer has a brokerage account through
----------------------
which securities may be purchased or sold. These securities include Nasdaq and
exchange-listed securities, options, mutual funds and fixed income investments,
including U.S. Treasuries, zero-coupon bonds, listed and OTC corporate bonds,
municipal bonds, GNMAs, unit investment trusts and CDs. If approved for margin
transactions, a customer may borrow a portion of the price of certain securities
purchased through Schwab, or may sell securities short. Customers must have
specific approval to trade options; as of December 31, 1995, approximately
169,000 accounts were so approved. To write uncovered options, customers must
go through an additional approval process and must maintain a significantly
higher level of equity in their brokerage accounts.
Because Schwab does not pay interest on cash balances in basic brokerage
accounts, it provides customers with an option to have cash balances in their
accounts automatically swept into certain SchwabFunds (registered trademark)
money market funds. In July 1994, Schwab instituted a $1,000 cash and/or
securities minimum opening balance requirement for basic brokerage accounts.
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. When a Schwab One customer is approved for margin
trading, the checks and debit card also provide access to margin cash available.
For cash balances awaiting investment, Schwab pays interest to Schwab One
customers at a discretionary rate of interest. Alternatively, Schwab One
customers seeking tax-exempt income may elect to have cash balances swept into
one of three tax-exempt SchwabFunds money market funds. During 1995, the number
of active Schwab One accounts increased 19% and the customer assets in all
Schwab One accounts increased 51%.
Schwab acts as custodian, as well as broker, for Individual Retirement
Accounts (IRAs). In Schwab IRAs, cash balances are swept daily into one of
three SchwabFunds money market funds. During 1995, active IRAs increased 17%
and customer assets in all IRAs increased 44%. Schwab also acts as custodian
and broker for Keogh accounts.
During 1995, Schwab continued to expand its Schwab 500 Brokerage (trademark)
service to attract and retain customers who trade frequently. This service
provides discounts from Schwab's standard commission rates, as well as
customized services and information resources.
Customer Financing. Customers' securities transactions are effected on either
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a cash or margin basis. Generally, a customer buying securities in a cash-only
brokerage account is required to make payment by settlement date, usually three
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business days after the trade is executed. However, for purchases of certain
types of securities, such as certain mutual fund shares, a customer must have a
cash or money market fund balance in his or her account sufficient to pay for
the trade prior to execution. When selling securities, a customer is required
to deliver the securities, and is entitled to receive the proceeds, on
settlement date. In an account authorized for margin trading, Schwab may lend
its customer a portion of the market value of certain securities up to the limit
imposed by the Federal Reserve Board, which for most equity securities is
initially 50%. Such loans are collateralized by the securities in the
customer's account. Short sales of securities represent sales of borrowed
securities and create an obligation to purchase the securities at a later date.
Customers may sell securities short in a margin account subject to minimum
equity and applicable margin requirements and the availability of such
securities to be borrowed and delivered.
Interest on margin loans to customers provides an important source of revenue
to Schwab. During the year ended December 31, 1995, Schwab's outstanding margin
loans to its customers averaged approximately $3.2 billion, up from 1994's
average of approximately $2.7 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 SEC 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 must be invested in qualified interest-
bearing securities. To the extent customer cash balances are available for use
by Schwab at interest costs lower than Schwab's costs of borrowing from
alternative sources (e.g., balances in Schwab One (registered trademark)
brokerage accounts) or at no interest cost (e.g., balances in other accounts and
outstanding checks that have not yet cleared Schwab's bank), Schwab's cost of
funds is reduced and its net income is enhanced. Such interest savings
contribute substantially to Schwab's profitability and, if a significant
reduction of customer cash balances were to occur, Schwab's borrowings from
other sources 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 (registered trademark) money market
funds, the cash balances available to Schwab for investments or for financing
margin loans are reduced. However, Schwab receives mutual fund service fees
from such funds based on the daily average invested balances.
See also "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in the Company's 1995 Annual Report to Stockholders, which
is incorporated herein by reference to Exhibit No. 13.1 of this report, and
"Regulation" below.
Mutual Funds. CSIM provides investment advisory and administrative services
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to the SchwabFunds, which consisted of nine money market funds, six bond funds,
three equity index funds and three asset allocation funds, containing stocks,
bonds and cash equivalents, at December 31, 1995. Customer assets invested in
the SchwabFunds totaled approximately $31.7 billion at December 31, 1995, a 36%
increase over the prior year. The Company intends to offer additional
proprietary mutual funds to its customers in the future.
Through its Mutual Fund Marketplace (registered trademark) program, Schwab
purchases and redeems for its customers shares of over 1000 mutual funds in over
200 fund families sponsored by third parties. At December 31, 1995, the Mutual
Fund Marketplace totaled $50.0 billion in customer assets, including $23.9
billion in the Mutual Fund OneSource (registered trademark) service. The Mutual
Fund Marketplace 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). Commissions from customer transactions
in mutual fund shares comprised approximately 8% of Schwab's total commission
revenues in 1995, compared to approximately 11% in 1994 and approximately 9% in
1993.
At December 31, 1995, Schwab's Mutual Fund OneSource service enabled customers
to trade 370 mutual funds in 44 well-known fund families without incurring
brokerage 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. While Schwab does not receive transaction fees (commissions) on
customer transactions in the Mutual Fund OneSource program, 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.
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Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade
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execution services in Nasdaq securities to broker-dealers, including Schwab, and
institutional customers. In most instances, customer orders are routed directly
to M&S' trading system and are executed automatically. M&S generally executes
customer trades as principal. M&S business practices call for competitively-
priced customer trade executions, generally defined as the highest bid price on
a sell order and the lowest offer price on a buy order available through the
National Association of Securities Dealers (NASD) member firms. Certain
customer trades are executed on a negotiated basis. Substantially all Nasdaq
security trades originated by the customers of Schwab are directed to M&S. In
1995's third quarter, the Company introduced a new service, Assurance Trading
(trademark), which provides customers an opportunity for price improvement on
certain trades in certain Nasdaq securities through the scanning of multiple
computer systems for a price better than the current quoted Nasdaq inside
price.
During 1994, Schwab commenced operation of specialist posts on the Pacific
Stock Exchange to make markets in exchange-listed securities and ended that year
with five posts that collectively made markets in over 240 securities. At
December 31, 1995, Schwab had fourteen specialist posts that collectively made
markets in approximately 700 securities. The majority of trades originated by
the customers of Schwab in exchange-listed securities for which Schwab makes a
market are directed to these posts.
In the normal course of its market making in Nasdaq and exchange-listed
securities activities, M&S and Schwab maintain inventories in such securities
on both a long and short basis. While long inventory positions represent M&S'
and Schwab's ownership of securities, short inventory positions represent
obligations of M&S and Schwab to deliver specified securities at a contracted
price, which may differ from market prices prevailing at the time of completion
of the transaction. Accordingly, long or short inventory positions may result
in gains or losses as market values of such securities fluctuate.
Services for Independent Investment Managers. To attract the business of
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accounts managed by fee-based independent investment managers, Schwab has a
dedicated group through which, among other things, it assigns specific,
experienced registered representatives to individual managers and occasionally
provides certain research materials for the benefit of the managed accounts.
Independent investment managers participating in this program may use SchwabLink
(trademark) to access information in their customers' accounts directly from
Schwab's computer data bases and to enter their customers' trades online.
During 1995, Schwab added approximately 800 independent investment managers to
this program, which at December 31, 1995 totaled more than 5,600. Schwab's
brokerage business generated by independent investment managers and other
professional investors represented approximately 13% of Schwab's total
commission revenues in 1995, 14% in 1994 and 11% in 1993.
Customer Service 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, 1995, the Company maintained a network
of over 225 branches throughout the United States, including a branch office in
the Commonwealth of Puerto Rico and the United Kingdom. Schwab plans to
continue its branch expansion program in 1996 by opening approximately 10 to 15
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 regional customer
telephone service centers.
Regional Customer Telephone Service Centers. Schwab's four regional customer
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telephone service centers, located in Indianapolis, Denver, Phoenix and Orlando,
handle calls to many of Schwab's toll-free numbers, customer calls that
otherwise would have to wait for available registered representatives at
branches during business hours, and calls routed from branches after hours and
on weekends. Through the service centers, customers may place orders twenty-
four hours a day, seven days a week, except for certain holidays. Customer
orders placed during nonmarket hours are routed to appropriate markets the
following business day. The capacity of the service centers allows new branches
to be opened and maintained at lower staffing levels.
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) enables customers to place
orders for stocks, options and certain mutual funds, including Mutual Fund
OneSource (registered trademark) transactions, as well as obtain real-time
securities quotes and account information electronically from any touchtone
telephone. TeleBroker,
- 6 -
<PAGE>
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. In 1994, Schwab
introduced TeleBroker (registered trademark) in Spanish, and in 1995
Mandarin and Cantonese languages were added.
Online access to brokerage and investment information services is also
available through Schwab's online trading software, StreetSmart (registered
trademark) for Windows (registered trademark) and Macintosh (registered
trademark), introduced in October 1993 and July 1994, respectively. In 1995,
Schwab enhanced its electronic delivery services by introducing a new online
trading software, e.Schwab (trademark), and upgrading StreetSmart to a more
powerful version. During 1995, TeleBroker and other electronic brokerage
services handled over 75% of Schwab's customer calls.
Information Systems
Schwab's operations rely heavily on its information processing and
communications systems. Schwab's system for processing a securities transaction
is highly automated. Registered representatives equipped with online computer
terminals can access customer account information, obtain securities prices and
related information, and enter orders online.
To support its customer service delivery systems, as well as other
applications such as clearing functions, account administration, record keeping
and direct customer access to investment information, Schwab maintains a
sophisticated computer network connecting all of the branch offices and regional
customer telephone service centers. Schwab's computers are also linked to the
major registered United States securities exchanges, M&S, the National
Securities Clearing Corporation and The Depository Trust Company.
Failure of Schwab's information processing or communications systems for a
significant period of time could limit Schwab's ability to process its large
volume of transactions accurately and rapidly. This could cause Schwab to be
unable to satisfy its obligations to customers and other securities firms, and
could result in regulatory violations. External events, such as an earthquake
or power failure, loss of external information feeds, such as security price
information, as well as internal malfunctions, such as those that could occur
during the implementation of system modifications, could render part of or all
such systems inoperative.
To enhance the reliability of the system and integrity of data, Schwab
maintains carefully monitored backup and recovery functions. These include
logging of all critical files intraday, duplication and storage of all critical
data outside of its central computer site every 24 hours, and maintenance of
facilities for backup and communications in San Francisco. They also include
the maintenance and periodic testing of a disaster recovery plan that management
believes would permit Schwab to recommence essential computer operations if its
central computer site were to become inaccessible. To reduce the exposure to
system failures caused by external factors, including earthquakes, the Company
relocated its primary data center in 1993 from San Francisco to a newly
constructed and owned site in Phoenix.
Clearing and Account Maintenance
Schwab performs clearing services for all securities transactions in customer
accounts. Schwab clears the vast majority of customer transactions through the
facilities of the National Securities Clearing Corporation or the Options
Clearing Corporation. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions. Schwab is obligated to settle transactions with
clearing corporations, mutual funds and other financial institutions even if
Schwab's customer fails to meet his or her obligations to Schwab. In addition,
for transactions that do not settle through a clearing corporation, Schwab takes
the risk of the other party's failure to settle the trade. See "Financial
Instruments with Off-Balance-Sheet and Credit Risk" in the Notes to Consolidated
Financial Statements in the Company's 1995 Annual Report to Stockholders, which
are incorporated herein by reference to Exhibit No. 13.1 of this report.
Employees
As of December 31, 1995, the Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of approximately 9,200 full-time employees, including approximately
8,000 full-time employees and part-time equivalents. 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
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<PAGE>
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 by the
SEC as M&S' primary regulator with respect to its securities activities.
During 1995, the American Stock Exchange was Schwab's designated primary
regulator with respect to options trading activities. The Chicago Board Options
Exchange is Schwab's designated primary regulator with respect to options
trading activities for 1996. These self-regulatory organizations adopt rules
(subject to approval by the SEC) governing the industry and conduct periodic
examinations of broker-dealers. Securities firms are also subject to
regulation by state securities authorities in the states in which they do
business. Schwab was registered as a broker-dealer in 50 states, the District
of Columbia and Puerto Rico as of December 31, 1995. M&S was registered as
a broker-dealer in 22 states as of December 31, 1995.
The principal purpose of regulations and discipline of broker-dealers and
investment advisers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers and
investment advisers. The regulations to which broker-dealers and investment
advisers are subject cover all aspects of the securities business, including
sales methods, trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping, fee arrangements, disclosure to clients, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations or changes in the interpretation or
enforcement of existing laws and rules may directly affect the method of
operation and profitability of broker-dealers and investment advisers. The SEC,
self-regulatory organizations and state securities authorities may conduct
administrative proceedings which can result in censure, fine, cease and desist
orders, or suspension or expulsion of a broker-dealer or an investment adviser,
its officers, or employees. Schwab and M&S have been the subject of such
administrative proceedings.
M&S is a significant participant in the Nasdaq market. During 1994, the
Department of Justice, the SEC and the NASD commenced a series of investigations
and regulatory actions involving the activities of many market makers in Nasdaq
securities. These investigations and regulatory actions have continued into
1996. Current and proposed rulemaking, regulatory actions, improvements in
technology, such as those which permit the introduction of Assurance Trading
(trademark) (see also "Market Making in Nasdaq and Exchange-Listed Securities"
above), changes in market practices and new market systems, if approved, could
significantly impact the manner in which business is currently conducted in the
Nasdaq market. The above factors, individually or in the aggregate, have had
and could continue to have a material adverse impact on M&S' revenues from
principal transactions.
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.
In addition, in 1995, Schwab has purchased from private insurers additional
account protection of up to $49.5 million per customer, as defined, for customer
securities positions only. Stocks, bonds, mutual funds and money market funds
are considered securities and are protected on a share basis for the purposes of
SIPC protection and the additional protection (i.e., protected securities may
either be replaced or converted into an equivalent market value as of the date a
SIPC trustee is appointed). Neither SIPC protection nor the additional
protection applies to fluctuations in the market value of securities.
Schwab is also authorized by the Municipal Securities Rulemaking Board to
effect transactions in municipal securities on behalf of its customers and has
obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending by Schwab and M&S is subject to the margin rules of the Board
of Governors of the Federal Reserve System and the NYSE. Under such rules,
broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board
Options Exchange govern the amount of margin customers must provide and maintain
in writing uncovered options.
As a California state-chartered trust company, CSTC is authorized to conduct
business in California, and is primarily regulated by the California State
Banking Department. Since it provides employee benefit plan trust services,
CSTC is also required to comply with the Employee Retirement Income Security Act
of 1974 (ERISA) and, consequently, is subject to oversight by both the Internal
Revenue Service and Department of Labor. CSTC is required under ERISA to
maintain a fidelity bond for the protection of employee benefit trusts for which
it serves as trustee.
Charles Schwab Limited, a subsidiary of Schwab, is registered as an arranger
with the Securities and Futures Authority (SFA) in the United Kingdom, and
engages in business development activities on behalf of Schwab.
ShareLink Limited, a subsidiary of ShareLink, is registered as a broker-dealer
with the SFA in the United Kingdom.
- 8 -
<PAGE>
Net Capital Requirements
As registered broker-dealers, Schwab and M&S are subject to the Uniform Net
Capital Rule (Rule 15c3-1) promulgated by the SEC (the Net Capital Rule), which
has also been adopted through incorporation by reference in NYSE Rule 325.
Schwab is a member firm of the NYSE and the NASD, and M&S is a member firm of
the NASD. The Net Capital Rule specifies minimum net capital requirements for
all registered broker-dealers and is designed to measure financial integrity and
liquidity. Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NYSE and the NASD, certain punitive actions by
the SEC and other regulatory bodies, and ultimately may require a firm's
liquidation. Because CSC itself is not a registered broker-dealer, it is not
subject to the Net Capital Rule. However, if Schwab failed to maintain
specified levels of net capital, such failure would constitute a default by CSC
under certain debt covenants.
"Net capital" is essentially defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings, less certain deductions that result
from excluding assets that are not readily convertible into cash and from
conservatively valuing certain other assets. These deductions include charges
that discount the value of firm security positions to reflect the possibility of
adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to be
provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. Such rule prohibits withdrawals that would reduce a broker-dealer's net
capital to an amount less than 25% of its deductions required by the Net Capital
Rule as to its security positions. The Net Capital Rule also allows the SEC,
under limited circumstances, to restrict a broker-dealer from withdrawing equity
capital for up to 20 business days.
Schwab and M&S have elected the alternative method of calculation under
paragraph (a)(1)(ii) of the Net Capital Rule, which requires a broker-dealer to
maintain minimum net capital equal to 2% of its "aggregate debit items,"
computed in accordance with the Formula for Determination of Reserve
Requirements for Brokers and Dealers (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 more than 15 consecutive
business days; NYSE Rule 326 also prohibits the expansion of business if net
capital is less than 5% of aggregate debit items for more than 15 consecutive
business days. The provisions of NYSE Rule 326 also become operative if capital
withdrawals (including scheduled maturities of subordinated borrowings during
the following six months) would result in a reduction of a firm's net capital to
the levels indicated.
If compliance with applicable net capital rules were to limit Schwab's or M&S'
operations and their ability to repay subordinated debt to CSC, this in turn
could limit CSC's ability to repay debt, pay cash dividends and purchase shares
of its outstanding stock. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" in the Company's 1995 Annual Report to
Stockholders, which is incorporated herein by reference to Exhibit No. 13.1 of
this report.
At December 31, 1995, Schwab was required to maintain minimum net capital
under the Net Capital Rule of $82 million and had total regulatory net capital
of $392 million. At December 31, 1995, the amounts in excess of 2%, 4% and 5%
of aggregate debit items were $310 million, $229 million and $188 million,
respectively.
At December 31, 1995, M&S was required to maintain minimum net capital under
the Net Capital Rule of $1 million and had total regulatory net capital of
$6 million. At December 31, 1995, the amount in excess of 2% of aggregate debit
items exceeded $5 million.
CSTC's capital requirement is established by the California Superintendent of
Banks under the California Financial Code (the 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, 1995, the ratio of contributed capital to
accumulated deficit was 3.0 to 1. If CSTC's capital declines, or if the
California Superintendent of Banks determines that additional capital is
required for other reasons, CSC could be required to contribute additional
capital to CSTC.
Item 2. Properties
The Company's corporate headquarters are located in a 28-story building at 101
Montgomery Street in San Francisco, California. The building contains
approximately 296,000 square feet and is leased by Schwab under a term expiring
in the year 2000. The current rental is approximately $8.7 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 443,000 additional square feet at year-end 1995. M&S'
headquarters are located in leased office space in Jersey City, New Jersey.
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<PAGE>
The Company's primary data center is located in Phoenix, Arizona in a 105,000
square feet facility owned by the Company.
All of Schwab's branch offices and three of its regional 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.
In September 1995, the Company entered into an agreement to purchase an office
building containing approximately 330,000 square feet located in Phoenix,
Arizona to be used for the expansion of its operations. The Company expects to
close this transaction in April 1996 using general corporate resources or
external financing.
Item 3. Legal Proceedings
The information required to be furnished pursuant to this item is set forth
under the caption "Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements in the Company's 1995 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 1995.
Item 4a. Executive Officers of the Registrant
See Item 10 in Part III of this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is listed on the New York and Pacific Stock
Exchanges under the ticker symbol SCH. The number of common stockholders of
record as of February 9, 1996 was 2,486.
The other information required to be furnished pursuant to this item is set
forth under the caption "Quarterly Financial Information (Unaudited)" in the
Company's 1995 Annual Report to Stockholders, which is incorporated herein by
reference to Exhibit No. 13.1 of this report.
Item 6. Selected Financial Data
The information required to be furnished pursuant to this item is set forth
under the captions "Operating Results (for the year)," "Other (for the year)"
and "Other (at year end)" in the Company's 1995 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 1995 Annual Report to Stockholders,
which is incorporated herein by reference to Exhibit No. 13.1 of this report.
Average balances and interest rates for the fourth quarters of 1995 and 1994
are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Three Months Ended
December 31,
1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $5,144 $4,040
Average interest rate 5.68% 5.27%
Margin loans to customers:
Average balance outstanding $3,759 $2,855
Average interest rate 8.08% 7.58%
Average yield on earning assets 6.69% 6.23%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $7,257 $5,645
Average interest rate 4.72% 4.21%
Other interest-bearing sources:
Average balance outstanding $ 441 $ 368
Average interest rate 4.46% 3.29%
Average noninterest-bearing portion $1,205 $ 881
Average interest rate on funding sources 4.07% 3.62%
Summary:
Average yield on earning assets 6.69% 6.23%
Average interest rate on funding sources 4.07% 3.62%
- ----------------------------------------------------------------------
Average net interest margin 2.62% 2.61%
======================================================================
</TABLE>
The increase in interest revenue, net of interest expense, from the fourth
quarter of 1994 to the fourth quarter of 1995 was primarily due to higher levels
of earning assets, partially
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<PAGE>
offset by increases in average interest rates on funding sources compared to
earning assets.
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 1995 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, 1995 (the Proxy Statement) under the captions
"Election of Directors" (excluding all information under the caption
"Information about the Board of Directors and Committees of the Board") and
"Principal Stockholders."
Executive Officers of the Registrant
The following table provides certain information about each of the Company's
current executive officers. Executive officers are elected by and serve at the
discretion of the Company's Board of Directors. However, Mr. Schwab has an
employment agreement with the Company through March 2000, which includes an
automatic renewal feature that, as of each March 31 (beginning in 1996), extends
the agreement for an additional year unless either party elects to not extend
the agreement.
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Charles R. Schwab 58 Chairman and Chief Executive Officer, and Director
Lawrence J. Stupski 50 Vice Chairman, and Director
David S. Pottruck 47 President and Chief Operating Officer, and Director
John Philip Coghlan 44 Executive Vice President - Schwab Institutional
A. John Gambs 50 Executive Vice President - Finance, and Chief Financial Officer
Daniel O. Leemon 42 Executive Vice President - Business Strategy
Dawn Gould Lepore 41 Executive Vice President and Chief Information Officer
Timothy F. McCarthy 44 Executive Vice President - Mutual Funds
Elizabeth Gibson Sawi 43 Executive Vice President - Electronic Brokerage
Tom Decker Seip 46 Executive Vice President - Retail Brokerage
Luis E. Valencia 51 Executive Vice President and Chief Administrative Officer
</TABLE>
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<PAGE>
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. Mr. Schwab is currently a
director of The Gap, Inc., Transamerica Corporation, AirTouch Communications and
a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab
Capital Trust and Schwab Annuity Portfolios, all registered investment
companies.
Mr. Stupski has been Vice Chairman of the Company since 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 and
the Company's President from November 1986 to July 1992. He also served as
Chief Executive Officer and Chief Operating Officer of Schwab from July 1988 to
July 1992. He served as Vice Chairman of Schwab from July 1992 to August 1994.
Mr. Pottruck has been Chief Operating Officer and a director of the Company
since March 1994, President of the Company and Chief Executive Officer of Schwab
since July 1992, and President of Schwab since July 1988. Mr. Pottruck was
Executive Vice President of the Company and Schwab from March 1987 to July 1992.
Mr. Pottruck joined Schwab in March 1984.
Mr. Coghlan has been Executive Vice President of the Company and Schwab and
General Manager of Schwab Institutional since July 1992. Mr. Coghlan joined
Schwab in January 1986, became Vice President in 1988 and became Senior Vice
President in 1990.
Mr. Gambs has been Executive Vice President - Finance, and Chief Financial
Officer of the Company and Schwab since he joined the Company in March 1988.
Mr. Leemon has been Executive Vice President - Business Strategy of the
Company and Schwab since September 1995. Before joining the Company in
September 1995, Mr. Leemon held various positions with The Boston Consulting
Group, Inc., a management consulting firm, from 1989 to 1995, including Vice
President from 1990.
Ms. Lepore has been Executive Vice President and Chief Information Officer of
the Company and Schwab since October 1993. Ms. Lepore joined Schwab in
September 1983 and became Senior Vice President in 1989.
Mr. McCarthy has been Executive Vice President - Mutual Funds of the Company
and Schwab and Chief Executive Officer of Charles Schwab Investment Management,
Inc. since September 1995. Before joining the Company in September 1995, Mr.
McCarthy was Chief Executive Officer of Jardine Fleming Unit Trusts Ltd., a
mutual fund company, from 1994 to 1995. From 1987 to 1994, he held various
executive positions with Fidelity Investments, including President of Fidelity
Investments Advisor Group, President of National Financial Institutional
Services and Executive Director of Fidelity Brokerage Group.
Ms. Sawi has been Executive Vice President - Electronic Brokerage of the
Company and Schwab since May 1995. Ms. Sawi was President of Charles Schwab
Investment Management, Inc. from April 1994 to September 1995. From April 1994
to May 1995, she was Executive Vice President - Mutual Funds of the Company and
Schwab. Prior to that, Ms. Sawi was Executive Vice President - Marketing and
Advertising of the Company and Schwab from January 1992 to April 1994. Ms. Sawi
joined Schwab in November 1982.
Mr. Seip has been Executive Vice President - Retail Brokerage of the Company
and Schwab since April 1994. He was President of Charles Schwab Investment
Management, Inc. (CSIM) from July 1992 to April 1994 and Chief Operating Officer
of CSIM from June 1991 to April 1994. From July 1992 to April 1994, Mr. Seip
was Executive Vice President - Mutual Funds and Fixed Income Products of the
Company and Schwab. He joined Schwab in January 1983. Prior to becoming Senior
Vice President of Schwab 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.
Mr. Valencia has been Executive Vice President and Chief Administrative
Officer of the Company and Schwab since February 1996. From March 1994 to
February 1996, Mr. Valencia was Executive Vice President - Human Resources of
the Company and Schwab. Before joining the Company in March 1994, he 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, Mr. Valencia held various positions with
Citicorp, including President and Chief Executive Officer of Transaction
Technology, a subsidiary of Citicorp, from 1990 to 1993.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is incorporated
by reference from portions of the Proxy Statement under the captions "Executive
Compensation" (excluding all information under the caption "Board Compensation
Committee Report on Executive
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<PAGE>
Compensation" and "Performance Graph") and "Certain Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is incorporated
by reference from portions of the Proxy Statement under the caption "Principal
Stockholders."
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is incorporated
by reference from a portion of the Proxy Statement under the caption "Certain
Transactions."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report
--------------------------------------
1. Financial Statements
The financial statements and independent auditors' report are set forth in the
Company's 1995 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 1995.
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<PAGE>
(c) Exhibits
--------
The exhibits listed below are filed as part of this annual report on Form
10-K.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
<S> <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.
4.2 Neither the Registrant nor its subsidiaries are parties to any
instrument with respect to long-term debt for which securities
authorized thereunder exceed 10% of the total assets of the
Registrant and its subsidiaries on a consolidated basis. Copies
of instruments with respect to long-term debt of lesser amounts
will be provided to the SEC upon request.
10.4 Form of Release Agreement dated as of March 31, 1987 among BAC,
Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc.
and former shareholders of Schwab Holdings, Inc. *
10.5 Employment Agreement Dated as of March 31, 1987 among the
Registrant, Charles Schwab & Co., Inc. and Charles R. Schwab
(superseded by, effective as of March 31, 1995, Exhibit 10.149
to the Registrant's Form 10-K for the year ended December 31,
1994 and incorporated herein by reference). *+
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.
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<PAGE>
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.
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. +
10.83 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.
10.99 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.
10.113 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.
- 15 -
<PAGE>
10.116 Second Amendment to the Trust Agreement for the Charles Schwab
Profit Sharing and Employee Stock Ownership Plan effective July
1, 1992, dated June 30, 1992, filed as Exhibit 10.116 to the
Registrant's Form 10-Q for the quarter ended June 30, 1992 and
incorporated herein by reference.
10.120 ESOP Loan Agreement, effective as of January 19, 1993, between
Registrant and The Charles Schwab Profit Sharing and Employee
Stock Ownership Plan and Trust, filed as Exhibit 10.120 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference. +
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). +
10.137 Credit Agreement dated as of June 30, 1994, between the
Registrant and the Banks listed therein, filed as Exhibit 10.137
to the Registrant's Form 10-Q for the quarter ended June 30,
1994 and incorporated herein by reference.
10.138 Form of Nonstatutory Stock Option Agreement for Non-Employee
Directors (filed as Exhibit 4.4 to the Company's Registration
Statement No. 33-47842 on Form S-8 and incorporated herein by
reference). +
10.140 Form of Restricted Shares Agreement (filed as Exhibit 4.6 to the
Company's Registration Statement No. 33-54701 on Form S-8 and
incorporated herein by reference). +
10.141 The Charles Schwab Corporation 1992 Stock Incentive Plan, as
amended October 18, 1994 (supersedes Exhibit 10.131 to
Registrant's Form 10-K for the year ended December 31, 1993),
filed as Exhibit 10.141 to the Registrant's Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by
reference. +
10.142 The Charles Schwab Corporation Deferred Compensation Plan, as
amended October 18, 1994 (supersedes Exhibit 10.133 to
Registrant's Form 10-K for the year ended December 31, 1993),
filed as Exhibit 10.142 to the Registrant's Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by
reference. +
10.143 Form of Nonstatutory Stock Option Agreement (supersedes Exhibit
10.139 to Registrant's Form 10-Q for the quarter ended June 30,
1994), filed as Exhibit 10.143 to the Registrant's Form 10-Q for
the quarter ended September 30, 1994 and incorporated herein by
reference. +
10.144 Form of Incentive Stock Option Agreement, filed as Exhibit
10.144 to the Registrant's Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference. +
10.146 Annual Executive Individual Performance Plan dated as of January
1, 1995 (supersedes Exhibit 10.134 to the Registrant's Form 10-K
for the year ended December 31, 1993), filed as Exhibit 10.146
to the Registrant's Form 10-K for the year ended December 31,
1994 and incorporated herein by reference. +
- 16 -
<PAGE>
10.147 Corporate Executive Bonus Plan dated as of January 1, 1995
(formerly the Annual Executive Bonus Plan) (supersedes Exhibit
10.130 to the Registrant's Form 10-K for the year ended December
31, 1993), filed as Exhibit 10.147 to the Registrant's Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference. +
10.149 Employment Agreement dated as of March 31, 1995 between the
Registrant and Charles R. Schwab (supersedes, effective as of
March 31, 1995, Exhibit 10.5 to the Registrant's Registration
Statement No. 33-16192 on Form S-1 and incorporated herein by
reference), filed as Exhibit 10.149 to the Registrant's Form
10-K for the year ended December 31, 1994 and incorporated
herein by reference. +
10.150 Reimbursement Agreement dated as of December 19, 1994 between
the Registrant and Bank of America National Trust and Savings
Association, filed as Exhibit 10.150 to the Registrant's Form 10-
K for the year ended December 31, 1994 and incorporated herein
by reference.
10.151 Foreign Exchange Transaction dated as of April 13, 1995 between
the Registrant and Morgan Stanley & Co. Incorporated, filed as
Exhibit 10.151 to the Registrant's Form 10-Q for the quarter
ended March 31, 1995 and incorporated herein by reference.
10.152 The Charles Schwab Profit Sharing and Employee Stock Ownership
Plan, amended July 6, 1995, effective January 1, 1995 and
April 1, 1995 (supersedes Exhibit 10.145 to the Registrant's
Form 10-K for the year ended December 31, 1994), filed as
Exhibit 10.152 in the Registrant's Form 10-Q for the quarter
ended June 30, 1995 and incorporated herein by reference. +
10.153 First Amendment dated June 29, 1995 to the Credit Agreement
dated June 30, 1994, between the Registrant and the banks listed
therein, filed as Exhibit 10.153 in the Registrant's Form 10-Q
for the quarter ended June 30, 1995 and incorporated herein by
reference.
10.154 First Amendment dated July 31, 1995, as further amended August
7, 1995, to the Reimbursement Agreement, dated December 19,
1994, between the Registrant and Bank of America National Trust
and Savings Association, filed as Exhibit 10.154 in the
Registrant's Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference.
10.155 Forms of Restricted Share Award Agreements, incorporating
performance vesting provisions and/or supplemental cash payment
provisions, filed as Exhibit 10.155 in the Registrant's Form 10-
Q for the quarter ended September 30, 1995 and incorporated
herein by reference. +
- 17 -
<PAGE>
10.156 Agreement of Sale, dated as of September 18, 1995, as amended by
letter agreement dated September 21, 1995 and by Second
Amendment to Agreement of Sale dated September 22, 1995, between
American Express Company and Charles Schwab & Co., Inc.,
regarding American Express Western Regional Operations Center
located at 2423 Lincoln Drive, Phoenix, Arizona, filed as
Exhibit 10.156 in the Registrant's Form 10-Q for the quarter
ended September 30, 1995 and incorporated herein by reference.
10.157 The Charles Schwab Corporation Directors' Deferred Compensation
Plan, effective January 1, 1996. +
11.1 Computation of Earnings per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
13.1 Portions of The Charles Schwab Corporation 1995 Annual Report to
Stockholders, which have been incorporated herein by reference.
Except for such portions, such annual report is not deemed to be
"filed" herewith.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule (electronic only).
* Incorporated by reference to the identically-numbered exhibit to Registrant's
Registration Statement No. 33-16192 on Form S-1, as amended and declared
effective on September 22, 1987.
+ Management contract or compensatory plan.
</TABLE>
- 18 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 28, 1996.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY: /s/ CHARLES R. SCHWAB
-----------------------
Charles R. Schwab
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 28, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ CHARLES R. SCHWAB Chairman, Chief Executive Officer
- ----------------------- and Director
Charles R. Schwab (principal executive officer)
/s/ LAWRENCE J. STUPSKI Vice Chairman and Director
- -----------------------
Lawrence J. Stupski
/s/ DAVID S. POTTRUCK President, Chief Operating Officer
- ----------------------- and Director
David S. Pottruck
/s/ A. JOHN GAMBS Executive Vice President - Finance,
- ----------------------- and Chief Financial Officer
A. John Gambs (principal financial and accounting officer)
/s/ NANCY H. BECHTLE Director
- -----------------------
Nancy H. Bechtle
/s/ C. PRESTON BUTCHER Director
- -----------------------
C. Preston Butcher
/s/ DONALD G. FISHER Director
- -----------------------
Donald G. Fisher
/s/ ANTHONY M. FRANK Director
- -----------------------
Anthony M. Frank
/s/ JAMES R. HARVEY Director
- -----------------------
James R. Harvey
/s/ STEPHEN T. McLIN Director
- -----------------------
Stephen T. McLin
/s/ ROGER O. WALTHER Director
- -----------------------
Roger O. Walther
</TABLE>
- 19 -
<PAGE>
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedules
Page
----
Independent Auditors' Report F-2
Schedule I - Condensed Financial Information of Registrant:
Condensed Balance Sheet F-3
Condensed Statement of Income and Retained Earnings F-4
Condensed Statement of Cash Flows F-5
Schedule II - Valuation and Qualifying Accounts F-6
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the Company's
consolidated financial statements and notes in the Company's 1995 Annual Report
to Stockholders, which are incorporated herein by reference to Exhibit No. 13.1
of this report.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ------------------------------
To the Stockholders and Board of Directors of
The Charles Schwab Corporation:
We have audited the consolidated financial statements of The Charles Schwab
Corporation and subsidiaries (the Company) as of December 31, 1995 and 1994, and
for each of the three years in the period ended December 31, 1995, and have
issued our report thereon dated February 21, 1996; such consolidated financial
statements and report are included in your 1995 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
financial statement schedules of the Company and subsidiaries appearing on pages
F-3 through F-6. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 1996
F-2
<PAGE>
SCHEDULE I
THE CHARLES SCHWAB CORPORATION
(PARENT COMPANY ONLY)
Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
Assets
Cash and equivalents $ 41,198 $ 63,893
Receivable from subsidiaries 7,229 38,006
Subordinated receivable from subsidiary 203,000 124,000
Investment in subsidiaries, at equity 640,368 418,389
Other assets 4,762 4,678
- ------------------------------------------------------------------------------------------------------
Total $896,557 $648,966
======================================================================================================
Liabilities and Stockholders' Equity
Accrued expenses and other $ 23,663 $ 11,952
Borrowings 240,000 170,000
- ------------------------------------------------------------------------------------------------------
Total liabilities 263,663 181,952
- ------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value
per share; 178,459,416 shares issued in 1995 and 1994* 1,785 595
Additional paid-in capital 180,302 166,103
Retained earnings 520,532 373,161
Treasury stock - 4,427,255 shares in 1995 and 7,563,990 shares in
1994, at cost* (50,968) (57,968)
Unearned ESOP shares (9,397) (10,174)
Unamortized restricted stock compensation (7,074) (4,703)
Foreign currency translation adjustment (2,286)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 632,894 467,014
- ------------------------------------------------------------------------------------------------------
Total $896,557 $648,966
======================================================================================================
* Reflects the March 1995 three-for-two common stock split and the September 1995 two-for-one common
stock split.
See Notes to Consolidated Financial Statements in the Company's 1995 Annual Report to Stockholders,
which are incorporated herein by reference to Exhibit No. 13.1 of this report, for a discussion of
borrowings and contingent liabilities.
</TABLE>
F-3
<PAGE>
SCHEDULE I
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,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest revenue $ 18,879 $ 14,379 $ 14,952
Interest expense (13,886) (12,079) (13,258)
- ----------------------------------------------------------------------------------------------------------------
Net interest income 4,993 2,300 1,694
Other revenues 1,032 18
Other expenses (2,984) (8,467) (2,159)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit), equity
in earnings of subsidiaries and extraordinary charge 3,041 (6,149) (465)
Income tax expense (benefit) 1,235 (2,490) (472)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings of subsidiaries
and extraordinary charge 1,806 (3,659) 7
Equity in earnings of subsidiaries
Equity in undistributed earnings of subsidiaries 134,418 30,632 86,821
Dividends paid by subsidiaries 36,380 108,370 37,540
- ----------------------------------------------------------------------------------------------------------------
Total 170,798 139,002 124,361
Income before extraordinary charge 172,604 135,343 124,368
Extraordinary charge - early retirement of debt, net of tax (6,700)
- ----------------------------------------------------------------------------------------------------------------
Net income 172,604 135,343 117,668
Dividends on common stock (24,249) (16,038) (10,946)
Other (984) 164 (198)
Retained earnings:
At beginning of year 373,161 253,692 147,168
- ----------------------------------------------------------------------------------------------------------------
At end of year $520,532 $373,161 $253,692
================================================================================================================
</TABLE>
F-4
<PAGE>
SCHEDULE I
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,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 172,604 $135,343 $117,668
Noncash items included in net income:
Equity in undistributed earnings of subsidiaries (134,418) (30,632) (86,821)
Other 989
Extraordinary charge for early retirement of debt 11,205
Change in other assets (53) (2,144) (1,715)
Change in accrued expenses and other 4,455 7,011 1,447
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 43,577 109,578 41,784
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Decrease (increase) in receivable from subsidiaries 52,972 17,475 (39,118)
Collection on subordinated loans to subsidiary 8,728 26,500
Issuance of subordinated loans to subsidiaries (79,000) (5,000)
Increase in net investment in subsidiaries (16,206) (3,468) (46,179)
Cash payments for businesses acquired (63,696)
Purchase of life insurance policies (1,720) (2,268)
Collection on note receivable from Profit Sharing Plan 1,467 6,241
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (107,650) 21,934 (57,556)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from loans on life insurance policies 1,689 2,247
Proceeds from borrowings 70,000 20,000 150,000
Repayment of borrowings (35,000) (126,933)
Purchase of treasury stock (17,345) (46,781)
Dividends paid (24,249) (16,038) (10,946)
Other 11,283 7,953 3,651
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 41,378 (67,619) 15,772
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and equivalents (22,695) 63,893 ----
Cash and equivalents at beginning of year 63,893 ---- ----
- --------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 41,198 $ 63,893 $ ----
==============================================================================================================
See Notes to Consolidated Financial Statements in the Company's 1995 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.
</TABLE>
F-5
<PAGE>
SCHEDULE II
THE CHARLES SCHWAB CORPORATION
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at ------------------- Balance at
Beginning Charged End
Description of Year to Expense Other Written off of Year
------- ---------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1995:
Allowance for doubtful accounts $3,204 $1,349 $272 $(1,125) $3,700
=========================================================
For the year ended
December 31, 1994:
Allowance for doubtful accounts $2,229 $1,193 $150 $ (368) $3,204
=========================================================
For the year ended
December 31, 1993:
Allowance for doubtful accounts $3,449 $ 336 $ 19 $(1,575) $2,229
=========================================================
</TABLE>
F-6
Exhibit 3.4
AMENDED AND RESTATED BYLAWS OF
THE CHARLES SCHWAB CORPORATION
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of The Charles
Schwab Corporation (hereafter called the "Corporation") in the State of
Delaware shall be at 1013 Centre Road, Wilmington, Delaware, and the name of
the registered agent at that address shall be the Corporation Service Company.
Section 1.02. Principal Office. The principal office for the
transaction of the business of the Corporation shall be at 101 Montgomery
Street, San Francisco, California. The Board of Directors (hereafter called
the "Board") is hereby granted full power and authority to change said
principal office from one location to another.
Section 1.03. Other Offices. The Corporation may also have an office
or offices at such other place or places, either within or without the State
of Delaware, as the Board may from time to time determine or as the business
of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Annual Meetings. Annual meetings of the stockholders of
the Corporation for the purpose of electing directors and for the
transaction of such other proper business as may come before such meetings
shall be held each year on a date and at a time designated by the Board.
Section 2.02. Special Meetings. Special meetings of the stockholders
for any purpose or purposes may be called by the Chairman of the Board, the
Board or a committee of the Board which has been duly designated by the
Board and whose powers and authority, as provided in a resolution of the
Board or in these Bylaws, include the power to call such meetings. Unless
otherwise prescribed by statute, the Certificate of Incorporation or these
Bylaws, special meetings may not be called by any other person or persons.
No business may be transacted at any special meeting of stockholders other
than such business as may be designated in the notice calling such meeting.
Section 2.03. Place of Meetings. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as
may from time to time be designated by the person or persons calling the
respective meeting and specified in the respective notices or waivers of
notice thereof.
Section 2.04. Notice of Meetings. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before
the date of the meeting to each stockholder of record entitled to vote at
such meeting by delivering a typewritten or printed notice thereof to him
personally, or by depositing such notice in the United States mail, in a
postage prepaid envelope, directed to him at his post office address
furnished by him to the Secretary of the Corporation for such purpose or, if
he shall not have furnished to the Secretary his address for such purpose,
then at his post office address last known to the Secretary, or by
transmitting a notice thereof to him at such address by telegraph, cable,
or wireless. Except as otherwise expressly required by law, no publication
of any notice of a meeting of the stockholders shall be required.
Every notice of a meeting of the stockholder shall state the place, date
and hour of the meeting, and, in the case of a special meeting, shall also
state the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any
stockholder who shall have waived such notice and such notice shall be
deemed waived by any stockholder who shall attend such meeting in person or
by proxy, except a stockholder who shall attend such meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or convened. Except
as otherwise expressly required by law, notice of any adjourned meeting of
the stockholders need not be given if the time and place thereof are announced
at the meeting at which the adjournment is taken.
Section 2.05. Quorum. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy,
shall constitute a quorum for the transaction of business at any meeting of
the stockholders of the Corporation or any adjournment thereof. Where a
separate vote by a class or classes is required, a majority of the
outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority
of the shares of such class or classes present in person or represented by
proxy at the meeting shall be the act of such class. At any such adjourned
meeting at which a quorum is present any business may be transacted which
might have been transacted at the meeting as originally called. No business
may be transacted at a meeting in the absence of a quorum other than the
adjournment of such meeting, except that if a quorum is present at the
commencement of a meeting, business may be transacted until the meeting is
adjourned even though the withdrawal of stockholders results in less than a
quorum.
Section 2.06. Voting.
(a) Each stockholder shall, at each meeting of the stockholders,
be entitled to vote in person or by proxy each share or fractional share of
the stock of the Corporation having voting rights on the matter in question
and which shall have been held by him and registered in his name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.05 of these
Bylaws as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed,
then (a) at the close of business on the day next preceding the day on
which notice of the meeting shall be given or (b) if notice of the meeting
shall be waived, at the close of business on the day next preceding the day
on which the meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be
counted for quorum purposes. Nothing in this section shall be construed as
limiting the right of the Corporation to vote stock, including but not
limited to its own stock, held by it in a fiduciary capacity. Persons
holding stock of the Corporation in a fiduciary capacity shall be entitled
to vote such stock. Persons whose stock is pledging shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation
he shall have expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two
or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship,
shall be voted in accordance with the provisions of the General Corporation
Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by his proxy appointed by an instrument in
writing, subscribed by such stockholder or by his attorney thereunto
authorized and delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three (3) years from its
date unless said proxy shall provide for a longer period. The attendance at
any meeting of a stockholder who may theretofore have given a proxy shall
not have the effect of revoking the same unless he shall in writing so
notify the secretary of the meeting prior to the voting of the proxy. At
any meeting of the stockholders all matters, except as otherwise provided in
the Certificate of Incorporation, in these Bylaws or by law, shall be
decided by the vote of a majority of the shares present in person or by proxy
and entitled to vote thereat and thereon, a quorum being present. The vote at
any meeting of the stockholders on any questions shall be by ballot and each
ballot shall be signed by the stockholder voting, or by his proxy, if there
be such proxy, and it shall state the number of shares voted.
Section 2.07. List of Stockholders. The Secretary of the Corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for
a period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the duration thereof, and
may be inspected by any stockholder who is present.
Section 2.08. Inspectors of Election. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to
act at the meeting and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to act at the meeting.
If no inspector or alternative is able to act at a meeting of stockholders,
the chairman of such meeting shall appoint one or more inspectors to act
at the meeting. Each inspector so appointed shall first sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors shall
ascertain the number of shares outstanding and the voting power of each,
determine the shares represented at a meeting and the validity of proxies
and ballots, count all votes and ballots, determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and certify their determination of the
number of shares represented at the meeting and their count of all votes and
ballots. Reports of the inspectors shall be in writing and subscribed and
delivered by them to the Secretary of the Corporation. The inspectors may
appoint or retain other persons or entities to assist them in the
performance of their duties as inspectors. The inspectors need not be
stockholders of the Corporation, and any officer of the Corporation may be
an inspector on any question other than a vote for or against a proposal in
which he shall have a material interest.
Section 2.09. Action by Written Consent. Unless otherwise provide in
the Certificate of Incorporation, any action required or permitted to be
taken at any annual or special meeting of stockholders of the Corporation
may be taken without a meeting, without prior notice except as otherwise
provided by applicable law, and without a vote, if a consent in writing
setting forth the action so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the
State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail,
return receipt requested. Every written consent shall bear the date of
signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated consent delivered in the manner
required by this Section to the Corporation, written consents signed by a
sufficient number of stockholders to take action are delivered to the
Corporation by delivery as aforesaid. Prompt notice of the taking of
corporate action without a meeting by less than unanimous consent shall be
given to those stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The property, business and affairs of
the Corporation shall be managed by or under the direction of the Board.
Section 3.02. Number and Term of Office. The authorized number of
directors shall be such number between 2 and 15 as shall be determined from
time to time by a resolution adopted by a majority of the Board or by the
affirmative vote of the holders of not less than 66 2/3% of the total voting
power of all outstanding shares of voting stock of the Corporation. Each of
the directors of the Corporation shall hold office until his successor shall
have been duly elected and shall qualify or until he shall resign or shall have
been removed in the manner hereafter provided.
Section 3.03. Election of Directors. The directors shall be elected
by the stockholders of the Corporation at each annual meeting of
stockholders or by written consent pursuant to Section 2.09 hereof, and at
each election the persons receiving the greatest number of votes, up to the
number of directors then to be elected, shall be the persons then elected.
The election of directors is subject to any provisions contained in the
Certificate of Incorporation relating thereto, including any provisions for
cumulative voting.
Section 3.04. Resignations. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time
specified therein, or, if the time be not specified, it shall take effect
immediately upon its receipt; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 3.05. Removal. Any Director or the entire Board may be
removed without cause by the affirmative vote of a majority of the total voting
power of all outstanding shares then entitled to vote at an election of
directors, provided that (1) when cumulative voting is permitted, no
director may be removed (unless the entire Board is removed) when the votes
cast against removal, or not consenting in writing to such removal, would
be sufficient to elect such director if voted cumulatively at an election at
which the same total number of votes were cast (or, if such action is taken
by written consent, all shares entitled to vote were voted) and the entire
number of directors authorized at the time of the director's most recent
election were then being elected, and (2) when by the provisions of the
Certificate of Incorporation the holders of the shares of any class or
series, voting as a class or series, are entitled to elect one or more
directors, any director so elected may be removed only by the applicable
vote of the holders of the shares of that class or series. Any reduction of
the authorized number of directors does not remove any director prior to the
expiration of such director's term of office.
Section 3.06. Vacancies. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of
directors, or any other cause, may be filled by vote of the majority of the
remaining directors, although less than a quorum. The shareholders may
elect a director at any time to fill any vacancy not filled by the
directors. If, after the filling of any vacancy by the directors, the
directors then in office who have been elected by the shareholders shall
constitute less than a majority of the directors then in office, any holder
or holders of an aggregate of 5% or more of the total number of shares then
entitled to vote at an election of directors may call a special election of
shareholders to be held to elect the entire Board. Each director so chosen
or elected to fill a vacancy shall hold office until his successor shall
have been elected and shall qualify or until he shall resign or shall have
been removed in the manner herein provided.
Section 3.07. Place of Meeting, Etc. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated
by the person or persons calling the meeting or in the notice or a waiver of
notice of any such meeting. Directors may participate in any regular or
special meeting of the Board by means of conference telephone or similar
communications equipment pursuant to which all persons participating in the
meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
Section 3.08. First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
Section 3.09. Regular Meetings. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday
at the place where the meeting is to be held, then the meeting shall be held
at the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
Section 3.10. Special Meetings. Special meetings of the Board may be
called by the Chairman of the Board of Directors or the President. All special
meetings of the Board shall be given to each director at his address as it
appears on the records of the Corporation, as follows:
Section 3.11. Quorum and Manner of Acting. Except as otherwise
provided in the Certificate of Incorporation or these Bylaws or by law, the
presence of a majority of the total number of directors then in office shall
be required to constitute a quorum for the transaction of business at any
meeting of the Board. Except as otherwise provided in the Certificate of
Incorporation or these Bylaws or by law, all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority
of the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have
no power as such.
Section 3.12. Action by Consent. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.13. Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse
each such director for any expense incurred by him on account of his
attendance at any meetings of the Board or Committees of the Board. Neither
the payment of such compensation nor the reimbursement of such expenses
shall be construed to preclude any director from serving the Corporation or
its subsidiaries in any other capacity and receiving compensation therefor.
Section 3.14. Executive Committee. There may be an Executive
Committee of two or more directors appointed by the Board, who may meet at
stated times, or in notice to all by any of their own number, during the
intervals between the meetings of the Board; they shall advise and aid the
officers of the Corporation in all matters concerning its interest and the
management of its business, and generally perform such duties and exercise
such powers as may be directed or delegated by the Board from time to time.
The Board of Directors may also designate, if it desires, other directors as
alternate members who may replace any absent or disqualified member of the
Executive Committee at any meeting thereof. To the full extent permitted by
law, the Board may delegate to such committee authority to exercise all the
powers of the Board while the Board is not in session. Vacancies in the
membership of the committee shall be filled by the Board at a regular
meeting or at a special meeting for that purpose. In the absence or
disqualification of any member of the Executive Committee and any alternate
member in his or her place, the member or members of the Executive Committee
present at the meeting and not disqualified from voting, whether or not he
or she or they constitute a quorum, may, by unanimous vote, appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member. The Executive Committee shall keep written
minutes of its meeting and report the same to the Board when required. The
provisions of Sections 3.09, 3.10, 3.11 and 3.12 of these Bylaws shall
apply, mutatis mutandis, to any Executive Committee of the Board.
Section 3.15. Other Committees. The Board may, by resolution passed
by a majority of the whole Board, designate one or more other committees, each
such committee to consist of one or more of the directors of the
Corporation. The Board of Directors may also designate, if it desires,
other directors as alternate members who may replace any absent or
disqualified member of any such committee at any meeting thereof. To the full
extent permitted by law, any such committee shall have and may exercise such
powers and authority as the Board may designate in such resolution.
Vacancies in the membership of a committee shall be filled by the Board at a
regular meeting or a special meeting for that purpose. Any such committee
shall keep written minutes of its meeting and report the same to the Board
when required. In the absence or disqualification of any member of any such
committee and any alternate member or members of any such committee present
at the meeting and not disqualified from voting, whether or not he or she or
they constitute a quorum, may, by unanimous vote, appoint another member of the
Board of Directors to act at the meeting in the place of the absent or
disqualified member. The provisions of Section 3.09, 3.10, 3.11 and 3.12 of
these Bylaws shall apply, mutatis mutandis, to any such committee of the
Board.
ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the corporation shall be a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary
and a Treasurer. The Chief Executive Officer of the corporation shall be such
officer as the Board shall from time to time designate. The Board may also
elect one or more Assistant Secretaries and Assistant Treasurers. A person
may hold more than one office providing the duties thereof can be
consistently performed by the same person.
Section 4.02. Other Officers. The Board may appoint such other
officers as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4.03. Election. Each of the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions
of Section 4.02 or Section 4.05 of this Article, shall be chosen annually by
the Board and shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve, or his successor shall be
elected and qualified.
Section 4.04. Salaries. The salaries of all executive officers of the
Corporation shall be fixed by the Board or by such committee of the Board as
may be designated from time to time by a resolution adopted by a majority of
the Board.
Section 4.05. Removal; Vacancies. Subject to the express provisions
of a contract authorized by the Board, any officer may be removed, either with
or without cause, at any time by the Board or by any officer upon whom such
power of removal may be conferred by the Board. Any vacancy occurring in
any office of the Corporation shall be filled by the Board.
Section 4.06. The Chairman of the Board. The Chairman of the Board
shall preside at all meetings of the stockholders and directors and shall have
such other powers and duties as may be prescribed by the Board or by
applicable law. He shall be an ex-officio member of standing committees, if
so provided in the resolutions of the Board appointing the members of such
committees.
Section 4.07. The President. The President shall be the managing
officer of the Corporation. Subject to the control of the Board, the President
shall have general supervision, control and management of the affairs and
business of the Corporation, and general charge and supervision of all
offices, agents and employees of the Corporation; shall see that all orders
and resolutions of the Board are carried into effect; shall, in the absence
of the Chairman of the Board, preside at all meetings of the stockholders and
Board; and in general shall exercise all powers and perform all duties incident
to President and managing officer of the Corporation and such other powers and
duties as may from time to time be assigned to him by the Board or as may be
prescribed in these Bylaws.
The President may execute bonds, mortgages and other contracts requiring a
seal, under the seal of the Corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board to some other
officer or agent of the Corporation.
The President shall be an ex-officio member of standing committees, if
so provided in the resolutions of the Board appointing the members of such
committees.
Section 4.08. The Vice Presidents. In the absence of the President or
in the event of his inability or refusal to act, the Vice President (or in the
event there be more than one Vice President, the Vice Presidents in the
order designated, or in the absence of any designation, then in the order of
their election) shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the President. The Vice Presidents shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
Section 4.09. The Secretary and Assistant Secretary. The Secretary
shall attend all meetings of the Board and all meetings of the stockholders and
record all the proceedings of the meetings of the Corporation and of the
Board in a book to be kept for that purpose and shall perform like duties
for the standing and special committees of the Board when required. He
shall give, or cause to be given, notice of all meetings of the stockholders
and special meetings of the Board, and shall perform such other duties as may
be prescribed by the Board or President, under whose supervision he shall act.
He shall have custody of the corporate seal of the Corporation and he, or an
assistant secretary, shall have authority to affix the same to any
instrument requiring it and, when so affixed, it may be attested by his
signature or by the signature of such assistant secretary. The Board may
give general authority to any other officer to affix the seal of the
Corporation and to attest the affixing by his signature.
The assistant secretary, or if there be more than one, the assistant
secretaries in the order determined by the Board (or if there be no such
determination, then in the order of their election), shall, in the absence
of the Secretary or in the event of his inability or his refusal to act,
perform the duties and exercise the powers of the Secretary and shall
perform such other duties and have such other powers as the Board may from
time to time prescribe.
Section 4.10. The Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
Board.
He shall disburse the funds of the Corporation as may be ordered by the
Board, making proper vouchers for such disbursements, and shall render to
the President and the Board, at its regular meetings, or when the Board so
requires, an account of all his transactions as Treasurer and of the
financial condition of the Corporation.
If required by the Board , he shall give the Corporation a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as shall be satisfactory to the Board for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the Corporation.
Section 4.11. The Assistant Treasurer. The Assistant Treasurer, or if
there be more than one, the assistant treasurers in the order determined by the
Board (or if there be no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of
the Treasurer and shall perform such other duties and have such other powers as
the Board may from time to time prescribe.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness payable by the
Corporation and all contracts or agreements shall be signed by such person
or persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond,
if any, as the Board may require.
Section 5.02. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may
select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power shall have been delegated by the Board. For the purpose of
deposit and for the purpose of collection for the account of the Corporation,
the President, any Vice President or the Treasurer (or any other officer or
officers, assistant or assistants, agent or agents, or attorney or attorneys
of the Corporation who shall from time to time be determined by the Board)
may endorse, assign and deliver checks, drafts and other orders for the
payment of money which are payable to the order of the Corporation.
Section 5.03. General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board
may select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power shall have been delegated by the Board. The Board may make
such special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which
they shall be issued and shall be signed in the name of the Corporation by the
Chairman, Vice Chairman or President or a Vice President, and by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any
of or all of the signatures on the certificates may be a facsimile. In case
any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
such certificate may nevertheless be issued by the Corporation with the same
effect as though the person who signed such certificate, or whose facsimile
signature shall have been placed thereupon, were such officer, transfer agent
or registrar at the date of issue. A record shall be kept of the respective
names of the persons, firms or corporations owning the stock represented by
such certificates, the number and class of shares represented by such
certificates, respectively, and the respective dates thereof, and in case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled,
and no new certificate or certificates shall be issued in exchange for any
existing certificate until such existing certificate shall have been so
canceled, except in cases provided for in Section 6.04.
Section 6.02. Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.03, and upon
surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name shares
of stock stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation. Whenever any transfer of
shares shall be made for collateral security, and not absolutely, such fact
shall be so expressed in the entry of transfer if, when the certificate or
certificates shall be presented to the Corporation for transfer, both the
transferor and the transferee request the Corporation to do so.
Section 6.03. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares
of the stock of the Corporation. It may appoint, or authorize any officer
or officers to appoint, one or more transfer clerks or one or more transfer
agents and one or more registrars, and may require all certificates for stock
to bear the signature or signatures of any of them.
Section 6.04. Lost, Stolen, Destroyed, and Mutilated Certificates. In
any case of loss, theft, destruction or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft,
destruction or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued without requiring any bond
when, in the judgment of the Board, it is proper so to do.
Section 6.05. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment
of any dividend or other distribution or allotment of any rights or to
exercise any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action except for consenting to
corporate action in writing without a meeting, the Board of Directors may
fix a record date, which shall not precede the date the resolution fixing
the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as herein before described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at
the close of business on the day preceding the day on which notice is given
or, if notice is waived, at the close of business on the day next preceding
the day on which the meeting is held and, for determining stockholders
entitled to receive payment of any dividend or other distribution or
allotment of any rights or to exercise any rights in respect of any change,
conversion or exchange of stock or any other lawful action except for
consenting to corporate action in writing without a meeting, the record date
shall be the close of business on the day on which the Board of Directors
adopts a resolution relating thereto.
For purposes of determining the stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted, as of which shall be
determined the stockholders of record entitled to consent to corporate
action in writing without a meeting. If no record date has been fixed by
the Board of Directors and no prior action by the Board of Directors is
required by the Delaware General Corporation Law, the record date shall be
the first date on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the Corporation in the manner
prescribed in Section 2.09 hereof. If no record date has been fixed by the
Board of Directors and prior action by the Board of Directors is required by
the Delaware General Corporation Law with respect to the proposed action,
the record date for determining stockholders entitled to consent to
corporate action writing shall be the close of business on the day in which
the Board of Directors adopts the resolutions taking such prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees and
Agents; Insurance.
(a) Rights to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she 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
(hereinafter an "indemnitee"), 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, shall be indemnified and held harmless by the Corporation
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 such indemnitees in connection therewith
and such indemnification shall continue as to an indemnitee who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that
except as provided in paragraph (c) hereof with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized or
is subsequently ratified by the Board of Directors of the Corporation.
(b) Right to Advancement of Expenses. The right to
indemnification conferred in paragraph (a) of this Section shall include the
right to be paid by the Corporation the expenses (including attorneys' fees)
incurred in defending any proceeding for which such right to indemnification
is applicable in advance of its final disposition (hereinafter an
"advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an
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 such 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 such indemnitee, to repay all amounts
so advanced if it shall ultimately be determined by final judicial decision
from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for
such expenses under this Section or otherwise.
(c) Right of Indemnitee to Bring Suit. The rights to
indemnification and to the advancement of expenses conferred in paragraphs
(a) and (b) of this Section shall be a contract between the Corporation and
each director or officer of the Corporation who serves or served in such
capacity at any time while this Article VII is in effect. Any repeal or
modification of this Article VII 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 such
director or officer or the obligations of the Corporation hereunder. If a
claim under paragraph (a) or (b) of this Section 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 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 Section or otherwise shall be on the
Corporation.
(d) Non-Exclusivity of Rights. The rights to indemnification and
to the advancement of expenses conferred in this Section shall not be exclusive
of any other right which any person may have or hereafter acquire under any
statute, the Corporation's certificate of incorporation, by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
(e) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law,
provided that such insurance is available on acceptable terms, which
determination shall be made by the Board of Directors or by a committee
thereof.
(f) Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent and in accordance with the terms authorized
from time to time by the board of directors, grant rights to
indemnification, and to the advancement of expenses to any employee or agent
of the Corporation to the fullest extent of the provisions of this Section
with respect to the indemnification and advancement of expenses of directors
and officers of the Corporation.
(g) For purposes of this Section, references to "the 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 any person who 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 agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under this Section with respect to the
Corporation as he would have with respect to such constituent corporation if
its separate existence had continued.
(h) For purposes of this Section, references to "serving at
the request of the Corporation" shall include any service as director, officer,
employee or agent 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 a person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Section.
(i) Notwithstanding anything else in this Article VII, in the
event that the express provisions of the Delaware General Corporation Law
relating to indemnification of, or advancement of expenses by the
Corporation to, persons eligible for indemnification or advancement of
expenses under this Article VII 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.
(j) If this Article VII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each indemnitee of the Corporation
as to costs, charges and expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement with respect to any action, suit or
proceeding, whether civil, criminal, administrative or investigative, including
an action by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article VII that shall not have
been invalidated and to the full extent permitted by applicable law.
(k) Notwithstanding anything else in this Article VII, at any
and all times at which the Corporation is subject to the provisions of the
California Corporations Code by virtue of the operation of Section 2115
thereof or otherwise, the indemnification and advancement of expenses
provided by, or granted pursuant to, this Article VII shall be in all respects
limited by the provisions of the California Corporations Code made applicable
by such Section 2115 (or such other provision of California law).
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Seal. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation
and words and figures showing that the Corporation was incorporated in the
State of Delaware and the year of incorporation.
Section 8.02. Waiver of Notices. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or
after the time stated therein, and such waiver shall be deemed equivalent to
notice.
Section 8.03. Fiscal Year. The fiscal year of the Corporation shall
be fixed by resolution of the Board.
Section 8.04. Amendments. Subject to the provisions of the
Certificate of Incorporation, these Bylaws and applicable law, these Bylaws or
any of them may be amended or repealed and new Bylaws may be adopted (a) by
the Board, by vote of a majority of the number of directors then in office
or (b) by the vote of the holders of in excess of 50% of the total voting
power of all outstanding shares of voting stock of the Corporation at a
meeting of stockholders; provided that such action may be taken at a special
meeting of the Board or stockholders only if notice of such proposed amendment,
repeal or adoption is given in the notice of special meeting. Subject to the
provisions of the Certificate of Incorporation, any Bylaws adopted or
amended by the stockholders may be amended or repealed by the Board or the
stockholders.
Section 8.05. Voting Stock. Any person so authorized by the Board,
and in the absence of such authorization, the Chairman of the Board, the
President or any Vice President, shall have full power and authority on
behalf of the Corporation to attend and to act and vote at any meeting of
the stockholders of any corporation in which the Corporation may hold stock
and at any such meeting shall possess and may exercise any and all rights and
powers which are incident to the ownership of such stock and which as the owner
thereof the Corporation might have possessed and exercised if present. The
Board by resolution from time to time may confer like powers upon any other
person or persons.
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, the duly elected Secretary of The Charles Schwab
Corporation, a Delaware corporation, do hereby certify:
That the within and foregoing Amended and Restated Bylaws were adopted as
the Amended and Restated Bylaws of the corporation by the Board of Directors on
July 29, 1987, and were further amended by the Board of Directors on
March 25, 1991, and the same do now constitute the Bylaws of said
corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 25th day
of March, 1991.
/s/ Barbara W. Wolfe
Barbara A. Wolfe,
Secretary
<PAGE>
THE CHARLES SCHWAB CORPORATION
CERTIFICATE OF ASSISTANT CORPORATE SECRETARY
I, Pamela E. Herlich, Assistant Corporate Secretary of The Charles Schwab
Corporation, a Delaware corporation (the "Corporation"), hereby certify that
the following is a true and correct copy of certain resolutions adopted at a
meeting of the Board of Directors convened and held in accordance with the
Bylaws of the Corporation on March 25, 1991, and that said resolutions have
not been rescinded or modified and are now in full force and effect.
RESOLVED, the Bylaws of The Charles Schwab Corporation, amended and
restated on July 29, 1987, are hereby further amended as follows:
"Section 2.08. Judges." is hereby deleted in its entirety and is replaced
by the following:
Section 2.08. Inspectors of Election.
The Corporation shall, in advance of any meeting of stockholders, appoint
one or more inspectors to act at the meeting and make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to act at the meeting. If no inspector or alternate is able
to act at a meeting of stockholders, the chairman of such meeting shall
appoint one or more inspectors to act at the meeting. Each inspector
so appointed shall first sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the
best of his ability. The inspectors shall ascertain the number of shares
outstanding and the voting power of each, determine the shares represented
at a meeting and the validity of proxies and ballots, count all votes and
ballots, determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors,
and certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. Reports of the
inspectors shall be in writing and subscribed and delivered by them to
the Secretary of the Corporation. The inspectors may appoint or retain
other persons or entities to assist them in the performance of their
duties as inspectors. The inspectors need not be stockholders of the
Corporation, and any officer of the Corporation may be an inspector on any
question other than a vote for or against a proposal in which he shall
have a material interest.
"Section 7.01(b). Right to Advancement of Expenses." is hereby amended
to insert in the first sentence thereof between the words "expenses"
and "incurred" the parenthetical phrase "(including attorneys' fees),"
to read as follows:
(b) Right to Advancement of Expenses.
The right to indemnification conferred in paragraph (a) of this Section
shall include the right to be paid by the Corporation the expenses
(including attorneys' fees) incurred in defending any proceeding for
which such right to indemnification is applicable in advance of its
final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires an
advancement of expenses incurred by an 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 such 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 such indemnitee, to repay all amounts so advanced if it
shall ultimately be determined by final judicial decision from which
there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses
under this Section or otherwise.
IN WITNESS WHEREOF, I hereunto subscribe my name and affix the seal of
this Corporation this 28th day of March, 1991.
/s/ Pamela E. Herlich
Pamela E. Herlich
Assistant Corporate Secretary
(Seal)
<PAGE>
Exhibit 10.157
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
<PAGE>
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Section Page
Article I. Purpose
1.1 Establishment of the Plan 2
1.2 Purpose of the Plan 2
Article II. Definitions
2.1 Definitions 3
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 Deferrals 6
5.2 Deferral Procedures 6
5.3 Election of Time and Manner of Payment 6
5.4 Accounts and Earnings 7
5.5 Maintenance of Accounts 8
5.6 Change in Control 8
5.7 Payment of Deferred Amounts 12
5.8 Acceleration of Payment 12
<PAGE>
Section Page
Article VI. General Provisions
6.1 Unfunded Obligation 14
6.2 Informal Funding Vehicles 14
6.3 Beneficiary 15
6.4 Incapacity of Participant or Beneficiary 15
6.5 Nonassignment 16
6.6 No Right to Continued Employment 16
6.7 Tax Withholding 16
6.8 Claims Procedure and Arbitration 16
6.9 Termination and Amendment 17
6.10 Applicable Law 18
<PAGE>
THE CHARLES SCHWAB CORPORATION
DIRECTORS' DEFERRED COMPENSATION PLAN
Article I. Purpose
1.1 Establishment of the Plan. Effective as of January 1, 1996,
The Charles Schwab Corporation (hereinafter, the "Company") hereby
establishes The Charles Schwab Corporation Directors' Deferred
Compensation Plan (the "Plan"), as set forth in this document.
1.2 Purpose of the Plan. The Plan permits Directors to defer the
payment of directors' fees that they may earn. The opportunity to elect such
deferrals is provided in order to help the Company attract and retain
outside directors. This Plan is unfunded and is maintained primarily for
the purpose of providing deferred compensation for its outside directors.
It is 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, as amended.
<PAGE>
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) "Committee" means the Compensation Committee of the Board.
(f) "Deferral Account" means the account representing deferrals of
cash compensation, plus investment adjustments, as described in sections 5.4
and 5.5.
(g) "Director" means each member of the Board of the Directors who
is not an employee of the Company or any of its subsidiaries.
(h) "Plan" means The Charles Schwab Corporation Directors' Deferred
Compensation Plan, as in effect from time to time.
(i) "Plan Year" means the calendar year.
(j) "Termination" means the date a Participant ceases to be a
Director.
(k) "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 5.4.
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>
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
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>
Article IV. Participants
4.1 Participants. Each Director shall be eligible to participate
in this Plan.
<PAGE>
Article V. Deferrals
5.1 Deferrals. Each Director may elect to defer up to 100 percent
of the fees otherwise receivable from the Company for service as a Director.
Any such election must be made by entering a deferred compensation agreement
with the Company, 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 fees are to be earned; provided that for the
first year in which the Plan is in effect, the deferral election shall be
made within the first thirty days of the election period). 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 a Director 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 Director is an eligible Participant. Deferrals
that have been elected shall occur throughout the election period in pro
rata increments.
5.2 Deferral Procedures. Participants shall have an opportunity to
elect deferrals each year. Unless the Committee specifies other rules for the
deferrals that may be elected, deferrals may be made in increments of 10
percent or in a fixed dollar amount. If a deferral is elected, the election
shall be irrevocable. 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 any applicable tax withholding measures and may be
reduced to satisfy any applicable tax withholding requirements.
5.3 Election of Time and Manner of Payment. At the time a
Participant makes a deferral election under section 5.1, the Participant
shall also designate the manner of payment and the date on which payments
from his or her Deferral Account shall begin, from among the following
options:
(i) a lump sum payable by the end of February in the year
immediately following the Participant's Termination; or
(ii) a series of annual installments, commencing in the year
following the Participant's Termination and payable each year on or before
the end of February, over a period of five, ten, or fifteen years, as
designated by the Participant.
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 amount of each
installment payment shall be equal to the quotient determined by dividing
(A) the value of the portion of the Deferral Account to which the
installment payment election applies (determined as of the Valuation Date
coincident with or immediately preceding the date the payment is to be
made), by (B) the number of years over which the installment payments are
to be made, less the number of years in which prior payments attributable to
such installment payment election have been made.
Notwithstanding the foregoing, however, if earnings or any other
amounts credited to a Participant's Deferral Account do not otherwise meet
any applicable requirements of the Internal Revenue Code 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 payment of such amounts, to the extent in excess of the amount
that would be currently tax deductible, shall automatically be deferred
until the earliest year that the payment can be deducted.
5.4 Accounts and Earnings. The Company shall establish a Deferral
Account for each Participant who has elected a deferral under section 5.1
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 the
hypothetical compounded return that would have resulted (including
reinvestment of any cash dividends) had the amounts deferred been invested
in Common Stock of the Company on the date the Deferral occurred. 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 any form of investment income
under the Plan.
5.5 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, from 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 5.5, 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.
5.6 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 payment otherwise due that follows
the Change in Control.
(c) A special allocation of earnings on all Deferral Accounts shall
be made under section 5.4 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 5.3 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 fees 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 any of the
following:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either (i) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the
Corporation entitled to vote generally in the election of directors (the
"Outstanding Corporation Voting Securities"); provided, however, that for
purposes of this paragraph (1), the following acquisitions shall not
constitute a Change of Control: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company, or (iv) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of paragraph (3) hereof; or
(2) Individuals who, as of January 1, 1996, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to January 1, 1996 whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board; or
(3) Consummation of a reorganization, merger or consolidation, or sale
or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such Business Combination beneficially own, directly
or indirectly, more than 50% of, respectively, the then outstanding shares
of common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Business Combination, of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination
or any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (iii) at least a majority of
the members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing
for such Business Combination; or
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
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 5.6 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. Moreover, no
acquisition by (i) Charles Schwab and/or his spouse or any of his lineal
descendants or (ii) any trust created by or for the benefit of Charles Schwab
and/or his spouse or any of his lineal descendants or (iii) the Schwab
Family Foundation shall constitute a Change of Control.
5.7 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 5.3 (subject to any
modification that may occur pursuant to section 5.4, 5.6 or 5.8). 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), in cash,
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 5.4) thereon.
5.8 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 death, permanent
disability, 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>
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.
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 Service. Nothing in the Plan shall be
construed to confer upon any Participant any right to continue as a Director of
the Company.
6.7 Tax Withholding. Any 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 amounts 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 any applicable 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 5.6) the
claims procedure shall include the following arbitration procedure.
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 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.
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.
EXHIBIT 11.1
THE CHARLES SCHWAB CORPORATION
Computation of Earnings per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary charge $172,604 $135,343 $124,368
Extraordinary charge - early retirement of debt, net of tax 6,700
- --------------------------------------------------------------------------------------------------
Net Income $172,604 $135,343 $117,668
==================================================================================================
Shares*
Primary:
Weighted average number of common shares outstanding 172,285 169,953 172,674
Common stock equivalent shares related to option plans 6,191 5,253 5,676
- --------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 178,476 175,206 178,350
==================================================================================================
Fully Diluted:
Weighted average number of common shares outstanding 172,285 169,953 172,674
Common stock equivalent shares related to option plans 6,577 5,388 6,045
- --------------------------------------------------------------------------------------------------
Weighted average number of common and
common equivalent shares outstanding 178,862 175,341 178,719
==================================================================================================
Per Share*
Net earnings before extraordinary charge $.97 $.77 $.70
Extraordinary charge - early retirement of debt .04
- --------------------------------------------------------------------------------------------------
Primary earnings per share $.97 $.77 $.66
==================================================================================================
Fully diluted earnings per share $.97 $.77 $.66
==================================================================================================
* Reflects the March 1995 three-for-two common stock split and the September 1995
two-for-one common stock split.
</TABLE>
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,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings before taxes on income
and extraordinary charge $277,104 $224,343 $206,272 $146,228 $ 88,097
- -------------------------------------------------------------------------------------------------------
Fixed charges
Interest expense - customer 321,225 178,067 114,609 140,819 206,020
Interest expense - other 35,998 20,169 17,943 18,712 19,538
Interest portion of rental expense 20,810 17,102 15,428 13,314 10,531
- -------------------------------------------------------------------------------------------------------
Total fixed charges (a) 378,033 215,338 147,980 172,845 236,089
- -------------------------------------------------------------------------------------------------------
Earnings before taxes on income,
extraordinary charge and fixed charges (b) $655,137 $439,681 $354,252 $319,073 $324,186
- -------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges (b) divided
by (a)* 1.7 2.0 2.4 1.8 1.4
=======================================================================================================
Ratio of earnings to fixed charges as adjusted** 5.9 7.0 7.2 5.6 3.9
=======================================================================================================
* The ratio of earnings to fixed charges is calculated in a manner consistent
with SEC requirements. For such purposes, "earnings" consist of earnings before
taxes on income, extraordinary charge 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 payables to customers
is completely offset by interest revenue on related investments and margin
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.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 13.1
The Charles Schwab Corporation
1995 Annual Report to Stockholders
(only those portions specifically incorporated by reference
into The Charles Schwab Corporation 1995 Annual Report on Form 10-K)
The Charles Schwab Corporation
Quarterly Financial Information (Unaudited)
(In Millions, Except Per Share Data and Ratios)
Weighted Fully Dividends
Average Primary Diluted Declared Range Range
Expenses Common Earnings Earnings per of Common of Price/
Excluding Net Equivalent per per Common Stock Price Earnings
Revenues (a) Interest Income Shares (b) Share Share Share per Share (c) Ratio (d)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 by Quarter
Fourth $394.8 $332.4 $42.6 179.9 $.24 $.24 $.040 $26.68 - 16.63 28 - 17
Third Dividend Increase/
Stock Split 385.5 307.5 47.2 179.7 .26 .26 .040 29.00 - 20.75 32 - 23
Second 342.7 269.4 44.4 178.1 .25 .25 .030 22.88 - 14.75 27 - 18
First Dividend Increase/
Stock Split 296.9 233.5 38.4 176.1 .22 .22 .030 16.50 - 11.04 21 - 14
- -------------------------------------------------------------------------------------------------------------------------------
1994 by Quarter
Fourth $270.4 $214.4 $33.8 175.2 $.19 $.19 $.023 $12.33 - 9.21 16 - 12
Third 248.1 196.5 31.2 174.2 .18 .18 .023 10.29 - 8.46 14 - 11
Second 258.2 205.1 32.1 175.1 .18 .18 .023 11.29 - 8.25 16 - 12
First Dividend Increase/ 287.9 224.3 38.2 176.4 .22 .22 .023 11.00 - 8.67 16 - 13
- -------------------------------------------------------------------------------------------------------------------------------
1993 by Quarter
Fourth $257.5 $212.3 $28.5 179.5 $.16 $.16 $.017 $12.79 - 9.58 19 - 15
Third 238.8 191.1 22.2 (e) 179.0 .12 (e) .12 (e) .017 12.38 - 8.92 18 - 13
Second Dividend Increase/
Stock Split 232.4 180.4 31.6 177.9 .18 .18 .017 9.67 - 6.81 17 - 12
First 236.3 174.9 35.4 177.0 .20 .20 .013 8.28 - 5.53 17 - 11
- -------------------------------------------------------------------------------------------------------------------------------
1992 by Quarter
Fourth $193.5 $148.2 $25.2 173.5 $.15 $.15 $.013 $ 6.19 - 3.69 13 - 8
Third 159.3 144.3 7.8 174.7 .04 .04 .013 5.78 - 3.72 14 - 9
Second Dividend Increase 176.8 143.8 18.5 177.2 .10 .10 .013 7.69 - 4.53 18 - 10
First 219.9 167.0 29.7 177.5 .17 .17 .009 8.39 - 6.47 22 - 17
- -------------------------------------------------------------------------------------------------------------------------------
1991 by Quarter
Fourth Dividend Increase/
Stock Split $167.3 $138.6 $16.1 176.9 $.09 $.09 $.009 $ 7.47 - 4.41 26 - 16
Third Dividend Increase 147.4 122.9 13.2 176.2 .08 .08 .007 4.63 - 3.69 23 - 19
Second 128.9 112.3 9.5 175.4 .05 .05 .006 3.69 - 2.63 23 - 16
First 126.1 107.7 10.6 175.0 .06 .06 .006 3.04 - 1.69 23 - 13
===============================================================================================================================
All share and per share data reflect the March 1995 three-for-two common stock split and the September 1995 two-for-one common
stock split.
(a) Revenues are presented net of interest expense.
(b) Amounts shown are used to calculate primary earnings per share.
(c) Represents New York Stock Exchange high and low range of common stock price per share.
(d) Price/earnings ratio is computed by dividing the high and low market prices by primary earnings per share for the 12-month
period ended on the last day of the quarter presented. The extraordinary charge in 1993 (described
below) has been excluded.
(e) Net income and primary and fully diluted earnings per share are net of the effect of a $6.7 million ($.04 per share)
extraordinary charge on the early retirement of debt.
</TABLE>
1
The Charles Schwab Corporation
Selected Financial and Operating Data
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Growth Rates (1)
Compounded Annual
5-Year 1-Year
1990-1995 1994-1995 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results (for the year)
Revenues
Commissions 25% 38% $ 751 $ 546 $ 552 $ 441 $ 349
Mutual fund service fees 37% 40% 219 157 99 63 54
Interest revenue, net of interest expense (2) 24% 28% 211 165 120 92 77
Principal transactions (3) 18% 191 163 169 130 63
Other 16% 39% 48 34 25 24 27
- -------------------------------------------------------------------------------------------------------------------------
Total 30% 33% 1,420 1,065 965 750 570
- -------------------------------------------------------------------------------------------------------------------------
Expenses excluding interest
Compensation and benefits 31% 36% 594 437 393 307 234
Communications 25% 21% 129 107 94 76 57
Occupancy and equipment 21% 27% 111 88 77 65 51
Commissions, clearance and floor brokerage 44% 56% 77 49 43 32 21
Other 17% 46% 231 160 151 124 119
- -------------------------------------------------------------------------------------------------------------------------
Total 26% 36% 1,142 841 758 604 482
- -------------------------------------------------------------------------------------------------------------------------
Income before taxes on income and
extraordinary charge 57% 24% 278 224 207 146 88
Taxes on income 53% 17% 105 89 82 65 39
- -------------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 59% 28% 173 135 125 81 49
Extraordinary charge-early
retirement of debt 7
- -------------------------------------------------------------------------------------------------------------------------
Net income 59% 28% $ 173 $ 135 $ 118 $ 81 $ 49
=========================================================================================================================
Primary earnings per share (4)
Primary earnings before extraordinary charge 61% 26% $ .97 $ .77 $ .70 $ .46 $ .28
Extraordinary charge-early retirement of debt .04
- -------------------------------------------------------------------------------------------------------------------------
Primary earnings per share 61% 26% $ .97 $ .77 $ .66 $ .46 $ .28
=========================================================================================================================
Dividends declared per common share (4) 51% 52% $ .140 $ .092 $ .064 $.048 $.028
=========================================================================================================================
Weighted average number of common and
common equivalent shares outstanding (4, 5) 178 175 178 176 176
=========================================================================================================================
Other (for the year)
Return on stockholders' equity (1) 31% 32% 37% 35% 28%
Revenue growth 33% 10% 29% 32% 47%
Pre-tax profit margin 20% 21% 21% 20% 15%
After-tax profit margin 12% 13% 12% 11% 9%
Effective income tax rate 38% 40% 40% 44% 44%
=========================================================================================================================
Other (at year end)
Total assets 20% 33% $10,552 $7,918 $6,897 $5,905 $5,026
Borrowings 14% 44% $ 246 $ 171 $ 185 $ 152 $ 119
Stockholders' equity 33% 36% $ 633 $ 467 $ 379 $ 259 $ 200
Book value per common share (4) 31% 33% $ 3.64 $ 2.73 $ 2.19 $ 1.52 $ 1.15
=========================================================================================================================
(1) In cases where the calculation does not yield a meaningful result, growth rates are not presented.
(2) Interest revenue is presented net of interest expense. Interest expense for 1991 through 1995 was
(in millions): $225, $159, $132, $198 and $357, respectively.
(3) On July 1, 1991, the Company acquired Mayer & Schweitzer, Inc., whose operating results have been
consolidated with those of the Company since the acquisition.
(4) Reflects the March 1995 three-for-two common stock split and the September 1995 two-for-one common stock split.
(5) Amounts shown are used to calculate primary earnings per share.
Certain prior years' revenues and expenses have been reclassified to conform to the 1995 presentation.
</TABLE>
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 customers with 3.4 million active(a) accounts and assets that
totaled $181.7 billion at December 31, 1995. CSC's principal subsidiary,
Charles Schwab & Co., Inc. (Schwab), serves an estimated 51% of the
discount brokerage market, up from 50%(b) in 1994. Mayer & Schweitzer, Inc.
(M&S), a market maker in Nasdaq securities, provides trade execution
services to broker-dealers and institutional customers. During 1995, orders
handled by M&S totaled over 7 billion shares, or approximately 7% of the
total shares traded on Nasdaq.
(CHART OMITTED)
With a network of over 225 branch offices, Schwab is physically
represented in 46 states, the Commonwealth of Puerto Rico and the United
Kingdom. In addition, 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 electronic
services - allow Schwab to achieve its customer service quality standards
in a cost-competitive manner. Collectively, these systems handled over
80 million calls and over 15 million trades during 1995.
(CHART OMITTED)
The Company has historically used discount pricing as a tactic in its
efforts to gain market share and enhance the value of its products and
services. In recent years, Schwab has introduced price-competitive product
offerings such as its Mutual Fund OneSource (registered trademark) service,
which offers mutual funds with no transaction fees, and its Schwab 500
Brokerage (trademark) service, which includes commission discounts from
Schwab's standard rates. During 1995, Schwab introduced e.Schwab
(trademark), which provides online trading access and includes significant
commission discounts from Schwab's standard rates. Management expects to
continue aggressive use of discount pricing in the marketing of new
products and services.
Environmental factors influencing the Company's performance include
fundamentally cyclical financial markets, and heavy competition from full
commission and discount brokerage firms, as well as from mutual fund
companies. Increasingly, competition has come from banks, software
development companies, insurance companies and others as they expand their
product lines. Such competition may negatively impact the Company's profit
margin.
The significant growth during 1995 of asset-based revenues such as mutual
fund service fees and net interest revenue has enhanced the consistency of
the Company's revenue streams, enabling the Company to cover a greater
proportion of fixed expenses. However, transaction-based revenues continue
to represent the majority of the Company's revenues. Since these revenues
are heavily influenced by fluctuations in the volume 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. The nature of the Company's revenues and
expenses, along with the environmental factors discussed above, may subject
the Company's future earnings and common stock price to significant
volatility.
The Company's long-term performance objectives call for profitable growth
within several markets of the financial services industry - retail
brokerage, mutual funds, equity securities market-making, support services
for independent investment managers and electronic brokerage. 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 long-term goal to increase the value
of the Company by achieving a 20% annual revenue growth rate while
maintaining a 10% after-tax profit margin and a 20% return on stockholders'
equity.
In addition to the historical information contained throughout this Annual
Report, there are forward-looking statements that reflect management's
expectations for the future. A variety of important factors could cause
actual results to differ materially from such statements. These factors are
noted throughout this Annual Report and in the Company's Annual Report on
Form 10-K and include: the actions of both current and potential new
competitors, rapid changes in technology, financial market volatility,
evolving industry regulation, customer trading patterns, and new products
and services.
(CHART OMITTED)
RESULTS OF OPERATIONS
SUMMARY
Revenues of $1.4 billion in 1995 mark the Company's sixth consecutive year
of record revenues, up 33% from
(a) Accounts with balances or activity within the preceding twelve months.
(b) The Securities Industry Association revised its definition of discount
brokers in 1995. Schwab's share in 1994 was revised to 50% from 42%
under this new definition.
3
1994 and well above management's long-term goal of 20%. Trading activity at
Schwab reached record levels during 1995, with daily average retail trades,
which include Mutual Fund OneSource (registered trademark) trades, increasing
over 29% from 1994 to 56,300. The combined daily average share volume of the
New York Stock Exchange and Nasdaq increased 27% from 1994 to 748 million
shares. The Company's strong performance was also reflected in a $59.1 billion,
or 48%, increase in customer assets. On a dividend reinvested basis, the
Standard & Poor's 500 Index ended the year up 38%.
(CHART OMITTED)
Earnings in 1995 were $173 million, or $.97 per share, marking the
Company's fifth consecutive year of record earnings, up from $135 million,
or $.77 per share, in 1994, and $118 million, or $.66 per share, in 1993.
Share information throughout this report has been restated to reflect the
March 1995 three-for-two common stock split, effected in the form of a 50%
stock dividend, and the September 1995 two-for-one common stock split,
effected in the form of a 100% stock dividend. The after-tax profit margin
for 1995 was 12%, which exceeded the Company's long-term goal of 10%.
Return on stockholders' equity was 31% in 1995, well above the Company's
long-term goal of 20%. Reflecting these strong results, the Company's Board
of Directors declared two cash dividend increases during 1995, raising the
effective annual dividend rate 74% from the end of 1994.
(CHART OMITTED)
During 1995, the Company continued to invest in technology, product and
service enhancements, marketing programs, and new and expanded customer
service capacity. This contributed to a 36% increase in noninterest
expenses, which totaled $1.1 billion. With customer trading activity up 29%
over 1994, the Company increased its servicing capacity by expanding each
of its regional customer telephone service centers and its electronic
delivery services, as well as opening 19 branch offices. Capital
expenditures for 1995 totaled $166 million.
(CHART OMITTED)
REVENUES
Commissions
Commission revenues were $751 million in 1995, compared to $546 million in
1994 and $552 million in 1993. Commission revenues are affected by the
number of customer accounts that traded, the average number of transactions
per account that traded and the average commission per transaction. Schwab
operates in an agency capacity when executing commission transactions.
(CHART OMITTED)
Retail agency commission revenues, which exclude commissions from
institutional customers, constituted approximately 96% of total commissions
in each of the last three years. Commissions earned on retail agency trades
totaled $711 million in 1995, compared to $523 million in 1994 and
$531 million in 1993. The daily average retail agency trade level was
38,000 in 1995, 28,900 in 1994 and 27,700 in 1993. The following table
shows a comparison of certain factors that influence retail agency
commission revenues:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Number of customer accounts
that traded during the year
(in thousands) 1,543 1,352 1,227
Average number of retail agency
transactions per account
that traded 6.3 5.4 5.7
Total number of retail agency
transactions (in thousands) 9,753 7,282 7,003
Average commission per retail
agency transaction $72.88 $71.88 $75.89
Total retail agency commission
revenues (in millions) $ 711 $ 523 $ 531
==============================================================
Note: The above table excludes customer transactions in
Schwab's Mutual Fund OneSource (registered trademark) service.
</TABLE>
From 1993 to 1995, the total number of retail agency transactions executed
by Schwab has increased as Schwab's customer base has grown. From 1994 to
1995, average commission per retail agency transaction increased $1.00
mainly due to a higher proportion of equity securities transactions, which
carry a higher average commission per trade.
From 1993 to 1994, average commission per retail agency transaction
decreased $4.01 as the proportion of trades in lower commission per transaction
products increased. This was primarily the result of Schwab's success in
attracting customer mutual fund business. Strong price competition,
particularly with respect to customer equity securities transactions, also
contributed to the decrease. The effect of the increase in the total number of
retail agency transactions on retail agency commission revenues for 1994 was
offset entirely by the decrease in average commission per retail agency
transaction.
Attracting new customer accounts is important in generating commission
revenues. Schwab opened 698,000 new customer accounts during 1995, up 1%
and 8%, respectively, over account openings of 688,000 in 1994 and 644,000
in 1993. Prior year amounts are restated to reflect the $1,000 minimum
opening balance requirement for basic brokerage accounts implemented in
July 1994.
4
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 daily balances of customer assets invested
in the funds. Revenues received from customer purchase and sale
transactions of mutual funds 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 $219 million in 1995, compared to
$157 million in 1994 and $99 million in 1993. The increases from 1993 to
1995 were primarily attributable to significant increases in customer
assets in Schwab's proprietary funds, collectively referred to as the
SchwabFunds (registered trademark), and customer assets in funds purchased
through Schwab's Mutual Fund OneSource (registered trademark) service.
The SchwabFunds include money market funds, bond funds, equity index
funds, and asset allocation funds which contain stocks, bonds and cash
equivalents. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money
market funds. Customer assets invested in the SchwabFunds, substantially
all of which are in SchwabFunds money market funds, were $31.7 billion,
$23.3 billion and $15.8 billion at the end of 1995, 1994 and 1993,
respectively.
At December 31, 1995, Schwab's Mutual Fund OneSource service enabled
customers to trade over 370 mutual funds in 44 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 to achieve
investment diversity among fund families. In addition, investors' record
keeping and investment monitoring are simplified through one consolidated
statement. Fees received by Schwab via the Mutual Fund OneSource program
are based on daily balances of customer assets invested in the
participating funds through Schwab and are paid by the funds and/or fund
sponsors. Customer assets held by Schwab that have been purchased through
the Mutual Fund OneSource service, excluding Schwab's proprietary funds,
totaled $23.9 billion, $12.5 billion and $8.3 billion at the end of 1995,
1994 and 1993, respectively.
Interest Revenue, Net of Interest Expense
The Company presents interest revenue, net of interest expense, in its
consolidated financial statements. This presentation eliminates the impact
of market interest rate fluctuations on total revenues, thereby providing a
clearer view of the Company's performance in the areas of attracting and
investing customer cash balances and managing its balance sheet.
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, Schwab and M&S 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. Schwab's and M&S' policies for
credit quality and maximum maturity requirements are more restrictive than
these SEC regulations. In each of the last three years, resale agreements
accounted for over 87% of Schwab's investments in segregated customer cash
balances. The average maturities of Schwab's total investments in
segregated customer cash balances were 48 days, 54 days and 71 days in
1995, 1994 and 1993, respectively.
Interest revenue, net of interest expense, reached a record $211 million
in 1995, compared to $165 million in 1994 and $120 million in 1993 as shown
in the following table (in millions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Interest Revenue
Investments, customer-related $283 $168 $113
Margin loans to customers 264 185 132
Other 21 10 7
- ----------------------------------------------------------------
Total 568 363 252
- ----------------------------------------------------------------
Interest Expense
Customer cash balances 321 178 115
Borrowings 12 12 12
Other 24 8 5
- ----------------------------------------------------------------
Total 357 198 132
- ----------------------------------------------------------------
Interest Revenue, Net of
Interest Expense $211 $165 $120
================================================================
</TABLE>
The Company's interest-earning assets (principally investments and margin
loans to customers) are financed primarily by interest-bearing customer
cash balances. Other funding sources include noninterest-bearing customer
cash balances, proceeds from stock-lending activities, borrowings and
stockholders' equity. Average balances and interest rates on customer-
related, interest-earning assets and related funding sources are summarized
as follows (dollars in millions):
5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Earning Assets (customer-related):
Investments:
Average balance outstanding $4,815 $3,957 $3,469
Average interest rate 5.88% 4.26% 3.25%
Margin loans to customers:
Average balance outstanding $3,221 $2,742 $2,212
Average interest rate 8.20% 6.74% 5.99%
Average yield on earning assets 6.81% 5.28% 4.32%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $6,553 $5,472 $4,693
Average interest rate 4.90% 3.25% 2.44%
Other interest-bearing sources:
Average balance outstanding $ 411 $ 353 $ 275
Average interest rate 4.33% 2.94% 3.30%
Average noninterest-bearing portion $1,072 $ 874 $ 713
Average interest rate on funding sources 4.22% 2.81% 2.18%
Summary:
Average yield on earning assets 6.81% 5.28% 4.32%
Average interest rate on funding sources 4.22% 2.81% 2.18%
- --------------------------------------------------------------------------
Average net interest margin 2.59% 2.47% 2.14%
==========================================================================
</TABLE>
The increase in interest revenue, net of interest expense, from 1993 to
1995 was primarily due to higher levels of average earning assets, and to
sharper increases in average interest rates on earning assets compared to
funding sources.
Principal Transactions
Principal transactions are primarily comprised of net gains from market-
making activities in Nasdaq securities. Factors that influence principal
transactions include the volume of customer trades and market price
volatility. During 1995, a record 101 billion shares traded on Nasdaq, and
the Nasdaq Composite Index increased 40%. As a market maker in Nasdaq
securities, M&S generally executes customer trades as principal. M&S
business practices call for competitively-priced customer trade executions,
generally defined as the highest bid price on a sell order and the lowest
offer price on a buy order available through the National Association of
Securities Dealers (NASD) member firms. Certain customer trades are
executed on a negotiated basis. Substantially all Nasdaq security trades
originated by the customers of Schwab are directed to M&S.
Revenues from principal transactions were $191 million in 1995, compared
to $163 million in 1994 and $169 million in 1993. The 18% increase from
1994 to 1995 was primarily due to an increase in trading volume handled by
M&S.
The volume increase at M&S was partially offset by lower average revenue
per principal transaction mainly due to the impact of the July 1994 NASD
Interpretation to its Rules of Fair Practice governing the way in which
market makers in Nasdaq securities handle the execution of customer limit
orders. M&S extended the benefits of the July 1994 NASD Interpretation to
substantially all retail customer limit orders in Nasdaq securities
received from broker-dealers for which it executes such orders. The
introduction of Assurance Trading (trademark) (see discussion below) also
contributed to lower average revenue per principal transaction. The 4%
decrease from 1993 to 1994 was due to a lower average revenue per principal
transaction in 1994 and the impact of the July 1994 NASD Interpretation.
In August 1995, Assurance Trading was introduced. This new service
provides customers an opportunity for price improvement on certain trades
in certain Nasdaq securities through the scanning of multiple computer
systems for a price better than the current quoted Nasdaq inside price.
M&S is a significant participant in the Nasdaq market. During 1994, the
Department of Justice, the SEC and the NASD commenced a series of
investigations and regulatory actions involving the activities of many
market makers in Nasdaq securities. These investigations and regulatory
actions have continued into 1996.
Current and proposed rulemaking, regulatory actions, improvements in
technology, such as those which permit the introduction of Assurance
Trading, changes in market practices and new market systems, if approved,
could significantly impact the manner in which business is currently
conducted in the Nasdaq market. The above factors, individually or in the
aggregate, could continue to have a material adverse impact on M&S' future
revenues from principal transactions.
During 1994, Schwab commenced operation of specialist posts on the Pacific
Stock Exchange to make markets in exchange-listed securities and ended that
year with five posts that collectively made markets in over 240 securities.
At December 31, 1995, Schwab had fourteen specialist posts that
collectively made markets in approximately 700 securities. The majority of
trades originated by the customers of Schwab in exchange-listed securities
for which Schwab makes a market are directed to these posts. Revenues from
these specialist posts also have contributed to the increase in principal
transactions from 1994 to 1995.
Other Revenues
Other revenues include other brokerage fees, IRA maintenance fees, and
software product sales and usage fees. These revenues totaled $48 million
during 1995, compared to $34 million in 1994 and $25 million in 1993. The
39% increase from 1994 to 1995 represented higher other brokerage fees and
increased cash surrender value of company-owned life insurance policies.
The 36% increase from 1993 to 1994 represented higher IRA maintenance fees
and increased sales of StreetSmart (registered trademark) and Equalizer
(registered trademark), Schwab's online trading software products,
partially offset by a decrease in revenues from Schwab's affinity credit
card arrangement.
(CHART OMITTED)
6
EXPENSES
Compensation and Benefits
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. The Company provides
its employees with compensation programs that contain variable pay
components that are tied to the achievement of specified objectives
relating to revenue growth, profit margin and growth in customer assets.
Therefore, a significant portion of compensation and benefits expense will
fluctuate with these measures.
Compensation and benefits expense was $594 million for 1995, compared to
$437 million in 1994 and $393 million in 1993. Variable compensation as a
percentage of total compensation and benefits expense was 24% in 1995, 23%
in 1994 and 27% in 1993. The Company had full-time, part-time and temporary
employees, and persons employed on a contract basis that represented the
equivalent of approximately 9,200 full-time employees at the end of 1995,
compared to approximately 6,500 at the end of both 1994 and 1993. Increases
in compensation and benefits expense between 1993 and 1995 were generally
the result of increases in salaries and wages due to the larger average
number of employees. In 1995, an increase in variable compensation also
contributed to the overall increase in compensation and benefits. In 1994,
the increase in salaries and wages was partially offset by a decline in
variable compensation.
The Company encourages and provides mechanisms for employee ownership of
the Company's common stock through its profit sharing and 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 interests of
employees with those of stockholders. At December 31, 1995, management,
employees and their families owned directly and through the Company's
profit sharing and employee stock ownership plan approximately 41% of the
Company's outstanding common stock. In addition, management and employees
held options to purchase common stock, which are not considered outstanding
for ownership purposes, that totaled approximately 9% of the Company's
outstanding common stock at December 31, 1995.
(CHART OMITTED)
Communications
Communications expense, including telephone, postage, and news and
quotation charges, was $129 million for 1995, $107 million in 1994 and
$94 million in 1993. The increase in communications expense between 1993
and 1995 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 regional customer telephone service centers, and StreetSmart
(registered trademark) usage also contributed to higher telephone expenses
over this period.
Occupancy and Equipment
Occupancy and equipment expense includes the costs of leasing and
maintaining the Company's headquarters, four regional customer telephone
service centers, a primary data center and over 225 branch offices. It also
includes lease and rental expenses on computer and other equipment.
Occupancy and equipment expense was $111 million for 1995, compared to
$88 million in 1994 and $77 million in 1993, reflecting the Company's
continued growth. The Company expanded each of its regional customer
telephone service centers in 1995, opened a regional customer telephone
service center in 1994 and opened its primary data center in Phoenix in
1993. Schwab opened 19 new branch offices in 1995, 10 in 1994 and 23 in
1993.
Commissions, Clearance and Floor Brokerage
Commissions, clearance and floor brokerage expense includes fees paid to
stock and option exchanges for trade executions, fees paid by M&S to broker-
dealers for orders received for execution and fees paid to clearing
entities for trade processing. Commissions, clearance and floor brokerage
expense was $77 million in 1995, $49 million in 1994 and $43 million in
1993. The increases from 1993 to 1995 were primarily attributable to
increases in the number of trades processed by M&S and Schwab.
Depreciation and Amortization
Depreciation and amortization expense includes that relating to equipment
and office facilities, property, leasehold improvements, goodwill and other
intangibles. Such expenses were $69 million for 1995, compared to
$55 million in 1994 and $44 million in 1993. The increases from 1993 to
1995 were primarily due to newly acquired data processing-related assets
and leasehold improvements which increased the Company's customer service
capacity and fixed asset base from the respective preceding year's level. A
portion of the 1995 increase was due to the amortization of goodwill and
other intangibles resulting from businesses acquired during the year.
Advertising and Market Development
Advertising builds the image and awareness of the firm and plays a crucial
role in obtaining new customer accounts, 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 $53 million in 1995, $36 million in 1994 and
$41 million in 1993. The 45% increase from 1994 to 1995 was primarily a
result of higher expenses relating to print marketing materials, and cable
television and radio advertising. The 11% decrease from 1993 to 1994 was
primarily a result of the Company's
7
reduced spending on network and cable television advertising, and print
marketing materials.
Professional Services
Professional services expense was $41 million in 1995, $22 million in 1994
and $22 million in 1993. This category includes the cost of consultants
engaged to support product, service and systems development, and legal and
accounting fees. The 88% increase in professional services expense from
1994 to 1995 was primarily due to increases in consulting fees relating to
various development projects - including those involving data processing,
product and customer service enhancement, and company infrastructure.
Other Expenses
Other expenses were $69 million for 1995, $47 million in 1994 and
$44 million in 1993. Other expenses include those relating to travel and
entertainment, errors and bad debts, bank service charges (primarily
relating to costs of processing checks written by customers), registration
fees for employees and other miscellaneous expenses. The increase in these
expenses from 1993 to 1995 was primarily attributable to a combination of
higher staffing levels and to higher transaction volumes. In 1995, higher
charitable contributions also contributed to the overall increase in other
expenses.
Taxes on Income
The Company's effective income tax rate was 37.7% in 1995, and 39.7% in
both 1994 and 1993. The decline in the effective income tax rate during
1995 was primarily due to the accounting for the August 1995 settlement of
substantially all issues raised in the Company's U.S. Tax Court case with
the Internal Revenue Service. See "Commitments and Contingent Liabilities"
note in the Notes to Consolidated Financial Statements. The Company expects
its effective income tax rate in 1996 to be from 40% to 41%.
LIQUIDITY AND CAPITAL RESOURCES
CSC operates 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 operations. 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
(the majority of which are segregated for the exclusive benefit of
customers pursuant to regulatory requirements), receivables from customers,
and receivables from brokers, dealers and clearing organizations. 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 $8.4 billion in 1995, $6.7 billion in 1994 and $5.7 billion
in 1993. 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
$250 million subordinated revolving credit facility maturing in September
1997, of which $174 million was outstanding at December 31, 1995. This
facility was increased in December 1995 from $180 million. At year end,
Schwab also had outstanding $25 million in fixed-rate subordinated term
loans from CSC maturing in 1997. In January 1996, the maturity date for
$15 million of the $25 million debt scheduled to mature in 1997 was
extended to 1998. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintains uncommitted
unsecured bank credit lines totaling $470 million. The need for short-term
borrowings arises primarily from timing differences between cash flow
requirements and the scheduled liquidation of interest-bearing investments,
or, if applicable, the release of funds from required regulatory reserves.
Schwab used such borrowings for 9 days in 1995, 29 days in 1994 and 25 days
in 1993, with the daily amounts borrowed averaging $24 million, $43 million
and $19 million, respectively. These lines were unused at December 31,
1995.
M&S
M&S' liquidity needs are generally met through earnings generated by its
operations. Most of M&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 $35 million
under a subordinated lending arrangement with CSC. This facility was
increased in December 1995 from $10 million. At year end, M&S had
outstanding $4 million maturing in December 1997 under this facility.
Borrowings under this arrangement qualify as regulatory capital for M&S.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. Schwab and
M&S 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
8
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, 1995, Schwab had $392 million of net capital
(10% of aggregate debit balances), which was $310 million in excess of its
minimum required net capital. At December 31, 1995, M&S had $6 million of net
capital (110% of aggregate debit balances), which was $5 million in excess of
its minimum required net capital. Management believes that funds generated
by the operations of CSC's subsidiaries will continue to be the primary funding
source in meeting CSC's liquidity needs and maintaining Schwab's and M&S'
net capital.
CSC has individual liquidity needs that arise from its issued and
outstanding $240 million Senior Medium-Term Notes, Series A (Medium-Term
Notes), as well as from the funding of cash dividends, common stock
repurchases and acquisitions. The Medium-Term Notes have maturities ranging
from 1996 to 2005 and fixed interest rates ranging from 4.95% to 7.72% with
interest payable semiannually.
In August 1995, a prospectus supplement covering the issuance of up to
$140 million in Senior or Senior Subordinated Medium-Term Notes, Series A,
was filed with the SEC of which $110 million in securities remained
unissued at December 31, 1995.
In October 1994, CSC prepaid its $35 million Senior Term Loan due in March
1995 using working capital funds. When the loan was prepaid, a related
interest rate exchange arrangement was terminated.
CSC may borrow under its $250 million committed unsecured credit facility
with a group of ten banks through June 1996. The funds are available for
general corporate purposes for which CSC pays a commitment fee on the
unused balance. The terms of this facility require CSC to maintain minimum
levels of stockholders' equity and Schwab and M&S to maintain minimum
levels of net capital, as defined. This facility has never been used.
See "Commitments and Contingent Liabilities" note in the Notes to
Consolidated Financial Statements.
(CHART OMITTED)
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $241 million during
1995, up 27% from $190 million in 1994, allowing the Company to finance the
majority of its growth with internally-generated funds. During 1995, the
Company invested $166 million in various capital expenditures including the
expansion of each of its regional customer telephone service centers, and
enhancements to its data processing and telecommunications systems. The
Company also opened 19 branch offices and made improvements to certain
existing office facilities.
As has been the case in recent years, capital expenditures will vary from
period to period as business conditions change. While management retains
substantial flexibility to adjust capital expenditures as necessary, in
general the level of future expenditures will be influenced by the rate of
growth in customer assets and trading activities, staffing and facilities
requirements, and availability of relevant technology to support innovation
in products and services. Management currently anticipates that 1996
capital expenditures will be comparable to, and may exceed, the 1995 level.
In addition, during 1995, the Company:
- - Paid approximately $68 million, net of cash received, for businesses
acquired. The largest acquisition was ShareLink Investment Services plc,
a retail discount securities brokerage firm located in the United
Kingdom.
- - Issued $70 million in Medium-Term Notes.
- - Repurchased 873,800 shares of its common stock for $17 million. As of
December 31, 1995, authorization granted by the Company's Board of
Directors allowed for the repurchase of up to 952,000 additional shares.
The Company will continue to monitor opportunities to repurchase common
stock in cases where stockholder value would be enhanced.
- - Paid common stock dividends of $24 million.
(CHART OMITTED)
The Company monitors both the relative composition and absolute level of
its financial capital. The Company's stockholders' equity at December 31,
1995 totaled $633 million. In addition, the Company had borrowings of
$246 million that bear interest at a weighted average rate of 6.28%. These
borrowings, together with the Company's equity, provided total financial
capital of $879 million at December 31, 1995, up $241 million, or 38% from
a year ago. Management currently anticipates that the proportions of
borrowings and stockholders' equity in the Company's financial capital will
remain comparable to current levels.
EFFECTS OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting
Standards (SFAS) No. 121 - Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of - in 1996. The statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
The Company is also required to adopt SFAS No. 123 - Accounting for Stock-
Based Compensation - in 1996. The statement establishes accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. The
9
Company plans to implement only the disclosure requirements of the statement.
Management believes the adoption of these statements in 1996 will have no
effect on the Company's results of operations, earnings per share or cash
flows.
LOOKING AHEAD
The continued general financial success within the securities industry
over the past several years has strengthened existing competitors and
attracted new competitors. Management expects intense competition to
continue in 1996. The Company intends to respond to such competition by
continuing to invest heavily in technology, customer service facilities and
product development. To help ensure effective use of resources, the Company
will continue to focus on improving its 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 intends to continue to support its products and services with
aggressive marketing and promotional efforts, and to focus its business
development activities on attracting customer assets.
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
The Charles Schwab Corporation
Consolidated Statement of Income
(In Thousands, Except Per Share Amounts)
<TABLE>
<caption
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Commissions $ 750,896 $ 546,112 $552,206
Mutual fund service fees 218,784 156,812 98,554
Interest revenue, net of interest expense of
$357,223 in 1995, $198,236 in 1994 and
$132,382 in 1993 210,897 164,708 119,849
Principal transactions 191,392 162,595 169,081
Other 47,934 34,370 25,323
- -----------------------------------------------------------------------------------------------------
Total 1,419,903 1,064,597 965,013
- -----------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 594,105 437,064 392,768
Communications 128,554 106,682 94,348
Occupancy and equipment 110,977 87,641 76,668
Commissions, clearance and floor brokerage 77,061 49,344 43,039
Depreciation and amortization 68,793 54,556 44,433
Advertising and market development 52,772 36,401 40,726
Professional services 41,304 21,928 22,385
Other 69,233 46,638 44,374
- -----------------------------------------------------------------------------------------------------
Total 1,142,799 840,254 758,741
- -----------------------------------------------------------------------------------------------------
Income before taxes on income and
extraordinary charge 277,104 224,343 206,272
Taxes on income 104,500 89,000 81,904
- -----------------------------------------------------------------------------------------------------
Income before extraordinary charge 172,604 135,343 124,368
Extraordinary charge - early retirement of debt,
net of tax 6,700
- -----------------------------------------------------------------------------------------------------
Net Income $ 172,604 $ 135,343 $117,668
=====================================================================================================
Weighted average number of common and
common equivalent shares outstanding (1, 2) 178,476 175,206 178,350
=====================================================================================================
Per Common Share (1)
Net earnings before extraordinary charge $ .97 $ .77 $ .70
Extraordinary charge - early retirement of
debt .04
- -----------------------------------------------------------------------------------------------------
Primary Earnings per Share $ .97 $ .77 $ .66
=====================================================================================================
Fully Diluted Earnings per Share $ .97 $ .77 $ .66
=====================================================================================================
Dividends Declared per Common Share (1) $ .140 $ .092 $ .064
=====================================================================================================
(1) Reflects the March 1995 three-for-two common stock split and the September 1995 two-for-one common stock split.
(2) Amounts shown are used to calculate primary earnings per share.
See Notes to Consolidated Financial Statements.
</TABLE>
11
The Charles Schwab Corporation
Consolidated Balance Sheet
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and equivalents (including resale agreements of $250,000 in 1995 and
$242,500 in 1994) $ 429,298 $ 380,616
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $4,384,298 in 1995
and $3,787,984 in 1994) 5,426,619 4,206,466
Receivable from brokers, dealers and clearing organizations 141,916 86,028
Receivable from customers (less allowance for doubtful accounts
of $3,700 in 1995 and $3,204 in 1994) 3,946,295 2,923,867
Securities owned - at market value 113,522 60,226
Equipment, office facilities and property (less accumulated depreciation
and amortization of $212,035 in 1995 and $162,474 in 1994) 243,472 129,105
Intangible assets (less accumulated amortization of $162,358 in 1995
and $148,722 in 1994) 80,863 29,968
Other assets 170,023 101,586
- ------------------------------------------------------------------------------------------------------------------------------
Total $10,552,008 $7,917,862
==============================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 212,961 $ 117,383
Payable to brokers, dealers and clearing organizations 581,226 296,420
Payable to customers 8,551,996 6,670,362
Accrued expenses and other 326,785 195,320
Borrowings 246,146 171,363
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,919,114 7,450,848
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value
per share; none issued
Common stock - 200,000,000 shares authorized; $.01 par value per share;
178,459,416 shares issued in 1995 and 1994* 1,785 595
Additional paid-in capital 180,302 166,103
Retained earnings 520,532 373,161
Treasury stock - 4,427,255 shares in 1995 and 7,563,990 shares in 1994, at cost* (50,968) (57,968)
Unearned ESOP shares (9,397) (10,174)
Unamortized restricted stock compensation (7,074) (4,703)
Foreign currency translation adjustment (2,286)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 632,894 467,014
- ------------------------------------------------------------------------------------------------------------------------------
Total $10,552,008 $7,917,862
==============================================================================================================================
* Reflects the March 1995 three-for-two common stock split and the September 1995 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
</TABLE>
12
The Charles Schwab Corporation
Consolidated Statement of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 172,604 $ 135,343 $ 117,668
Noncash items included in net income:
Depreciation and amortization 68,793 54,556 44,433
Deferred income taxes (6,975) 3,781 (5,352)
Other 3,609 3,699 (1,074)
Extraordinary charge - early retirement of debt 11,205
Change in securities owned - at market value (53,296) (25,189) (10,639)
Change in accrued expenses and other 141,431 40,908 43,653
Change in other assets (44,894) (2,026) (26,986)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 281,272 211,072 172,908
- -----------------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding the effects
of businesses acquired):
Payable to customers 1,775,434 924,579 670,276
Receivable from customers (1,011,008) (371,587) (648,548)
Drafts payable 89,909 (6,001) 21,052
Payable to brokers, dealers and clearing organizations 285,363 (7,561) 105,483
Receivable from brokers, dealers and clearing organizations (15,908) (14,412) (23,250)
Cash and investments required to be segregated under
Federal or other regulations (1,157,717) (530,147) (166,170)
- -----------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (33,927) (5,129) (41,157)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 247,345 205,943 131,751
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (165,630) (31,534) (77,127)
Cash payments for businesses acquired, net of cash received (68,244)
Purchase of life insurance policies (39,628) (41,684)
Other (606) 6,241
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (273,502) (73,824) (70,886)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from loans on life insurance policies 38,297 41,299
Proceeds from borrowings 70,000 20,000 150,000
Repayment of borrowings (2,781) (35,916) (128,032)
Purchase of treasury stock (17,345) (46,781)
Dividends paid (24,249) (16,038) (10,946)
Other 11,623 6,105 3,651
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 75,545 (31,331) 14,673
- -----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (706)
- -----------------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 48,682 100,788 75,538
Cash and equivalents at beginning of year 380,616 279,828 204,290
- -----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 429,298 $ 380,616 $ 279,828
=======================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
13
The Charles Schwab Corporation
Consolidated Statement of Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Note
Receivable Unamortized Foreign
Common Stock Additional From Profit Unearned Restricted Currency
---------------- Paid-In Retained Treasury Sharing ESOP Stock Translation
Shares* Amount Capital Earnings Stock Plan Shares Compensation Adjustment Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 170,024 $ 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 exercised
and restricted stock
compensation awards 1,311 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 2,177 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 173,512 595 161,052 253,692 (23,153) (13,013) 379,173
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 135,343 135,343
Dividends declared
on common stock (16,038) (16,038)
Purchase of treasury
stock (5,000) (46,781) (46,781)
Stock options exercised
and restricted stock
compensation awards 2,384 4,293 11,966 $(4,892) 11,367
Amortization of
restricted stock
compensation awards 189 189
Collection on note
receivable from
Profit Sharing Plan 1,467 1,467
Reclassification of note
receivable from Profit
Sharing Plan 11,546 $(11,546)
ESOP shares released
for allocation 758 164 1,372 2,294
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 170,896 595 166,103 373,161 (57,968) (10,174) (4,703) 467,014
- ----------------------------------------------------------------------------------------------------------------------------------
Net income 172,604 172,604
Dividends declared
on common stock (24,249) (24,249)
Purchase of treasury
stock (874) (17,345) (17,345)
Stock options exercised
and restricted stock
compensation awards 4,010 12,809 24,345 (3,511) 33,643
Three-for-two stock
split effected in
the form of a 50%
stock dividend 297 (297)
Two-for-one stock
split effected in
the form of a 100%
stock dividend 893 (893)
Amortization of
restricted stock
compensation awards 1,140 1,140
ESOP shares released
for allocation 1,390 206 777 2,373
Foreign currency
translation
adjustment $(2,286) (2,286)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 174,032 $1,785 $180,302 $520,532 $(50,968) $ (9,397) $(7,074) $(2,286) $632,894
==================================================================================================================================
*Share amounts are presented net of treasury shares and reflect the March 1995 three-for-two common stock split and the
September 1995 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
</TABLE>
14
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). CSC is
a holding company engaged, through its subsidiaries, in securities
brokerage and related investment services. CSC's principal operating
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-
dealer with a network of over 225 branch offices in 46 states. Another
subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities, provides trade execution services to broker-dealers, including
Schwab, and institutional customers. Fees received from the Company's
proprietary mutual funds represented approximately 12% of the Company's
consolidated revenues in 1995. As of December 31, 1995, approximately 28%
of Schwab's total customer accounts were located in California.
Certain items in prior years' financial statements have been reclassified
to conform to the 1995 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 a trade date basis for 1995 and a settlement date
basis for years prior to 1995. Revenues and expenses on a settlement date
basis for Schwab were not materially different from trade date and the
effect of the change is not material to the financial statements. 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), certificates of deposit and, in the case of
ShareLink Investment Services plc (ShareLink), money market funds. Resale
Agreements are accounted for as collateralized financing transactions and
are recorded at their contractual amounts. Certificates of deposit and
money market funds are stated at cost, which approximates market.
Use of estimates in the preparation of the financial statements - The
preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts of revenues
and expenses during the period. Such estimates relate to useful lives of
equipment, office facilities, property and intangible assets, fair value of
financial instruments, allowance for doubtful accounts, and legal reserves.
Actual results could differ from such estimates.
Depreciation and amortization - Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the
asset, generally three to seven years. Property is depreciated on a
straight-line basis over twenty years. Leasehold improvements are amortized
on a straight-line basis over the lesser of the estimated useful life of
the asset or the life of the lease. Other intangibles, including goodwill
and customer lists, are amortized on a straight-line basis over periods
from three to fifteen years.
Earnings per 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. The weighted average number of common shares
outstanding during 1995, 1994 and 1993 was 172,284,974, 169,953,118 and
172,674,255, respectively. Common share equivalents from the dilutive
effect of stock options utilized in computing earnings per share in 1995,
1994 and 1993 were 6,191,145, 5,253,000 and 5,675,844 for primary, and
6,577,351, 5,387,553 and 6,044,554 for fully diluted, respectively.
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 March 1995 three-for-two common stock split and
the September 1995 two-for-one common stock split.
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 - The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes
- - 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.
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 certain
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 "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.
15
Foreign currency translation - Assets and liabilities denominated in
foreign currencies are translated at the exchange rate on the balance sheet
date, while revenues and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments are
accumulated as a separate component of stockholders' equity.
Derivatives - During 1995 and 1994, the Company's derivatives activities
were limited to exchange-traded option contracts to reduce market risk on
inventories in Nasdaq and exchange-listed securities, a forward foreign
currency contract to reduce foreign exchange risk and an interest rate
exchange arrangement to reduce interest risk. The notional amount of such
derivatives was not material to the Company's consolidated balance sheet at
December 31, 1995.
Acquisitions
During 1995, the Company completed several acquisitions. The largest
acquisition was ShareLink, a retail discount securities brokerage firm in
the United Kingdom, for $60 million, net of cash received. Because the
acquisitions were accounted for using the purchase method of accounting,
the operating results of the acquired companies are included in the
consolidated results of the Company since the respective dates of
acquisitions. The historic results of the acquired companies are not
included in periods prior to such acquisitions.
Securities Owned
The market value of securities owned at December 31, 1995 and 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------
1995 1994
- ------------------------------------------------------
<S> <C> <C>
Equity and bond funds $ 40,657 $ 10,928
Equity and other securities 38,821 22,436
Money market funds 34,044 26,862
- ------------------------------------------------------
Total $113,522 $ 60,226
======================================================
</TABLE>
Securities sold, but not yet purchased of $24 million and $16 million at
December 31, 1995 and 1994, respectively, consist primarily of equity and
other securities, and are included at market value in accrued expenses and
other.
Payable to Customers
The principal source of funding for Schwab's margin lending is cash
balances in customer Schwab One (registered trademark) brokerage accounts.
At December 31, 1995, Schwab was paying interest at 4.7% on $7.3 billion of
cash balances in Schwab One brokerage accounts, which were included in
payable to customers. At December 31, 1994, Schwab was paying interest at
4.7% on $5.8 billion of such cash balances.
Borrowings
Borrowings at December 31, 1995 and 1994 consist of the following (in
thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------
1995 1994
- ------------------------------------------------------
<S> <C> <C>
Senior Medium-Term Notes $240,000 $170,000
Other 6,146 1,363
- ------------------------------------------------------
Total $246,146 $171,363
======================================================
</TABLE>
CSC has $240 million aggregate principal amount of Senior Medium-Term
Notes, Series A (Medium-Term Notes), with fixed interest rates ranging from
4.95% to 7.72% and maturities as follows: 1996 - $26 million; 1997 -
$28 million; 1998 - $40 million; 1999 - $40 million; 2000 - $38 million;
and thereafter - $68 million. The Medium-Term Notes carry a weighted
average interest rate of 6.29%. The fair value of the Medium-Term Notes was
estimated to be $243 million and $156 million at December 31, 1995 and
1994, respectively, based on estimates of market rates for debt with
similar terms and remaining maturities.
In August 1995, a prospectus supplement covering the issuance of up to
$140 million in Senior or Senior Subordinated Medium-Term Notes, Series A,
was filed with the Securities and Exchange Commission (SEC) of which
$110 million in securities remained unissued at December 31, 1995.
In October 1994, CSC prepaid its $35 million Senior Term Loan due in March
1995 using working capital funds. When the loan was prepaid, a related
interest rate exchange arrangement was terminated.
For use in its brokerage operations, at December 31, 1995, Schwab
maintained uncommitted unsecured bank credit lines totaling $470 million.
At December 31, 1994, Schwab's uncommitted bank credit lines totaled
$480 million, of which $400 million was available on an unsecured basis.
There were no borrowings outstanding under these lines at December 31,
1995 and 1994.
CSC may borrow under its $250 million committed unsecured credit facility
with a group of ten banks through June 1996. The funds are available for
general corporate purposes for which CSC pays a commitment fee on the
unused balance. The terms of this facility require CSC to maintain minimum
levels of stockholders' equity and Schwab and M&S to maintain minimum
levels of net capital, as defined. This facility has never been used.
During 1994, CSC had agreed to maintain availability under this facility to
repay any obligations arising under the then-
16
existing $100 million letter of credit facility that had been established by
CSC for three of the SchwabFunds (registered trademark) money market funds
(the Funds). As part of the 1995 reduction and extension of such letter of
credit facility (described in the "Commitments and Contingent Liabilities"
note), this availability requirement was eliminated. At December 31, 1995 and
1994, had the Funds disposed of all the specified securities at values provided
by the Funds' pricing service, the Funds would have had the right to make
demands for payments on the bank totaling approximately zero and
$9 million, respectively. These values may not be representative of market
values in effect at December 31, 1995 and 1994.
Taxes on Income
Income tax expense, including the current tax benefit related to the
extraordinary charge, is as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Year Ended December 31,
1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 96,742 $72,157 $72,362
State 14,733 13,062 14,894
- --------------------------------------------------------------------
Total current 111,475 85,219 87,256
- --------------------------------------------------------------------
Deferred:
Federal (6,818) 3,221 (4,477)
State (157) 560 (875)
- --------------------------------------------------------------------
Total deferred (6,975) 3,781 (5,352)
- --------------------------------------------------------------------
Taxes on income before
extraordinary charge 104,500 89,000 81,904
Current tax benefit -
extraordinary charge (4,504)
- --------------------------------------------------------------------
Total taxes on income $104,500 $89,000 $77,400
====================================================================
</TABLE>
The above amounts do not include the tax benefit from the exercise of
stock options, which for accounting purposes is credited directly to
additional paid-in capital. Such tax benefits reduced income taxes paid by
$22 million for 1995, $5 million for 1994 and $4 million for 1993.
The temporary differences which created deferred tax assets and
liabilities, included in other assets, and accrued expenses and other, are
detailed below (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
At
December 31,
1995 1994
- -----------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Deferred compensation $12,078 $ 8,086
Depreciation and amortization 16,564 3,386
Reserves and allowances 10,495 8,321
State and local taxes 2,624 1,325
- -----------------------------------------------------------
Total deferred assets 41,761 21,118
- -----------------------------------------------------------
Deferred Tax Liabilities:
Asset valuation difference (15,912) (7,870)
Other (6,003) (1,534)
- -----------------------------------------------------------
Total deferred liabilities (21,915) (9,404)
- -----------------------------------------------------------
Net deferred tax asset $19,846 $11,714
===========================================================
</TABLE>
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1995 and 1994 was necessary.
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,
1995 1994 1993
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal tax benefit 3.4 4.0 4.5
Other (.7) .7 .2
- ----------------------------------------------------------------
Effective income tax rate 37.7% 39.7% 39.7%
================================================================
</TABLE>
Stock Options, Restricted Stock Awards and Performance Units
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 and performance units. 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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Number Option Price
of Shares Per Share
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1992 15,662,737 $ .19 - 8.11
- ------------------------------------------------------------------------
Granted 1,842,642 6.92 - 11.54
Exercised (1,232,884) .19 - 4.36
Canceled (430,823) 1.44 - 4.36
- ------------------------------------------------------------------------
Outstanding at December 31, 1993 15,841,672 .19 - 11.54
- ------------------------------------------------------------------------
Granted 3,695,108 8.50 - 10.79
Exercised (1,927,718) .19 - 9.21
Canceled (176,190) 1.94 - 11.17
- ------------------------------------------------------------------------
Outstanding at December 31, 1994 17,432,872 .19 - 11.54
- ------------------------------------------------------------------------
Granted 2,628,550 14.46 - 25.63
Exercised (3,858,343) .19 - 11.54
Canceled (755,331) 1.94 - 22.63
- ------------------------------------------------------------------------
Outstanding at December 31, 1995 15,447,748 $ .93 - 25.63
========================================================================
</TABLE>
At December 31, 1995, options to purchase 7,039,345 shares were vested,
8,408,403 shares were unvested and 3,929,289 shares were available for
future grants.
In 1995 and 1994, the Company granted 164,200 and 456,000 shares of common
stock, respectively, to certain officers of the Company. The 1995 and 1994
common stock grants had aggregate fair market values of $4 million and
$5 million, respectively, at their grant dates. Shares granted in the 1995
and 1994 stock grants are restricted from sale, and have a five-year
amortization and vesting period. A portion of the 1995 grants vests based
upon the Company achieving certain financial measures.
In 1995 and 1994, the Company granted 302,025 and 896,554 performance
units in tandem with stock options on a one-to-one basis, respectively, to
certain officers and other key employees of the Company. In lieu of
exercising the related stock option, each unit gives the participant the
right to receive cash, based upon the Company achieving a certain level of
annual after-tax net income. For financial statement purposes, the Company
assumes a portion of these units will be redeemed for cash. The units and
options vest over a five-year period.
The Company is required to adopt SFAS No. 123 - Accounting for Stock-Based
Compensation - in 1996. The new standard establishes accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. Under the new standard, the
Company may either adopt the new fair value-based accounting method or
continue using the intrinsic value-based method under Accounting Principles
Board Opinion No. 25 and provide pro forma disclosures of net income and
earnings per share as if the accounting provision of the new standard had
been adopted. The Company plans to implement only the disclosure
requirements of the new standard; therefore, such adoption in 1996 will
have no effect on the Company's results of operations, earnings per share
or cash flows.
Employee Benefit Plans
The Company has a profit sharing and employee stock ownership plan (the
Profit Sharing Plan), including a 401(k) salary deferral component, for
eligible employees who have met certain service requirements. The Company
matches certain employee contributions; additional contributions to this
plan are at the discretion of the Company. Total Company contribution
expense was $32 million for 1995, $14 million for 1994 and $16 million for
1993. The increase from 1994 to 1995 was primarily due to changes in the
way in which the Company accounts for the employee stock ownership plan
(ESOP) component of the Profit Sharing Plan (described below).
Commencing January 1, 1994, in connection with the adoption of Statement
of Position No. 93-6 - Employers' Accounting for Employee Stock Ownership
Plans (the Statement), the Company recognizes as expense the fair value of
shares released for allocation to employees through an ESOP. For shares
purchased by the ESOP prior to 1993, the Company recognized as expense the
cost basis of shares released for allocation through the ESOP.
In January 1993, the Profit Sharing Plan borrowed $15 million from the
Company to purchase 2,177,416 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. Upon implementation of the Statement,
the note from the plan was reclassified from note receivable to unearned
ESOP shares on the consolidated balance sheet. As the note is repaid,
shares are released for allocation to eligible employees based on the
proportion of debt service paid during the year. In accordance with the
Statement, at December 31, 1995 and 1994, only released ESOP shares were
considered outstanding for earnings per share computations. At December 31,
1993, unreleased ESOP shares were considered outstanding for earnings per
share computations. Dividends on allocated shares and unallocated shares
are charged to retained earnings and compensation and benefits expense,
respectively. Compensation and benefits expense related to shares released
for allocation through the ESOP loan repayments was $2 million in 1995 and
$3 million in 1994, for shares purchased in 1993, and $2 million in 1994,
for shares purchased prior to 1993. ESOP information is as follows:
18
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Shares Purchased Shares Purchased
in 1993 Prior to 1993
- ----------------------------------------------------------------------------------
<S> <C> <C>
Number of shares purchased 2,177,416 4,462,810
Shares released for allocation
prior to 1994 (417,582) (3,505,956)
Shares released for allocation in 1994 (283,167) (956,854)
- ----------------------------------------------------------------------------------
Unreleased shares at December 31, 1994
(fair value: $17,166,242) 1,476,667
- ----------------------------------------------------------------------------------
Shares released for allocation in 1995 (112,474)
- ----------------------------------------------------------------------------------
Unreleased shares at December 31, 1995
(fair value: $27,454,384) 1,364,193
==================================================================================
</TABLE>
In January 1991, the Company implemented a four-year cash incentive plan
for certain officers and key employees. Payments under this plan were based
upon achieving a certain level of pre-tax income, as defined, over the four-
year period ended December 31, 1994. Related compensation expense, accrued
as pre-tax income reached certain targeted levels, was $18 million for 1994
and $16 million for 1993.
During 1994, the Company, as the beneficiary, implemented a life insurance
program covering the majority of its employees. Under the program, the cash
surrender value of the insurance policies is recorded net of policy loans
in other assets. At December 31, 1995, policy loans with an interest rate
of 8.96% totaled $80 million. At December 31, 1994, policy loans with an
interest rate of 10.32% totaled $41 million.
Regulatory Requirements
Schwab and M&S are subject to the SEC's 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,
1995, Schwab's net capital was $392 million (10% of aggregate debit
balances), which was $310 million in excess of its minimum required net
capital and $188 million in excess of 5% of aggregate debit balances. At
December 31, 1995, M&S' net capital was $6 million (110% of aggregate debit
balances), which was $5 million in excess of its minimum required net
capital.
Schwab and ShareLink had portions of their cash and investments segregated
for the exclusive benefit of customers at December 31, 1995, in accordance
with applicable regulations. M&S had no such cash reserve requirement at
December 31, 1995.
Commitments and Contingent Liabilities
The Company has noncancelable operating leases for office space and
equipment. Future minimum rental commitments under these leases at
December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------
<S> <C>
1996 $54,996
1997 47,640
1998 35,172
1999 32,798
2000 19,381
Thereafter 49,665
==========================================
</TABLE>
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense
was $79 million for 1995, $64 million for 1994 and $56 million for 1993.
The Company has entered into certain agreements with its Chairman that
provide compensation for employment through March 2000 and for the use of
his name and likeness subsequent to his employment. The employment
agreement includes an automatic renewal feature that, as of each March 31
(beginning in 1996), extends the agreement for an additional year unless
either party elects to not extend the agreement. 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 September 1995, the Company entered into an agreement to purchase for
$32 million an office building located in Phoenix, Arizona to be used for
the expansion of its operations. The Company expects to close this
transaction in April 1996 using general corporate resources or external
financing.
In January 1992, the Company filed a petition in U.S. Tax Court refuting a
claim for additional Federal income tax arising from the Internal Revenue
Service audit of the tax periods ended March 31, 1988 and December 31,
1988. The majority of the asserted additional tax related to deductions
claimed by the Company for amortization of intangible assets received in
the Company's 1987 acquisition of Schwab. In August 1995, a settlement with
the IRS was reached regarding these deductions for the tax periods under
audit and any subsequent period. This settlement had no
19
material effect on the Company's financial position or results of operations.
M&S has been named as one of thirty-three defendant market-making firms in
a consolidated class action which is pending in Federal District Court in
the Southern District of New York pursuant to an order of the Judicial
Panel on Multidistrict Litigation. On December 16, 1994, the plaintiffs
filed a consolidated amended complaint purportedly on behalf of certain
persons who purchased or sold Nasdaq securities during the period May 1,
1989 through May 27, 1994. A second consolidated amended complaint was
filed on August 22, 1995. The consolidated complaint does not set forth any
specific conduct by M&S and does not request any specific amount of
damages, although it requests that the actual damages be trebled where
permitted by statute. The consolidated complaint generally alleges an
illegal combination and conspiracy among the defendant market makers to fix
and maintain the spreads between the bid and ask prices of Nasdaq
securities. The ultimate outcome of this consolidated action cannot
currently be determined.
On June 30, 1995, a class was certified in Civil District Court for the
Parish of Orleans in Louisiana for Louisiana residents who purchased or
sold securities through Schwab between February 1, 1985 and February 1,
1995 for which Schwab received monetary payments from the market maker or
stock dealer who executed the transaction. On August 16, 1995, another
class was certified in Civil District Court for the Parish of Natchitoches
in Louisiana for residents of all states who purchased or sold securities
through Schwab since 1985 for which Schwab received monetary payments from
the market maker or other third party who executed the transaction. Schwab
has appealed both class certifications to the Louisiana Court of Appeals.
Schwab has been named as a defendant in nine additional class action
lawsuits filed in state courts in Minnesota, Illinois, New York, Texas,
Florida and California. The class actions were filed between August 12,
1993 and November 17, 1995, and purport to be brought on behalf of
customers of Schwab who purchased or sold securities for which Schwab
received payments from market makers, stock dealers or others who executed
the transaction. The complaints allege that Schwab failed to disclose and
remit such payments to members of the class, and generally seek damages
equal to the payments received by Schwab. The ultimate outcome of these
actions cannot currently be determined.
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.
At December 31, 1994, letters of credit (LOCs) totaling $58.5 million were
outstanding under a $100 million letter of credit facility established by
CSC with a commercial bank for the Funds in connection with the
bankruptcies of Orange County, California and the Orange County investment
pool. In August 1995, the $100 million facility and one LOC, relating to
one Fund, were each reduced to $10.4 million and the maturity of each was
extended from August 1, 1995 to August 1, 1996. The remaining LOCs expired
unutilized in August 1995. Although management is currently unable to
determine whether, or to what extent, the Fund would make any demands for
payments under the LOC, any such payments would not have a material impact
on the Company's financial position or results of operations.
Financial Instruments with Off-Balance-Sheet and Credit Risk
Through Schwab and M&S, 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 mitigates 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 three 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.
In the normal course of its margin lending activities, Schwab may be
liable for the margin requirement of customer margin securities
transactions. 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
mitigate 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
20
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. Also, Schwab maintains inventories in
exchange-listed securities on both a long and short basis relating to its
specialist operations and could incur losses or gains as a result of changes
in the market value of these securities. To mitigate the risk of losses, long
and short positions are marked to market daily and are continuously monitored
to assure compliance with limits established by the Company. Additionally,
the Company may purchase exchange-traded option contracts to reduce market
risk on these inventories.
Schwab enters into collateralized Resale Agreements principally with other
broker-dealers 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
mitigate 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.
Supplemental Cash Flow Information
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 98,444 $ 75,530 $ 86,453
==============================================================================
Interest:
Customers $319,645 $176,487 $114,606
Borrowings 11,131 11,632 13,584
Other 18,939 7,422 4,400
- ------------------------------------------------------------------------------
Total interest $349,715 $195,541 $132,590
==============================================================================
Noncash investing and financing activity:
Common stock issued to Profit
Sharing Plan for a note receivable $15,000
==============================================================================
Businesses acquired:
Assets acquired $219,457
Liabilities assumed (138,204)
Loan notes issued (5,484)
- ------------------------------------------------------------------------------
Cash payments 75,769
Cash received (7,525)
- ------------------------------------------------------------------------------
Cash payments, net of cash received $ 68,244
==============================================================================
</TABLE>
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 LLP, 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 LLP all the Company's
financial records and related data. We believe that all representations
made to Deloitte & Touche LLP 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 LLP, 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 (the Company) as of
December 31, 1995 and 1994, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 21, 1996
22
THE CHARLES SCHWAB CORPORATION
Chart Appendix List
In this appendix, the following descriptions of certain charts in portions
of the Company's 1995 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 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 Company's 1995 Annual Report to Stockholders.
<TABLE>
<CAPTION>
EDGAR
Version
Page
Number CHART DESCRIPTION
- ------ -----------------
<S> <C>
3 Bar chart titled "Active Schwab Customer Accounts" depicting the number
of active Schwab customer accounts at year end 1991, 1992, 1993, 1994 and
1995 (shown on the bottom axis) as follows (millions of accounts) (bar
labeled): 1.6, 2.0, 2.5, 3.0 and 3.4, respectively.
3 Stacked bar chart titled "Assets in Schwab Customer Accounts" depicting
the composition of assets in Schwab customer accounts at year end 1991,
1992, 1993, 1994 and 1995 (shown on the bottom axis) as follows
(billions of dollars): Cash and Equivalents $12.6, $15.6, $20.1, $28.6
and $37.9, respectively; Stocks (net of margin loans) $22.1, $29.6,
$39.5, $46.1 and $71.6, respectively; Mutual Fund Marketplace
(registered trademark) $6.4, $12.2, $26.2, $32.2 and $52.0,
respectively; Fixed Income Securities $6.4, $8.2, $10.0, $15.7 and
$20.2, respectively; Assets in Schwab Customer Accounts (bar labeled)
$47.5, $65.6, $95.8 and $122.6 and $181.7, respectively.
3 Bar chart titled "Revenues" depicting the revenues for the fiscal years
1991, 1992, 1993, 1994 and 1995 (shown on the bottom axis) as follows
(millions of dollars) (bar labeled): $570, $750, $965, $1,065 and
$1,420, respectively.
4 Stacked bar chart titled "Schwab Customers' Daily Average Trading
Volume" depicting the composition of Schwab customers' daily average
trading volume for the fiscal years 1991, 1992, 1993, 1994 and 1995
(shown on the bottom axis) as follows (thousands of trades):
Commission and Other Trades 17.6, 22.2, 27.9, 29.2 and 38.3,
respectively; Mutual Fund OneSource (registered trademark) Trades .3,
1.4, 7.4, 14.3 and 18.0, respectively; Schwab Customers' Daily Average
Trading Volume (bar labeled) 17.9, 23.6, 35.3, 43.5 and 56.3,
respectively.
4 Bar chart titled "Net Income" depicting the net income for the fiscal
years 1993, 1994 and 1995 (shown on the bottom axis) as follows
(millions of dollars) (bar labeled): $118, $135 and $173,
respectively.
4 Pie chart titled "Composition of Revenues" depicting the composition of
revenues (percent of total) for the fiscal years 1993, 1994 and 1995
as follows: Commissions 57%, 51% and 53%, respectively; Mutual Fund
Service Fees 10%, 15% and 15%, respectively; Net Interest Revenue 12%,
15% and 15%, respectively; Principal Transactions 18%, 15% and 13%,
respectively; Other 3%, 4% and 4%, respectively.
4 Stacked bar chart titled "Commissions" depicting the composition of
commissions for the fiscal years 1993, 1994 and 1995 (shown on the
bottom axis) as follows (millions of dollars): Listed $299, $278 and
$356, respectively; Nasdaq $169, $169 and $283, respectively; Options
$37, $39 and $53, respectively; Other $47, $60 and $58, respectively;
Commissions (bar labeled) $552, $546 and $751, respectively.
6 Pie chart titled "Expenses Excluding Interest" depicting the
composition of expenses excluding interest (percent of total) for the
fiscal years 1993, 1994 and 1995 as follows: Compensation and Benefits
52%, 52% and 52%, respectively; Communications 12%, 13% and 11%,
respectively; Occupancy and Equipment 10%, 10% and 10%, respectively;
Commissions, Clearance and Floor Brokerage 6%, 6% and 7%, respectively;
Other 20%, 19% and 20%, respectively.
7 Stacked bar chart titled "Compensation and Benefits" depicting the
composition of compensation and benefits for the fiscal years 1993,
1994 and 1995 (shown on the bottom axis) as follows (millions of
dollars): Salaries and Wages $225, $273 and $355, respectively;
Variable Compensation $108, $101 and $144, respectively; Other Benefits
$60, $63 and $95, respectively; Compensation and Benefits (bar labeled)
$393, $437 and $594, respectively.
9 Bar chart titled "Net Income Plus Depreciation and Amortization"
depicting the net income plus depreciation and amortization for the
fiscal years 1993, 1994 and 1995 (shown on the bottom axis) as follows
(millions of dollars) (bar labeled): $162, $190 and $241,
respectively.
9 Bar chart titled "Dividends Declared Per Common Share" depicting the
dividends declared per common share for the fiscal years 1993, 1994
and 1995 (shown on the bottom axis) as follows (bar labeled): $.064,
$.092 and $.140, respectively.
</TABLE>
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 Limited, an England and Wales corporation
Charles Schwab Investment Management, Inc., a Delaware corporation
Mayer & Schweitzer, Inc., a New Jersey corporation
The Charles Schwab Trust Company, a California corporation
Performance Technologies, Inc., a North Carolina corporation
Charles Schwab Holdings (UK), an England and Wales corporation
Charles Schwab (UK) plc, an England and Wales corporation
ShareLink Investment Services plc, an England and Wales corporation
TrustMark, Inc., a North Carolina corporation
Hampton Pension Services, Inc., an Ohio corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference 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. 33-54701
on Form S-8, and in Registration Statement No. 33-61943 on
Form S-3 of The Charles Schwab Corporation of our reports dated
February 21, 1996 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, 1995.
DELOITTE & TOUCHE LLP
San Francisco, California
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and Consolidated Balance Sheet of the Company's
1995 Annual Report to Stockholders, which are incorporated herein by reference
to Exhibit No. 13.1 of this report, for the period ended December 31, 1995, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1221619
<RECEIVABLES> 4088211
<SECURITIES-RESALE> 4634298
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 113522
<PP&E> 243472
<TOTAL-ASSETS> 10552008
<SHORT-TERM> 212961
<PAYABLES> 9133222
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 246146
<COMMON> 1785
0
0
<OTHER-SE> 631109
<TOTAL-LIABILITY-AND-EQUITY> 10552008
<TRADING-REVENUE> 191392
<INTEREST-DIVIDENDS> 568120
<COMMISSIONS> 750896
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 218784
<INTEREST-EXPENSE> 357223
<COMPENSATION> 594105
<INCOME-PRETAX> 277104
<INCOME-PRE-EXTRAORDINARY> 172604
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172604
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
</TABLE>
