-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DX/JFz1F8yXGt9xpxoWjNvGdiemwtjDxCdd+Lwlnx9A+9K0QU+C+SoIrcGe/LOkj CDoiiWMYe+NDq0cvw6FxFw== 0000316709-96-000007.txt : 19960329 0000316709-96-000007.hdr.sgml : 19960329 ACCESSION NUMBER: 0000316709-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB CHARLES CORP CENTRAL INDEX KEY: 0000316709 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 943025021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09700 FILM NUMBER: 96540082 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-K 1 ANNUAL REPORT ON FORM 10-K 12/31/95 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 ------------------- ----------------------------------------- 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. THE CHARLES SCHWAB CORPORATION Annual Report On Form 10-K For Fiscal Year Ended December 31, 1995 --------------------------------------- TABLE OF CONTENTS Part I - ------ 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 - ------- 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 - -------- 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 - ------- 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. PART I Item 1. Business (a) General Development of Business. The Charles Schwab Corporation (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), 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 ---------------------------------------------- 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. - 1 - 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 ---------------------------------- 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. - 2 - Sources of Revenues (Dollar amounts in thousands)
Year Ended December 31, ------------------------------------------------------------------------ 1995 1994 1993 --------------------- --------------------- --------------------- Type of Revenue Amount Percent Amount Percent Amount Percent --------------------- --------------------- --------------------- 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% - --------------------------------------------------------------------------------------------------------------------- Commissions 750,896 52.9% 546,112 51.3% 552,206 57.2% - --------------------------------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------------------------------- Total $1,419,903 100.0% $1,064,597 100.0% $ 965,013 100.0% ===================================================================================================================== 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.
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 - 3 - 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 ------------------- 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 - 4 - 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 ------------- 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. - 5 - Market Making In Nasdaq and Exchange-Listed Securities. M&S provides trade ------------------------------------------------------- execution services in Nasdaq securities to broker-dealers, including Schwab, and institutional customers. In most instances, customer orders are routed directly to M&S' trading system and are executed automatically. M&S generally executes customer trades as principal. M&S business practices call for competitively- priced customer trade executions, 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 --------------------------------------------- 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 -------------------------------------------- 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 - 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 - 7 - 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 - 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. - 9 - 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):
- ---------------------------------------------------------------------- Three Months Ended December 31, 1995 1994 - ---------------------------------------------------------------------- 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% ======================================================================
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 - 10 - 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
Name Age Position with the Company ---- --- ------------------------- 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
- 11 - 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 - 12 - 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. - 13 - (c) Exhibits -------- The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit Number Exhibit - -------------------------------------------------------------------------------- 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. - 14 - 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 - 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 - 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 - 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.
- 18 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 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.
Signature Title --------- ----- /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
- 19 - THE CHARLES SCHWAB CORPORATION Index to Financial Statement Schedules Page ---- Independent Auditors' Report F-2 Schedule I - Condensed Financial Information of Registrant: Condensed Balance Sheet F-3 Condensed Statement of Income 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 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 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Balance Sheet (In thousands, except share data)
December 31, 1995 1994 ---- ---- 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.
F-3 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Statement of Income and Retained Earnings (In thousands)
Year Ended December 31, 1995 1994 1993 ---- ---- ---- 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 ================================================================================================================
F-4 SCHEDULE I THE CHARLES SCHWAB CORPORATION (PARENT COMPANY ONLY) Condensed Financial Information of Registrant Condensed Statement of Cash Flows (In thousands)
Year Ended December 31, 1995 1994 1993 ---- ---- ---- 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.
F-5 SCHEDULE II THE CHARLES SCHWAB CORPORATION Valuation and Qualifying Accounts (In thousands)
Additions Balance at ------------------- Balance at Beginning Charged End Description of Year to Expense Other Written off of Year ------- ---------- ----- ----------- ------- For the year ended December 31, 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 =========================================================
F-6 EX-3 2 EXHIBIT 3.4 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. 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 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) EX-10 3 EXHIBIT 10.157 Exhibit 10.157 THE CHARLES SCHWAB CORPORATION DIRECTORS' DEFERRED COMPENSATION PLAN 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 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 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. 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. 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. Article IV. Participants 4.1 Participants. Each Director shall be eligible to participate in this Plan. 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. 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. EX-11 4 EXHIBIT 11.1 EXHIBIT 11.1 THE CHARLES SCHWAB CORPORATION Computation of Earnings per Share (In thousands, except per share amounts)
Year Ended December 31, 1995 1994 1993 ---- ---- ---- 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.
EX-12 5 EXHIBIT 12.1 EXHIBIT 12.1 THE CHARLES SCHWAB CORPORATION Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands, unaudited)
Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- 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.
EX-13 6 EXHIBIT 13.1
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) - ------------------------------------------------------------------------------------------------------------------------------- 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.
1 The Charles Schwab Corporation Selected Financial and Operating Data (In Millions, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------- Growth Rates (1) Compounded Annual 5-Year 1-Year 1990-1995 1994-1995 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------- 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.
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:
- -------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------- 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.
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):
- ---------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------- 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 ================================================================
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
- -------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------- 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% ==========================================================================
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)
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.
11 The Charles Schwab Corporation Consolidated Balance Sheet (In Thousands, Except Share Data)
December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 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.
12 The Charles Schwab Corporation Consolidated Statement of Cash Flows (In Thousands)
December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------- 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.
13 The Charles Schwab Corporation Consolidated Statement of Stockholders' Equity (In Thousands)
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 - ---------------------------------------------------------------------------------------------------------------------------------- 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.
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):
- ------------------------------------------------------ 1995 1994 - ------------------------------------------------------ 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 ======================================================
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):
- ------------------------------------------------------ 1995 1994 - ------------------------------------------------------ Senior Medium-Term Notes $240,000 $170,000 Other 6,146 1,363 - ------------------------------------------------------ Total $246,146 $171,363 ======================================================
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):
- -------------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------- 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 ====================================================================
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):
- ----------------------------------------------------------- At December 31, 1995 1994 - ----------------------------------------------------------- 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 ===========================================================
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:
- ---------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------- 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% ================================================================
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
- ------------------------------------------------------------------------ Number Option Price of Shares Per Share - ------------------------------------------------------------------------ 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 ========================================================================
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
- ---------------------------------------------------------------------------------- Shares Purchased Shares Purchased in 1993 Prior to 1993 - ---------------------------------------------------------------------------------- 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 ==================================================================================
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):
- ------------------------------------------ 1996 $54,996 1997 47,640 1998 35,172 1999 32,798 2000 19,381 Thereafter 49,665 ==========================================
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
- ------------------------------------------------------------------------------ Year Ended December 31, (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------ 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 ==============================================================================
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.
EDGAR Version Page Number CHART DESCRIPTION - ------ ----------------- 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.
EX-21 7 EXHIBIT 21.1 Exhibit 21.1 THE CHARLES SCHWAB CORPORATION Subsidiaries of the Registrant Schwab Holdings, Inc., a Delaware corporation Charles Schwab & Co., Inc., a California corporation Charles Schwab (Hong Kong) Limited, a Hong Kong corporation Charles Schwab 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 EX-23 8 EXHIBIT 23.1 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 EX-27 9 EXHIBIT 27
BD 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. 1000 YEAR DEC-31-1995 DEC-31-1995 1221619 4088211 4634298 0 113522 243472 10552008 212961 9133222 0 0 0 246146 1785 0 0 631109 10552008 191392 568120 750896 0 218784 357223 594105 277104 172604 0 0 172604 .97 .97
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