EXHIBIT 13.1
The Charles Schwab Corporation
1999 Annual Report to Stockholders
(Only those portions specifically incorporated by reference into
The Charles Schwab Corporation 1999 Annual Report on Form 10-K
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Selected Financial and Operating Data The Charles Schwab Corporation
(In Millions, Except Per Share Amounts, Ratios,
Number of Branches, Average Commission and as Noted)
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Growth Rates
Compunded Annual
5-Year 1-Year
1994-1999 1998-1999 1999 1998 1997(1) 1996 1995
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Operating Results
Revenues 30% 44% $ 3,945 $ 2,736 $ 2,299 $ 1,851 $ 1,420
Expenses excluding interest 29% 38% $ 2,974 $ 2,160 $ 1,852 $ 1,457 $ 1,143
Net income (2) 34% 69% $ 589 $ 348 $ 270 $ 234 $ 173
Basic earnings per share (2, 3, 4) 32% 66% $ .73 $ .44 $ .34 $ .30 $ .22
Diluted earnings per share (2, 3, 4) 33% 67% $ .70 $ .42 $ .33 $ .29 $ .21
Dividends declared per common share (3) 22% 4% $ .0560 $ .0540 $ .0467 $ .0400 $ .0311
Weighted-average common shares outstanding - diluted (3) 843 823 818 807 803
Trading revenues as a percentage of revenues (5) 60% 58% 62% 66% 66%
Non-trading revenues as a percentage of revenues (5) 40% 42% 38% 34% 34%
Effective income tax rate 39.4% 39.6% 39.6% 40.7% 37.7%
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Performance Measures
Revenue growth 44% 19% 24% 30% 33%
Pre-tax profit margin 24.6% 21.1% 19.5% 21.3% 19.5%
After-tax profit margin 14.9% 12.7% 11.8% 12.6% 12.2%
Return on stockholders' equity 32% 27% 27% 31% 31%
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Financial Condition (at year end)
Total assets 30% 32% $29,299 $22,264 $16,482 $13,779 $10,552
Borrowings 22% 30% $ 455 $ 351 $ 361 $ 284 $ 246
Stockholders' equity 37% 59% $ 2,274 $ 1,429 $ 1,145 $ 855 $ 633
Assets to stockholders' equity ratio 13 16 14 16 17
Borrowings to total financial capital
(borrowings plus stockholders' equity) 17% 20% 24% 25% 28%
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Customer Information (at year end)
Schwab active customer accounts (6) 17% 18% 6.6 5.6 4.8 4.0 3.4
Schwab customer assets (in billions) 43% 48% $ 725 $ 491 $ 354 $ 253 $ 182
SchwabFunds(R) assets (in billions) (7) 36% 32% $ 107.9 $ 81.5 $ 55.8 $ 43.1 $ 31.7
Mutual Fund OneSource(R) assets (in billions) (8) 52% 46% $ 102.3 $ 69.9 $ 56.6 $ 39.2 $ 23.9
Total Mutual Fund Marketplace(R) assets
(in billions) (8) 42% 37% $ 176.6 $ 129.1 $ 104.6 $ 74.6 $ 50.0
Active independent investment managers (in thousands) 4% 7% 5.8 5.4 5.3 4.8 5.6
Independent investment manager client accounts
(in thousands) 23% 23% 848.3 689.9 547.2 442.2 390.6
Independent investment manager client assets
(in billions) 46% 46% $ 213.1 $ 146.4 $ 105.8 $ 72.9 $ 50.6
Number of domestic branches 10% 17% 340 291 272 235 226
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Employee Information
Full-time equivalent employees
(at year end, in thousands) 23% 36% 18.1 13.3 12.7 10.4 9.2
Revenues per average full-time equivalent employee
(in thousands) 8% 18% $ 245 $ 208 $ 198 $ 190 $ 185
Compensation and benefits expense as a percentage
of revenues 41.2% 42.5% 41.8% 41.4% 41.8%
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Selected Cash Flow Highlights
Net income plus depreciation and amortization (2) 31% 53% $ 746 $ 487 $ 395 $ 332 $ 241
Capital expenditures - cash purchases of
equipment, office facilities and property, net 55% 53% $ 283 $ 185 $ 139 $ 160 $ 166
Capital expenditures as a percentage of revenues 7.2% 6.8% 6.0% 8.6% 11.7%
Cash dividends paid 24% 7% $ 46 $ 43 $ 37 $ 31 $ 24
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Customers' Daily Average Trading Volume (in thousands) (9)
Daily average revenue trades 41% 68% 163.1 97.2 71.8 54.0 40.8
Mutual Fund OneSource trades 26% 13% 45.6 40.3 34.2 27.2 17.8
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Daily average trades 37% 52% 208.7 137.5 106.0 81.2 58.6
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Average Commission Per Revenue Trade (9%) (15%) $ 45.55 $ 53.44 $ 64.27 $ 69.08 $ 73.11
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Certain prior years' revenues and expenses have been reclassified to conform to the 1999 presentation.
(1) 1997 includes charges for a litigation settlement of $24 million after-tax ($.03 per share for both basic and diluted earnings
per share).
(2) 1999 reflects an accounting change, which increased net income by $41 million ($.05 per share for both basic and diluted
earnings per share), for certain internal-use software development costs to conform with Statement of Position 98-1.
(3) All periods have been restated for the July 1999 two-for-one common stock split.
(4) Both basic and diluted earnings per share are net of the effect of an extraordinary charge in 1993 of $.01 per share.
(5) Trading revenues include commission and principal transaction revenues. Non-trading revenues include mutual fund service fees,
net interest revenue and other revenues.
(6) Effective in 1998, active accounts are defined as accounts with balances or activity within the preceding eight months instead
of twelve months as previously defined. This change in definition had the effect of decreasing the number of active accounts
in 1998 by approximately 200,000. Prior years have not been restated.
(7) Includes money market, equity and bond funds.
(8) Excludes money market funds and all of Schwab's proprietary money market, equity and bond funds. Mutual Fund OneSource assets
are included in Total Mutual Fund Marketplace assets.
(9) Effective in 1997, revenue trades have been restated for all years presented to include all customer trades (both domestic and
international) that generate either commission revenue or revenue from principal markups.
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The Charles Schwab Corporation
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 securities brokerage and related financial
services for 6.6 million active customer accounts(a). Customer assets in these
accounts totaled $725.2 billion at December 31, 1999. CSC's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer
with 340 domestic branch offices in 48 states, as well as branches in the
Commonwealth of Puerto Rico and the U.S. Virgin Islands. Another subsidiary,
Charles Schwab Europe (CSE), is a retail securities brokerage firm located in
the United Kingdom. Other subsidiaries include Charles Schwab Investment
Management, Inc., the investment advisor for Schwab's proprietary mutual funds,
and Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq and other
securities providing trade execution services to broker-dealers and
institutional customers.
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(a) Accounts with balances or activity within the preceding eight months.
The Company provides financial services to individuals, institutional
customers and broker-dealers through three segments - Individual Investor,
Institutional Investor and Capital Markets. The Individual Investor segment
includes the Company's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. The Capital Markets segment provides trade execution
services in Nasdaq, exchange-listed and other securities primarily to
broker-dealers and institutional customers. The Company's mutual fund services
are considered a product and not a segment. Mutual fund service fees are
included in both the Individual Investor and Institutional Investor segments.
(CHART OMITTED)
The Company's strategy is to attract and retain customer assets by focusing
on a number of areas within the financial services industry - retail brokerage,
mutual funds, support services for independent investment managers, 401(k)
defined contribution plans and equity securities market-making.
To pursue its strategy and its objective of long-term profitable growth, the
Company plans to continue to leverage its competitive advantages. These
advantages include a nationally recognized brand, a broad range of products and
services, multi-channel delivery systems and an ongoing investment in
technology. While the Company's business continues to be predominantly conducted
in the U.S., in 1999 the Company continued to selectively expand its
international presence.
Brand: The Company's nationwide advertising and marketing programs support
its strategy by continually reinforcing the strengths and key attributes of
Schwab's full-service offering. By maintaining a consistent level of visibility
in the marketplace, the Company seeks to establish a leading and lasting
financial services brand in a focused and cost-effective manner. The Company
primarily uses a combination of network, cable and local television, print
media, national and local radio, and athletic event sponsorship in its
advertising to investors. These programs helped the Company attract $106.9
billion in net new customer assets and open 1,481,000 new accounts during 1999.
Products and Services: The Company offers a broad range of value-oriented
products and services to meet customers' varying investment and financial needs,
including help and advice and access to extensive investment research, news and
information. The Company's approach to advice is based on long-term investment
strategies and guidance on portfolio diversification and asset allocation. The
Company strives to demystify investing by educating and assisting customers in
the development of investment plans. This approach is designed to be offered
consistently across all of the Company's delivery channels and provides
customers with a wide selection of choices for their investment needs. Schwab's
registered representatives can assist investors in developing asset allocation
strategies and evaluating their investment choices, and refer investors who
desire additional guidance to independent investment managers through the Schwab
AdvisorSource(TM) service. In 1999, Schwab expanded the AdvisorSource referral
services program to include financial planners and certified public accountants.
Schwab also introduced customized portfolio guidance through Schwab investment
specialists and a range of new Web-based planning and investment evaluation
tools. Schwab's Mutual Fund Marketplace(R) provides customers with the ability
to invest in over 1,900 mutual funds from 316 fund families, including 1,143
Mutual Fund OneSource(R) funds. Schwab's share of the industry's net inflows to
direct-marketed mutual funds was 14% in 1999, down from 18% in 1998(b). Schwab's
share of the industry's direct-marketed mutual fund assets was 11% at December
31, 1999, up from 10% at December 31, 1998(b).
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(b) Source: Strategic Insight Mutual Fund Research and Consulting, LLC.
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Schwab also provides custodial, trading and support services to approximately
5,800 independent investment managers. As of December 31, 1999, these managers
were guiding the investments of 848,000 Schwab customer accounts containing
$213.1 billion in assets.
The Company responds to changing customer needs with continued product,
technology and service innovations. In 1999, the Company launched the Schwab
Signature Services(TM) program and Velocity(TM). Schwab Signature Services
provides enhanced personal and online services for customers with higher asset
balances or trading volumes with Schwab. Velocity, an online trading system,
provides enhanced trade information and order execution for certain of Schwab's
customers who trade frequently. Also in 1999, Schwab introduced a number of
Web-based service offerings, including MyResearch(TM) report, which enables
customers to design their own research reports. Additionally, Schwab launched
two mutual fund research tools, Advanced Mutual Fund Screener and Fund Details,
which allow customers to access detailed information on all Morningstar, Inc.
rated funds. Further, Schwab enabled customers to open a new account, update
contact information, sign up for the Schwab MoneyLink(R) service and request a
check through automated Web-based processes. Continuing its practice of
leveraging technology to improve customer service, in 1999 Schwab launched
SchwabAlerts(TM), which delivers investment and market activity news to
customers via both wireless and regular e-mail. Also in 1999, Schwab introduced
eConfirms(TM), a service that delivers trade confirmations electronically.
Additionally, Schwab launched an online service, MySchwab(TM), allowing users to
customize a personal Schwab home page with content provided by Excite@Home. The
Company formed additional alliances during 1999 with Financial Engines, Inc. and
mPower.com, Inc. to provide participants in SchwabPlan(R), a bundled 401(k)
offering, with access to online investment guidance services; and with OffRoad
Capital to provide certain customers with access to private equity investment
opportunities. Further, during 1999, the Company and several major financial
services firms formed a new electronic communications network (ECN), REDIBook
ECN LLC, which utilizes technology developed by Spear, Leeds & Kellogg LP.
Participation in this ECN has enabled Schwab to launch an extended-hours trading
session for certain Nasdaq and selected exchange-listed stocks. Also in 1999,
the Company entered into an agreement with TD Waterhouse Group, Inc., Ameritrade
Holding Corporation, KPCB Holdings, Inc., Trident Capital Management, LLC and
Benchmark Capital Partners to form Epoch Partners, a new online investment bank
that intends to focus on information technology and Internet companies. This new
company plans to commence operations in 2000. In addition, a precedent-setting
no-action letter from the Securities and Exchange Commission (SEC) will enable
Schwab to be the first brokerage firm to provide individual investors with
access to Web-based presentations by companies in the process of going public.
Delivery Systems: The Company's multi-channel delivery systems allow
customers to choose how they prefer to do business with the Company. To enable
customers to obtain services in person with a Company representative, the
Company maintains a network of branch offices which also provides investors with
access to the Internet. The Company's branch office network was expanded by 49
during 1999 to 340 at December 31, 1999. Telephonic access to the Company is
provided primarily through four regional customer telephone service centers and
two online customer support centers that operate both during and after normal
market hours. Additionally, customers are able to obtain financial information
on an automated basis through the Company's automated telephonic and online
channels. Automated telephonic channels include TeleBroker(R), Schwab's
touch-tone telephone quote and trading service, and VoiceBroker(TM), Schwab's
voice recognition quote and trading service. Schwab's automated telephonic
channels handled over 70% of customer calls received in both 1999 and 1998.
Schwab handled a total of 110 million automated and live calls received in 1999,
up 6% from 1998. Online channels include the Charles Schwab Web Site(TM), an
information and trading service on the Internet at www.schwab.com, and PC-based
services such as SchwabLink(R), a service for investment managers. While the
online channel is the Company's fastest-growing channel, the Company continues
to stress the importance of Clicks and Mortar(TM) access - blending the power of
the Internet with personal service to create a full-service customer experience.
The Company's online channels handled 68% of total trades during 1999, up from
54% of total trades in 1998. Schwab's share of the industry's online assets was
39% at December 31, 1999, down from 42% at December 31, 1998(c). Schwab's share
of the industry's online trades was 24% in 1999, down from 30% in 1998(c).
Schwab provides every retail customer access to all delivery channels and
flat-fee pricing for Internet trades. To help improve multi-channel access for
independent investment managers and their customers, Schwab launched the
Signature Services Alliance(TM) during 1999. This service provides enhanced
personalized services, including access to a dedicated team of representatives,
a new Schwab Institutional Web site(TM) and flat-fee pricing for Internet
trades.
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(c) Source: U.S. Bancorp Piper Jaffray.
Technology: The Company's ongoing investment in technology is a key element
in expanding its product and service offerings, enhancing its delivery systems,
providing fast and consistent customer service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in customer
activity without a corresponding rise in staffing levels. The Company uses
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technology to empower its customers to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
In 1999, the Company announced a joint effort with IBM to implement new systems
technology intended to help the Company's computers share their workload more
efficiently. Additionally in 1999, the Company's investment in systems capacity,
which totaled $126 million, expanded the Company's Web server, mainframe and
data storage capacity by 765%, 225% and 190%, respectively.
International Expansion: The Company moved to expand its international
presence through several transactions during 1999, including entering into a
joint venture agreement with The Tokio Marine and Fire Insurance Co., Limited
(TMI) and certain of its related companies (collectively, the TMI Group). The
Company and each member of the TMI Group are shareholders in a Japanese
corporation, Charles Schwab Tokio Marine Securities Co., Ltd. (CSTMS), in which
the Company has a 50% equity interest. CSTMS, whose business is expected to
commence in the first half of 2000, will initially provide retail brokerage and
investment services in U.S. dollar-denominated securities to residents of Japan.
CSTMS is currently expected to offer Japanese Yen-denominated securities later
in 2000. In 1999, the Company made an initial capital contribution of (Yen)
3.0 billion, or approximately $27 million. The Company may, under certain
circumstances, be required to make additional capital contributions pursuant to
the joint venture agreements, including contributions to assure that CSTMS is in
compliance with regulatory requirements regarding capital adequacy. Also in
1999, the Company completed the acquisitions of Canadian-based Priority
Brokerage Inc. and Porthmeor Securities Inc. These two companies were combined
to create Charles Schwab Canada, Co., a subsidiary of CSC. Additionally in 1999,
the Company signed a definitive agreement to form a joint venture with ecorp
Limited to provide financial services to Australian and New Zealand investors.
The transaction closed in February 2000. Further, during 1999 CSE extended
online and telephonic services to Swiss investors.
SUBSEQUENT EVENTS
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust), a leading wealth management
firm serving affluent individuals and families. This transaction is intended to
combine certain of the Company's strengths - technology, operations,
advertising and distribution - with U.S. Trust's highly personalized service
model, research capabilities, trust and estate services, investment track record
and reputation in wealth management services. Management believes that the
combined organization can create a comprehensive, integrated, value-priced,
wealth management offering for affluent households, including both individual
investors and customers of independent investment managers.
Under the terms of the agreement, which provides for a non-taxable
stock-for-stock exchange, U.S. Trust will become a wholly owned subsidiary of
CSC and U.S. Trust's shareholders will receive 3.427 shares of CSC's common
stock for each common share of U.S. Trust. Based on CSC's closing stock price
immediately prior to announcement as of January 12, 2000 the transaction valued
each of U.S. Trust's shares at $129, resulting in a total transaction value of
approximately $2.7 billion. Assuming completion of the transaction and assuming
the completion of the CyBerCorp, Inc. (CyBerCorp) acquisition described below,
U.S. Trust's shareholders are expected to hold approximately 8% pro-forma
ownership of CSC's common stock as of February 1, 2000 on a fully-diluted basis.
Following the merger, the Company expects to become a financial holding company
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust's shareholder approval. If such regulatory and shareholder approvals are
obtained, the Company will be required to limit its business to financial
services. It may be required to maintain capital at certain levels which could
affect its ability to pay dividends. Under certain circumstances, the Company
may be required to provide additional capital to its subsidiaries, and such
subsidiaries may be prohibited from paying dividends. Additionally, Federal
Reserve Board approval will be required for certain changes in control of CSC.
The transaction, which is expected to be completed by July 2000, is intended to
qualify for pooling of interests accounting treatment.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, a closely-held electronic trading technology and
brokerage firm providing Internet-based services to highly active, online
investors. This acquisition is intended to utilize CyBerCorp's order entry,
routing and management technology to attract and retain actively trading
individual investors. The technology is also intended to benefit Schwab's
independent investment advisors' customers and other institutional and
international investors.
Under the terms of the agreement, which provides for a non-taxable
stock-for-stock exchange, CyBerCorp will become a wholly owned subsidiary of
CSC. Based on CSC's $35.50 closing stock price immediately prior to announcement
as of February 1, 2000, the total value of the transaction is approximately $488
million. Assuming completion of the transaction and assuming the completion of
the U.S. Trust acquisition described above, CyBerCorp's shareholders are
expected to hold approximately 1.5% pro-forma ownership of CSC's common stock as
of February 1, 2000 on a fully-diluted basis. CSC has agreed to register the
shares with the SEC after the closing. The acquisition has been approved by both
companies' Boards of Directors and is subject to various closing conditions,
including the
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approval of the transaction by CyBerCorp's shareholders. Agreements to vote in
favor of the acquisition have been entered into by holders of approximately 95%
of CyBerCorp's common stock. The acquisition, which is expected to be completed
in the first quarter of 2000, is intended to be accounted for as a purchase (see
note "16 - Subsequent Events" in the Notes to Consolidated Financial
Statements).
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements that reflect management's beliefs, objectives and
expectations as of the date hereof. These statements relate to, among other
things, the Company's strategy (see Description of Business), acquisitions (see
Description of Business and Subsequent Events), average commission per revenue
trade (see Revenues - Commissions and Risk Management - Competition), Internet
trade pricing for independent investment managers and reduced pricing on equity
online trades for certain customers (see Revenues - Commissions), average
revenue per share traded (see Revenues - Principal Transactions), fee
adjustments related to minimum account balances (see Revenues - Other Revenues),
sources of liquidity (see Liquidity and Capital Resources - Liquidity),
development spending (see Liquidity and Capital Resources - Development
Spending), capital expenditures and capital structure (see Liquidity and Capital
Resources - Cash Flows and Capital Resources), market risk (see Risk Management
- - Market Risk), revenue growth, after-tax profit margin, and return on
stockholders' equity (see Results of Operations and Looking Ahead), the
Company's competitive position (see Looking Ahead), and contingent liabilities
(see note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements). Achievement of the expressed beliefs,
objectives and expectations described in these statements is subject to certain
risks and uncertainties that could cause actual results to differ materially
from the expressed objectives and expectations. Important factors that may cause
such differences include, but are not limited to: the effect of customer trading
patterns on Company revenues and earnings; the risk of not completing the above
described acquisitions; the inability to assimilate the acquired companies and
to achieve the anticipated benefits; the Company's inability to attract and
retain key personnel; changes in the Company's level of personnel hiring,
investment in new or existing technology, or utilization of public media for
advertising; changes in technology; computer system failures and security
breaches; the effects of competitors' pricing, product and service decisions and
intensified competition; evolving regulation and changing industry practices
adversely affecting the Company; adverse results of litigation; the inability to
obtain external financing; changes in revenues and profit margin due to cyclical
securities markets and interest rates; the level and volatility of equity
prices; a significant downturn in the securities markets over a short period of
time or a sustained decline in securities prices and trading volumes; and risks
associated with international expansion and operations. Certain of these factors
are discussed in greater detail in this Annual Report and in the Company's
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Financial Overview
The Company achieved record revenues for the tenth consecutive year and
record earnings for the ninth consecutive year in 1999. One of the factors
contributing to this record performance was strong trading volumes in the
securities markets during the year. The combined daily average share volume for
the New York Stock Exchange (NYSE) and Nasdaq reached an all-time high of 1,864
million shares in 1999, a 28% increase over 1998. The Standard & Poor's 500
Index (on a dividend reinvested basis) rose 21% during 1999.
(CHART OMITTED)
Other key factors that contributed to the Company's financial performance in
1999 include:
- Assets in Schwab customer accounts rose $234.1 billion, or 48%, to a record
$725.2 billion. This increase resulted from net new customer assets of
$106.9 billion and net market gains of $127.2 billion.
- A record 1,481,000 new Schwab customer accounts were opened, an increase
of 7% from 1,380,000 opened in 1998.
Trading activity reached record levels as shown in the following table (in
thousands):
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Daily Average Trades 1999 1998 1997
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Revenue Trades
Online 119.1 56.3 26.8
TeleBroker(R) and VoiceBroker(TM) 8.5 8.2 12.2
Regional customer telephone
service centers, branch offices
and other 35.5 32.7 32.8
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Total 163.1 97.2 71.8
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Mutual Fund OneSource(R) Trades
Online 23.3 18.0 12.8
TeleBroker and VoiceBroker 1.0 1.0 1.3
Regional customer telephone
service centers, branch offices
and other 21.3 21.3 20.1
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Total 45.6 40.3 34.2
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Total Daily Average Trades
Online 142.4 74.3 39.6
TeleBroker and VoiceBroker 9.5 9.2 13.5
Regional customer telephone
service centers, branch offices
and other 56.8 54.0 52.9
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Total 208.7 137.5 106.0
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Revenues increased mainly due to higher customer trading volume and an
increase in customer assets. Revenues of $3,945 million in 1999 grew 44% from
1998 due to increases in revenues of $829 million, or 42%, in the Individual
Investor segment, $215 million, or 64%, in the Capital Markets segment, and $165
million, or 37%, in the Institutional Investor segment. See note "14 - Segment
Information" in the Notes to Consolidated Financial Statements for financial
information by segment for the last three years.
The Company's 1999 earnings rose 69% to $589 million, or $.70 per share, up
from $348 million, or $.42 per share, in 1998. Share and per share information
throughout this report have been restated to reflect the July 1999 two-for-one
common stock split, effected in the form of a 100% stock dividend. All
references to earnings per share information in this report reflect diluted
earnings per share unless otherwise noted.
The Company's 1997 results include charges for the settlement of a
class-action lawsuit involving M&S and other firms engaged in making markets in
Nasdaq securities. These charges totaled $24 million after-tax, or $.03 per
share. Excluding these charges, the Company's 1998 earnings would have increased
18% from 1997.
The Company's operating expenses increased 38% during 1999 to $2,974 million,
primarily due to a 40% increase in compensation and benefits, a 56% increase in
advertising and market development, and a 33% increase in occupancy and
equipment expenses. The Company's after-tax profit margin for 1999 was 14.9%,
which was higher than the 12.7% margin in 1998, and above the Company's annual
long-term objective of 12%. During 1999, net income plus depreciation and
amortization increased 53% to $746 million and capital expenditures increased
53% to $283 million.
Return on stockholders' equity was 32% in 1999, exceeding the Company's
annual long-term objective of 20%.
REVENUES
Revenues grew $1,209 million, or 44%, in 1999, exceeding management's annual
long-term objective of 20%, due to a 42% increase in commission revenues, a 48%
increase in interest revenue, net of interest expense (referred to as net
interest revenue), a 75% increase in principal transaction revenues and a 34%
increase in mutual fund service fees. Non-trading revenues represented 40% of
total revenues for 1999, down from 42% for 1998 and up from 38% for 1997 as
shown in the table below.
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Composition of Revenues 1999 1998 1997
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Commissions 47% 48% 51%
Principal transactions 13 10 11
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Total trading revenues 60 58 62
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Mutual fund service fees 19 20 19
Net interest revenue 18 17 15
Other 3 5 4
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Total non-trading revenues 40 42 38
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Total 100% 100% 100%
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Commissions
The Company earns commission revenues by executing customer trades primarily
through the Individual Investor and Institutional Investor segments. These
revenues are affected by the number of customer accounts that traded, the
average number of commission-generating trades per account, and the average
commission per trade. Commission revenues were $1,863 million in 1999, compared
to $1,309 million in 1998 and $1,174 million in 1997.
As illustrated in the following table below, from 1997 to 1999, the total
number of customer revenue trades executed by the Company has increased 126% as
the Company's customer base has grown and the average number of trades per
account has increased. From 1997 to 1999, average commission per revenue trade
decreased 29%. The 15% decrease from 1998 to 1999 was mainly due to an increase
in the proportion of trades placed through online channels, which have lower
commission rates than the Company's other channels. The 17% decrease from 1997
to 1998 was mainly due to the Company's integration of its online and
traditional brokerage services and the resulting reduction of the price of
online trades for most of its customers in 1998. However, the increase in
trading activity more than offset the effect of the lower average commission per
revenue trade. As more customers migrate to online channels, average
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commission per revenue trade is expected to continue to decline.
In November 1999, the Company began to provide independent investment
managers with flat-fee pricing for Internet trades. This price reduction is
designed to enhance the Company's competitive position and to align the pricing
of Internet trades for independent investment managers with that offered to most
of the Company's individual customers. While the effect of this price reduction
cannot be predicted with certainty, management expects that the impact of this
reduction on the Company's results of operations will be offset by the lower
cost of processing Internet trades and by expected growth in customer assets and
trading volumes associated with independent investment managers. This price
reduction will only affect the Institutional Investor segment and, based on
management's expectations, it will not have a material impact on that segment's
revenues.
In February 2000, the Company announced a plan to provide customers who meet
certain online equity trading criteria with reduced pricing. This price
reduction is designed to enhance the Company's competitive position with
actively trading investors. While the effect of this price reduction cannot be
predicted with certainty, management expects that the impact of this reduction
on the Company's results of operations will be offset over time with increased
trading volume and increased fees related to minimum account balances (see Other
Revenues). This price reduction will only affect the Individual Investor segment
and, based on management's expectations, will not have a material impact on that
segment's revenues.
- --------------------------------------------------------------------------------
Commissions Earned on Customer Revenue Trades 1999 1998 1997
- --------------------------------------------------------------------------------
Customer accounts that traded during the year
(in thousands) 3,349 2,783 2,380
Average customer revenue trades per account 12.3 8.8 7.6
Total revenue trades (in thousands) 41,116 24,508 18,169
Average commission per revenue trade $45.55 $53.44 $64.27
Commissions earned on customer revenue trades
(in millions) (1) $1,873 $1,309 $1,168
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
customer trades totaling $39 million in 1999, $25 million in 1998 and $16
million in 1997. Excludes commissions on trades relating to specialist
operations totaling $29 million in 1999, $25 million in 1998 and $22
million in 1997.
Mutual Fund Service Fees
The Company earns mutual fund service fees for recordkeeping and shareholder
services provided to third-party funds, and for transfer agent services,
shareholder services, administration and investment management provided to its
proprietary funds. These fees are based upon the daily balances of customer
assets invested in third-party funds and upon the average daily net assets of
Schwab's proprietary funds. Mutual fund service fees are earned primarily
through the Individual Investor and Institutional Investor segments.
Mutual fund service fees were $750 million in 1999, compared to $559
million in 1998 and $428 million in 1997. The increases from 1997 to 1999 were
primarily due to significant increases in customer assets in Schwab's
proprietary funds, referred to as the SchwabFunds(R), and in funds purchased
through Schwab's Mutual Fund OneSource(R) service.
The SchwabFunds include money market funds, equity index funds, bond funds,
asset allocation funds, and funds that primarily invest in stock, bond and money
market funds. Schwab customers may elect to have cash balances in their
brokerage accounts automatically invested in certain SchwabFunds money market
funds. Customer assets invested in the SchwabFunds were $107.9 billion, $81.5
billion and $55.8 billion at the end of 1999, 1998 and 1997, respectively.
At December 31, 1999, Schwab's Mutual Fund OneSource service enabled
customers to trade 1,143 mutual funds in 208 fund families without incurring
transaction fees. The service allows investors to access multiple mutual fund
companies, avoid brokerage transaction fees, and achieve investment diversity
among fund families. In addition, investors' recordkeeping and investment
monitoring are simplified through one consolidated statement. Customer assets
held by Schwab that have been purchased through the Mutual Fund OneSource
service, excluding SchwabFunds, were $102.3 billion, $69.9 billion and $56.6
billion at the end of 1999, 1998 and 1997, respectively.
Additionally, customer assets invested in the Mutual Fund Marketplace(R),
excluding the Mutual Fund OneSource service, were $74.3 billion, $59.2 billion
and $48.0 billion at the end of 1999, 1998 and 1997, respectively. Schwab
charges a transaction fee on trades placed in the funds included in the Mutual
Fund Marketplace (except on trades through the Mutual Fund OneSource service).
These fees are recorded as commission revenues.
Net Interest Revenue
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to customers and investments) and interest paid on
liabilities (mainly customer cash balances). Net interest revenue is affected by
changes in the volume and mix of these assets and liabilities, as well as by
fluctuations in interest rates.
Substantially all of the Company's net interest revenue is earned by Schwab
through the Individual Investor and Institutional Investor segments. In clearing
its customers' trades, Schwab holds cash balances payable to customers. In most
cases, Schwab pays its customers interest on cash balances awaiting investment,
and may invest these funds and earn interest revenue. Schwab also may lend funds
to customers on a secured basis to purchase qualified securities - a practice
commonly known as "margin lending." Pursuant to SEC regulations, customer cash
balances that are not used for margin lending are segregated into an
-7-
investment account that is maintained for the exclusive benefit of customers.
When investing segregated customer cash balances, Schwab 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 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 70% of Schwab's investments of segregated customer
cash balances. The average maturities of Schwab's total investments of
segregated customer cash balances were 62 days in 1999, 66 days in 1998 and 63
days in 1997.
Net interest revenue was $703 million in 1999, compared to $476 million in
1998 and $354 million in 1997, as shown in the following table (in millions):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 983 $ 671 $489
Investments, customer-related 404 400 376
Other 84 57 35
- --------------------------------------------------------------------------------
Total 1,471 1,128 900
- --------------------------------------------------------------------------------
Interest Expense
Customer cash balances 689 580 481
Stock-lending activities 32 37 37
Borrowings 28 25 20
Other 19 10 8
- --------------------------------------------------------------------------------
Total 768 652 546
- --------------------------------------------------------------------------------
Net interest revenue $ 703 $ 476 $354
================================================================================
The Company's interest-earning assets 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. Customer-related daily average
balances, interest rates, and average net interest margin are summarized as
follows (dollars in millions):
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Margin loans to customers:
Average balance outstanding $13,172 $ 8,772 $ 6,367
Average interest rate 7.46% 7.65% 7.68%
Investments:
Average balance outstanding $ 8,555 $ 7,687 $ 6,990
Average interest rate 4.72% 5.21% 5.38%
Average yield on interest-earning assets 6.38% 6.51% 6.48%
Funding Sources (customer-related and other):
Interest-bearing customer cash balances:
Average balance outstanding $17,344 $13,278 $10,661
Average interest rate 3.97% 4.37% 4.51%
Other interest-bearing sources:
Average balance outstanding $ 1,510 $ 1,299 $ 1,122
Average interest rate 3.85% 4.23% 4.44%
Average noninterest-bearing portion $ 2,873 $ 1,882 $ 1,574
Average interest rate on funding sources 3.44% 3.86% 3.97%
Summary:
Average yield on interest-earning assets 6.38% 6.51% 6.48%
Average interest rate on funding sources 3.44% 3.86% 3.97%
- --------------------------------------------------------------------------------
Average net interest margin 2.94% 2.65% 2.51%
================================================================================
The increases in net interest revenue from 1997 to 1999 were primarily due to
higher levels of margin loans to customers, partially offset by higher average
customer cash balances.
Since the Company establishes the rates paid on customer cash balances and
charged on margin loans, a substantial portion of its net interest margin is
managed by the Company. However, the margin is highly influenced by external
factors such as the interest rate environment and competition. The Company's
average net interest margin increased from 1998 to 1999 as the average interest
rate on funding sources declined more than the decline in the average yield on
interest-earning assets. The Company's average net interest margin increased
from 1997 to 1998 as the average yield on interest-earning assets increased and
the average interest rate on funding sources declined.
Principal Transactions
Principal transaction revenues are primarily comprised of net gains from
market-making activities in Nasdaq and other securities effected through the
Capital Markets segment. Factors that influence principal transaction revenues
include the volume of customer trades, market price volatility, average revenue
per share traded and changes in regulations and industry practices as discussed
below. As a market maker in Nasdaq and other securities, M&S generally executes
customer trades as principal. While substantially all Nasdaq security trades
originated by the customers of Schwab are directed to M&S, a substantial portion
of M&S' trading volume comes from parties other than Schwab. Orders handled by
M&S represented approximately 8% of
-8-
the total shares traded on Nasdaq in 1999, up from 7% in 1998(d).
- --------
(d) Source: The Nasdaq Stock Market, Inc.
Principal transaction revenues were $500 million in 1999, compared to $287
million in 1998 and $258 million in 1997. The increases from 1997 to 1999 were
primarily due to significant increases in share volume handled by M&S. The
increase from 1997 to 1998 was partially offset by lower average revenue per
share traded.
Certain SEC rules and rule amendments, known as the Order Handling Rules,
have significantly altered the manner in which orders for both Nasdaq and
exchange-listed securities are handled. These rules were implemented in phases
between January 20, 1997 and October 13, 1997. Additionally, in June 1997, most
major U.S. securities markets, including Nasdaq and the NYSE, began quoting and
trading most securities in increments of one-sixteenth dollar per share instead
of one-eighth dollar per share. Mainly as a result of these regulatory changes
and changes in industry practices, M&S' average revenue per share traded
declined from 3.3(cent) in 1997 to 2.5(cent) in 1998. However, M&S' average
revenue per share traded increased to 2.8(cent) in 1999. An increase in the
market price volatility of technology stocks in 1999 contributed to M&S' higher
average revenue per share traded. The major U.S. securities markets have
announced that beginning on July 3, 2000 for some stocks, they intend to begin
quoting and trading securities in decimal increments. This change is likely to
cause decreases in average revenue per share traded, will only affect the
Capital Markets segment and, based on management's expectations, will not have a
material impact on that segment's revenues.
See note "12 - Commitments and Contingent Liabilities" in the Notes to
Consolidated Financial Statements regarding certain civil litigation relating to
principal transaction activities.
Revenues relating to Schwab's specialist operations were $41 million in 1999,
$29 million in 1998 and $21 million in 1997. Higher revenues related to Schwab's
specialist operations and gains from the sale of fixed income securities owned
by Schwab for the purpose of facilitating customer orders also contributed to
the increase in principal transaction revenues from 1997 to 1998.
Other Revenues
Other revenues include retirement plan services fees and other brokerage
fees (mainly minimum account balance fees and related financial services fees).
Other revenues are earned primarily through the Individual Investor and
Institutional Investor segments. These revenues were $128 million in 1999,
compared to $105 million in 1998 and $86 million in 1997. The increase from 1998
to 1999 was due to higher levels of trading volume-related revenues and customer
account-based fees, as well as higher revenue from 401(k) recordkeeping fees.
The increase from 1997 to 1998 was due to higher revenue from minimum account
balance and other brokerage fees, 401(k) recordkeeping fees, Schwab
AdvisorSource(TM) referral fees and software maintenance fees.
In February 2000, the Company announced a plan to increase fees related to
minimum account balances (effective April 1, 2000). This fee adjustment is
designed to more effectively align account fees with the expanded and improved
services currently available to Schwab customers. While the effect of this fee
adjustment cannot be predicted with certainty, management expects that the
impact of this adjustment on the Company's results of operations will be more
than offset by the price reduction related to online equity trades for customers
who meet certain criteria for such trades (see Commissions). This fee adjustment
will only affect the Individual Investor segment and, based on management's
expectations, it will not have a material impact on that segment's revenues.
EXPENSES EXCLUDING INTEREST
- --------------------------------------------------------------------------------
Expenses Excluding Interest as a Percentage
of Revenues 1999 1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits 41% 42% 42%
Occupancy and equipment 7 7 7
Communications 7 8 8
Advertising and market development 6 6 6
Depreciation and amortization 4 5 5
Professional services 4 3 3
Commissions, clearance and floor brokerage 2 3 4
Other 4 5 6
- --------------------------------------------------------------------------------
Total 75% 79% 81%
================================================================================
Compensation and Benefits
Compensation and benefits expense includes salaries and wages, variable
compensation, and related employee benefits and taxes. Employees receive
variable compensation that is tied to the achievement of specified objectives
relating primarily 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 $1,625 million in 1999, compared to
$1,163 million in 1998 and $962 million in 1997. The increases from 1997 to 1999
were generally due to a greater number of employees and higher variable
compensation expense resulting from the Company's financial performance. The
following table shows a comparison of certain compensation and benefits
components and employee data (in thousands):
-9-
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Variable compensation as a
% of compensation and benefits expense 30% 23% 23%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 12% 14% 14%
Full-time equivalent employees(1) 18.1 13.3 12.7
Revenues per average full-time equivalent employee $245 $208 $198
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
The Company encourages and provides for employee ownership of the Company's
common stock through its profit sharing and employee stock ownership plan, its
stock incentive 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. To further this alignment and in recognition of the Company's
financial performance, the Company awarded all non-officer employees stock
option grants in 1999 and 1998 for options to buy shares of common stock
totaling 3,783,000 and 3,478,000 shares, respectively. The Company expects to
grant such options annually with the size of the grant based on Company
performance.
At December 31, 1999, directors, management and employees, and their
respective families, trusts and foundations, owned, including stock held for
employees' benefit in the Company's profit sharing and employee stock ownership
plan, approximately 31% of the Company's outstanding common stock. In addition,
directors, management and employees held options to purchase common stock in an
amount equal to approximately 7% of the Company's outstanding common stock at
December 31, 1999.
Occupancy and Equipment
Occupancy and equipment expense includes the costs of leasing and maintaining
the Company's office space, four regional customer telephone service centers,
two online customer support centers, two primary data centers and 340 domestic
branch offices. It also includes lease and rental expenses on computer and other
equipment. Occupancy and equipment expense was $266 million in 1999, compared to
$201 million in 1998 and $154 million in 1997. This trend reflects the Company's
continued growth and expansion, and its commitment to customer service and
investment in technology. The Company expanded its office space in 1999, 1998
and 1997, and opened its second data center in 1998. Schwab opened 49 new branch
offices in 1999, 19 in 1998 and 40 in 1997. The increases in occupancy and
equipment expense from 1997 to 1999 also reflect higher lease and maintenance
expenses on information technology equipment.
Communications
Communications expense includes telephone, postage and printing, and news and
quotation costs. This expense was $266 million in 1999, compared to $206 million
in 1998 and $183 million in 1997. The increases from 1997 to 1999 primarily
resulted from higher customer trading volumes, higher postage and printing costs
in connection with the growth in customer accounts, increased customer use of
automated telephonic and online channel news, quotation and information
services, additional leased telephone lines related to online service offerings,
and new branch offices.
Advertising and Market Development
Advertising and market development expense includes media, print and direct
mail advertising expenses, and related production, printing and postage costs.
This expense was $242 million in 1999, compared to $155 million in 1998 and $130
million in 1997. The increases from 1997 to 1999 were primarily a result of the
Company's increased brand-focused media spending. Advertising and market
development expense was 6% of revenues in each of 1999, 1998 and 1997.
Depreciation and Amortization
Depreciation and amortization includes expenses relating to equipment and
office facilities, capitalized software, leasehold improvements, goodwill,
property and other intangibles. This expense was $157 million in 1999, compared
to $138 million in 1998 and $125 million in 1997. The increases from 1997 to
1999 were primarily due to newly acquired information technology equipment that
increased the Company's customer service capacity. The increases from 1997 to
1999 also reflect increased amortization of leasehold improvements for new
branches and expanded office space. Amortization expense related to intangible
assets was $8 million in 1999, compared to $10 million in 1998 and $15 million
in 1997. Amortization expense decreased from 1997 to 1999 due to certain
intangibles becoming fully amortized.
Professional Services
Professional services expense includes fees paid to consultants engaged to
support product, service and information technology projects, and legal and
accounting fees. This expense was $151 million in 1999, compared to $88 million
in 1998 and $70 million in 1997. The increases from 1997 to 1999 were primarily
due to higher levels of consulting fees in many areas, including new and
expanded products and services, information technology projects, and capacity
expansion.
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. This expense was $96 million in 1999, compared to
$83 million in 1998 and $92 million in 1997.
-10-
The increase from 1998 to 1999 was primarily due to an increase in trading
volume processed by M&S and Schwab. The decrease from 1997 to 1998 was primarily
due to a decrease in the fees paid per share traded by M&S to broker-dealers for
orders received for execution, partially offset by an increase in trading volume
processed by M&S and Schwab.
Other Expenses
Other expenses include trade-related errors, travel and entertainment,
regulatory fees and dues, and other miscellaneous expenses. These other expenses
were $171 million in 1999, compared to $126 million in 1998 and $137 million in
1997. The change from 1998 to 1999 was primarily due to higher levels of travel
and related costs, volume-related regulatory fees and dues, an increase in
reserves for uncollectible accounts and contingent liabilities, and increased
trade-related errors resulting from system downtime. The decrease from 1997 to
1998 was primarily due to the $39 million pre-tax litigation settlement charges
in 1997, partially offset by higher trade-related errors and other
volume-related expenses in 1998.
Taxes on Income
The Company's effective income tax rate was 39.4% in 1999 and 39.6% in both
1998 and 1997.
New Accounting Pronouncement
In 1999, the Company adopted a new accounting standard related to
internal-use software development costs (see note "2 - Significant Accounting
Policies" in the Notes to Consolidated Financial Statements). As required by the
standard, in 1999 certain of the Company's costs, primarily compensation and
benefits, were capitalized and will be amortized over the software's estimated
useful life of three years. In prior years, these costs were expensed as
incurred. The Company capitalized $68 million in software development costs in
1999.
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 three of its subsidiaries, Schwab, M&S and CSE, follows.
Liquidity
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. As discussed
below, Schwab, M&S and CSE are subject to regulatory requirements that may
restrict them from certain transactions with CSC. 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 liquidity needs that arise from its issued and outstanding $455
million Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from
the funding of cash dividends, acquisitions and other investments. The
Medium-Term Notes have maturities ranging from 2000 to 2009 and fixed interest
rates ranging from 5.96% to 7.50% with interest payable semiannually. The
Medium-Term Notes are rated A3 by Moody's Investors Service and A- by Standard &
Poor's Ratings Group.
In June 1999, the SEC declared effective CSC's registration statement
covering the issuance of $395 million in Senior or Senior Subordinated
Medium-Term Notes, Series A (including $145 million of unissued notes previously
included in CSC's registration statement). At December 31, 1999, $311 million of
these notes remained unissued.
CSC may borrow under its committed, unsecured credit facilities. CSC
maintains a $600 million facility with a group of fourteen banks which expires
in June 2000 and a $175 million facility with a group of nine banks which
expires in June 2001. CSC plans to renegotiate the terms for the facility that
is due to expire in June 2000. The funds under both of these facilities are
available for general corporate purposes and CSC pays a commitment fee on the
unused balance of these facilities. The financial covenants in these facilities
require CSC to maintain minimum levels of stockholders' equity, and Schwab and
M&S to maintain specified levels of net capital, as defined. The Company
believes that these restrictions will not have a material effect on its ability
to meet foreseeable dividend or funding requirements. Other than an overnight
borrowing to test the availability of the $600 million facility, these
facilities were unused in 1999.
CSC has access to $685 million of the $795 million uncommitted, unsecured
bank credit lines that are primarily utilized by Schwab to manage short-term
liquidity. These lines were not used by CSC in 1999.
Schwab
Most of Schwab's assets are liquid, consisting primarily of receivable from
customers, 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), and
receivable from brokers, dealers and clearing organizations. Customer margin
loans are demand loan obligations secured by readily marketable securities.
Receivable from and payable to 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 were $23.0
billion, $17.5 billion and $12.7 billion at December 31, 1999, 1998 and 1997,
respectively. Management believes that customer cash
-11-
balances and operating earnings will continue to be the primary sources of
liquidity for Schwab in the future.
Schwab is subject to regulatory requirements that are intended to ensure the
general financial soundness and liquidity of broker-dealers. These regulations
prohibit Schwab from repaying subordinated borrowings to CSC, paying cash
dividends, or making 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 of $1
million. At December 31, 1999, Schwab's net capital was $1,766 million (10% of
aggregate debit balances), which was $1,421 million in excess of its minimum
required net capital and $903 million in excess of 5% of aggregate debit
balances. Schwab has historically targeted net capital to be 10% of its
aggregate debit balances, which primarily consist of customer margin loans. To
achieve this target, as customer margin loans have grown, an increasing amount
of cash flows have been retained to support aggregate debit balances.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$1,400 million subordinated revolving credit facility maturing in September
2001, of which $905 million was outstanding at December 31, 1999. At year end,
Schwab also had outstanding $25 million in fixed-rate subordinated term loans
from CSC maturing in 2001. Borrowings under these subordinated lending
arrangements qualify as regulatory capital for Schwab.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank
credit lines totaling $795 million at December 31, 1999 ($685 million of these
lines are also available for CSC to use). The need for short-term borrowings
arises primarily from timing differences between cash flow requirements and the
scheduled liquidation of interest-bearing investments. Schwab used such
borrowings for twenty-six days in 1999, six days in 1998 and eleven days in
1997, with the daily amounts borrowed averaging $125 million, $87 million and
$85 million, respectively. These lines were unused at December 31, 1999.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with eleven banks in favor of the OCC aggregating $905 million at
December 31, 1999. Schwab pays a fee to maintain these letters of credit. No
funds were drawn under these letters of credit at December 31, 1999.
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 marketable
securities, receivable from brokers, dealers and clearing organizations, and
cash and cash equivalents.
M&S' liquidity is affected by the same net capital regulatory requirements as
Schwab (see discussion above). At December 31, 1999, M&S' net capital was $13
million, which was $12 million in excess of its minimum required net capital.
M&S may borrow up to $35 million under a subordinated lending arrangement
with CSC maturing in 2001. Borrowings under this arrangement qualify as
regulatory capital for M&S. This facility was unused in 1999. In addition, CSC
provides M&S with a $25 million short-term credit facility. Borrowings under
this arrangement do not qualify as regulatory capital for M&S. This facility was
unused at December 31, 1999.
CSE
CSE's liquidity needs are generally met through earnings generated by its
operations. Most of CSE's assets are liquid, consisting primarily of cash and
investments required to be segregated, receivable from brokers, dealers and
clearing organizations, and receivable from customers and others.
CSE may borrow up to (pound)20 million, equivalent to $32 million at December
31, 1999, under subordinated lending arrangements with CSC. At December 31,
1999, CSE had outstanding (pound)18 million under these arrangements, equivalent
to $29 million, with (pound)5 million maturing in 2001 and (pound)13 million
maturing in 2003.
Development Spending
A significant portion of the Company's liquidity needs arises from ongoing
investments to support future growth. These investments, which the Company
refers to as development spending, are comprised of two categories: media
spending (including media and production expenses) and project spending. Project
spending is generally targeted towards enhancing future revenue growth, such as
improvements to the Company's Web site or branch expansion; enhancing the
Company's infrastructure, such as investments to improve customer statements or
its systems integration; and improving the firm's productivity, such as
enhancements to its telecommunications systems or operations processes. This
spending is imbedded throughout certain categories of the Company's non-interest
expenses.
Development spending in 1999 was approximately $448 million and management
currently anticipates an increase of approximately 30% in 2000, reflecting
management's belief that development spending is critical to strengthening the
Company's competitive advantages.
(CHART OMITTED)
As has been the case in recent years, the Company may adjust its development
spending from period to period as business conditions change. In general, the
level of future spending will be influenced by the rate of growth in customer
assets and trading activities, the opportunities to invest in technology that
improve capacity, productivity or the customer experience, and the expected
return on these investments as compared to the Company's financial objectives
and cost of capital. While development spending is discretionary and can be
altered in response to business
-12-
conditions, the Company views its development spending as essential for future
growth and therefore prefers to avoid major adjustments in such spending unless
faced with a sustained slowdown in revenue growth.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $746 million in 1999, up
53% from $487 million in 1998, allowing the Company to finance the majority of
its growth with internally generated funds. Depreciation and amortization
expense related to equipment, office facilities and property was $149 million in
1999 and $128 million in 1998. Amortization expense related to intangible assets
was $8 million in 1999 and $10 million in 1998.
(CHART OMITTED)
The Company's capital expenditures were $286 million ($283 million net of
proceeds from the sale of fixed assets) in 1999 and $190 million ($185 million
net of proceeds) in 1998, or 7% of revenues in both years. In 1999, 75% of
capital expenditures were for information technology and 25% for facilities
expansion and improvements. Capital expenditures as described above exclude the
capitalized costs for developing internal-use software of $68 million in 1999.
The Company opened 49 new branch offices during 1999, compared to 19 branch
offices opened in 1998, and continues to view its branch office network as
important to pursuing its strategy of attracting customer assets.
Management currently anticipates that 2000 capital expenditures will be
approximately 70% higher than 1999 spending. Approximately 66% of the 2000
planned expenditures relate to facilities expansion and improvements and
approximately 34% relate to information technology. The significant increase in
2000 planned expenditures is primarily due to leasehold improvements to support
the Company's growth in employees, and the Company's plans to enhance systems
capacity and availability. As has been the case in recent years, the Company may
adjust its capital expenditures from period to period as business conditions
change.
During 1999, the Company:
- Issued $144 million and repaid $40 million of Medium-Term Notes;
- Paid common stock dividends of $46 million.
The Company monitors both the relative composition and absolute level of its
capital structure. The Company's total financial capital (borrowings plus
stockholders' equity) at December 31, 1999 was $2,729 million, up $949 million,
or 53%, from a year ago. At December 31, 1999, the Company had borrowings of
$455 million, or 17% of total financial capital, bearing interest at a
weighted-average rate of 6.7%. At December 31, 1999, the Company's stockholders'
equity was $2,274 million, or 83% of total financial capital. Management
currently anticipates that borrowings will remain below 30% of total financial
capital.
Share Repurchases
The Company did not repurchase any shares of its common stock in 1999 and
repurchased 12,509,000 shares for $150 million in 1998 and 2,460,000 shares for
$18 million in 1997. Since the inception of the repurchase plan in 1988, the
Company has repurchased 132,830,700 shares of its common stock for $314 million.
There is no current authorization for share repurchases.
Dividend Policy
Since the initial dividend in 1989, the Company has paid 43 consecutive
quarterly dividends and has increased the dividend 11 times. Since 1989,
dividends have increased by a 34% compounded annual growth rate. The Company
paid common stock dividends of $.0560 per share in 1999, $.0540 per share in
1998 and $.0467 per share in 1997. While the payment and amount of dividends are
at the discretion of the Company's Board of Directors, the Company targets its
cash dividend at approximately 5% to 10% of net income plus depreciation and
amortization.
YEAR 2000 CENTURY CHANGE
The Company's mission critical systems operated throughout the Year 2000
century change without material errors or interruptions when processing data and
transactions incorporating year 2000 dates, and the Company did not encounter
any material problems with any of its mission critical vendor-supplied systems,
services or products. Mission critical systems, services and products means
those systems, services and products critical to the ongoing operation of the
business.
Compliance Costs
As of December 31, 1999, the Company spent approximately $91 million of the
estimated cost for its Year 2000 project. The Company currently anticipates
spending approximately $3 million during the first quarter of 2000 to complete
the project.
The Company has funded all Year 2000 related costs through operating cash
flows and a reallocation of the Company's overall development spending. This
reallocation did not result in the delay of any critical information technology
projects. In accordance with generally accepted accounting principles, Year 2000
expenditures are expensed as incurred.
RISK MANAGEMENT
Overview
The Company's business and activities expose it to different types of risks
including, but not limited to, those discussed below. Proper identification,
assessment and management of these risks are essential to the success and
financial soundness of the Company. Managing risk at the
-13-
Company begins with the expertise and experience of management at the business
unit level. To supplement risk management at the business unit level, the
Company has formed a Global Risk Steering Committee, and various other risk
committees consisting of members of senior management. The Global Risk Steering
Committee takes an active role in the oversight of the various risk committees
by reviewing risk exposures, leading in the continued development of the
Company's risk management practices, reviewing existing risk management programs
and policies, discussing changes in regulations and other risk-related
developments, and reporting regularly to the Audit Committee of the Company's
Board of Directors. Other risk committees include the Technology and Operations
Risk Committee, which focuses on the integrity of the Company's technology
systems and enhancements, and operating capacity; the Credit Oversight
Committee, which focuses on customer activity (i.e., margin lending activities
to customers and customer option activities), the investing activities of
certain of the Company's proprietary funds, and corporate credit activities
(i.e., counterparty and corporate investing activities); and the Financial Risk
Committee, which focuses on liquidity and capital resources, interest rate risk,
and securities owned. Additionally, the Finance, Compliance, and Internal Audit
Departments and the Office of Corporate Counsel assist management and the
various risk committees in evaluating and monitoring the Company's risk profile.
The following discussion highlights the Company's principal risks and some of
the policies and procedures for risk identification, assessment and mitigation.
See Liquidity and Capital Resources for a discussion on liquidity risk and note
"13 - Financial Instruments with Off-Balance-Sheet and Credit Risk" in the Notes
to Consolidated Financial Statements for additional discussion on credit risk.
Given the nature of the Company's revenues, expenses and risk profile, the
Company's earnings and CSC's common stock price may be subject to significant
volatility from period to period. The Company's results for any period are not
necessarily indicative of results for a future period. Risk is inherent in the
Company's business. Consequently, despite the Company's attempts to identify
areas of risk, oversee operational areas involving risk and implement policies
and procedures designed to mitigate risk, there can be no assurance that the
Company will not suffer unexpected losses due to operating or other risks.
Competition
The Company faces significant competition from companies seeking to attract
customer financial assets, including traditional brokerage firms (particularly
firms that have started providing online trading services), discount brokerage
firms, online brokerage firms, mutual fund companies and banks. Certain of these
competitors have greater financial resources than the Company. The consolidation
trend in the financial services industry is likely to increase in light of the
new financial modernization legislation that becomes effective in March 2000.
This new legislation allows banks, securities firms and insurance companies more
flexibility to affiliate under one holding company. These holding companies can
engage in activities and acquire companies engaged in activities that are
financial in nature. The expansion and customer acceptance of conducting
financial transactions online has also attracted competition from providers of
online services, software development companies and other providers of financial
services. Finally, the growth of online trading has led to the creation of new
ECNs and new exchanges, and is causing major existing markets to consider
converting to for-profit status, all of which may intensify competition. The
Company experienced declines in its average commission per revenue trade in 1998
mainly due to the Company's integration of its online and traditional brokerage
services and reduction of the price of online trades for most of its customers,
resulting in an increase in the proportion of trades placed through its online
channels. The Company's average commission per revenue trade declined in 1999
due to the continued increase in the proportion of trades placed through its
online channels. As the Company focuses on further enhancements to its
electronic service offering and online trades increase, average commission per
revenue trade is expected to continue to decline.
Business Environment
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. While the
Company's non-trading revenues have grown, transaction-based revenues continue
to represent a majority of the Company's revenues and the Company may experience
significant variations in revenues from period to period. The Company adjusts
its expenses in anticipation of and in response to changes in financial market
conditions and customer trading patterns. Certain of the Company's expenses
(including variable compensation, portions of communications, and commissions,
clearance and floor brokerage) vary directly with changes in financial
performance or customer trading activity. Expenses relating to the level of
contractors, temporary employees, overtime hours, advertising and market
development, and professional services are adjustable over the short term to
help the Company achieve its financial objectives. Additionally, development
spending is discretionary and can be altered in response to market conditions.
However, a significant portion of the Company's expenses such as salaries and
wages, occupancy and equipment, and depreciation and amortization do not vary
directly, at least in the short term, with fluctuations in revenues or
securities trading volumes. Also, the Company views its development spending as
essential for future growth and therefore prefers to avoid major adjustments in
such spending unless faced with a sustained slowdown in revenue growth.
-14-
Technology and Operating Risk
Technology and operating risk is the potential for loss due to deficiencies
in control processes or technology systems that constrain the Company's ability
to gather, process and communicate information efficiently and securely, without
interruptions. The Company's operations are highly dependent on the integrity of
its technology systems and the Company's success depends, in part, on its
ability to make timely enhancements and additions to its technology in
anticipation of customer demands. To the extent the Company experiences system
interruptions, errors or downtime (which could result from a variety of causes,
including changes in customer use patterns, technological failure, changes to
its systems, linkages with third-party systems, and power failures), the
Company's business and operations could be significantly negatively impacted.
Additionally, rapid increases in customer demand may strain the Company's
ability to enhance its technology and expand its operating capacity. To minimize
business interruptions, the Company has two data centers intended, in part, to
further improve the recovery of business processing in the event of an
emergency. The Company attempts to mitigate technology and operating risk by
maintaining a comprehensive internal control system and by employing experienced
personnel. Also, the Company maintains backup and recovery functions, including
facilities for backup and communications, and conducts periodic testing of a
disaster recovery plan. The Company is committed to an ongoing process of
upgrading, enhancing and testing its technology systems. This effort is focused
on meeting customer demands, meeting market and regulatory changes, and
deploying standardized technology platforms.
Credit Risk
Credit risk is the potential for loss due to a customer or counterparty
failing to perform its contractual obligations. The Company's exposure to credit
risk mainly results from its margin lending activities, securities lending
activities, role as a counterparty in financial contracts, investing activities,
and the investing activities of certain of the Company's proprietary funds. To
mitigate the risks of such losses, the Company has established policies and
procedures which include: establishing and reviewing credit limits, monitoring
of credit limits and quality of counterparties, and increasing margin
requirements for certain securities. In addition, most of the Company's credit
extensions, such as margin loans to customers, securities lending agreements,
and resale agreements, are supported by collateral arrangements. These
arrangements are subject to requirements to provide additional collateral in the
event that market fluctuations result in declines in the value of collateral
received.
Market Risk
Market risk is the potential for loss due to a change in the value of a
financial instrument held by the Company as a result of fluctuations in interest
and currency exchange rates, and equity prices.
The Company is exposed to interest rate risk primarily from changes in the
interest rates on its interest-earning assets (mainly margin loans to customers
and investments) and its funding sources (including customer cash balances,
proceeds from stock-lending activities, borrowings, and stockholders' equity)
which finance these assets. The Company attempts to mitigate this risk by
monitoring the net interest margin and average maturity of its investments. The
Company also has the ability to adjust the rates paid on customer balances and
charged on margin loans.
The Company is exposed to equity price risk through its role as a financial
intermediary in customer-related transactions, and by holding financial
instruments mainly in its capacity as a market maker and relating to its
specialists' operations. To mitigate the risk of losses, these financial
instruments are marked to market daily and are monitored by management to assure
compliance with limits established by the Company. Additionally, the Company
purchases from time to time exchange-traded option contracts to reduce market
risk on these inventories. The Company may also purchase futures contracts to
reduce this risk. The Company may enter into foreign currency contracts to
reduce currency exchange rate risk. However, the Company's exposure to currency
exchange risks through its international operations is not material.
Additional qualitative and quantitative disclosures about market risk are
summarized as follows.
Financial Instruments Held For Trading Purposes
The Company held government securities and certificates of deposit with a
fair value of approximately $22 million and $13 million at December 31, 1999 and
1998, respectively. These securities, and the associated interest rate risk, are
not material to the Company's financial position, results of operations or cash
flows.
Through Schwab and M&S, the Company maintains inventories in exchange-listed
and Nasdaq securities on both a long and short basis. The fair value of these
securities at December 31, 1999 was $107 million in long positions and $60
million in short positions. The fair value of these securities at December 31,
1998 was $60 million in long positions and $35 million in short positions. Using
a hypothetical 10% increase or decrease in prices, the potential loss or gain in
fair value is estimated to be approximately $5 million and $3 million at
December 31, 1999 and 1998, respectively, due to the offset of the change in
fair value in long and short positions. In addition, the Company generally
enters into exchange-traded option contracts to hedge against potential losses
in equity inventory positions, thus reducing this potential loss exposure. This
hypothetical 10% change in
-15-
fair value of these securities at December 31, 1999 and 1998 would not be
material to the Company's financial position, results of operations or cash
flows. The notional amount of option contracts was approximately $103 million
and $74 million at December 31, 1999 and 1998, respectively. The fair value of
such option contracts was not material to the Company's consolidated balance
sheets at December 31, 1999 and 1998.
Financial Instruments Held For Purposes Other Than Trading
For its working capital and reserves required to be segregated under federal
or other regulations, the Company invests in money market funds, resale
agreements, certificates of deposit, and commercial paper. Money market funds do
not have maturity dates and do not present a material market risk. The other
financial instruments, as shown in the following table, are fixed rate
investments with short-term maturities and are not subject to material changes
in value due to interest rate movements (dollars in millions):
- --------------------------------------------------------------------------------
Principal Amount
by Maturity Date Fair Value
December 31, 2000 Thereafter 1999 1998
- --------------------------------------------------------------------------------
Resale agreements (1) $6,915 $6,915 $7,608
Weighted-average interest rate 5.05%
Certificates of deposit $1,659 $1,659 $2,004
Weighted-average interest rate 5.66%
Commercial paper $ 220 $ 220 $ 525
Weighted-average interest rate 4.18%
================================================================================
(1) Fair value at December 31, 1999 includes resale agreements of $6,165
million included in cash and investments required to be segregated under
federal or other regulations and $750 million included in cash and cash
equivalents.
At December 31, 1999, CSC had $455 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.96% to
7.50%. At December 31, 1998, CSC had $351 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.78% to
7.72%. The Company has fixed cash flow requirements regarding these Medium-Term
Notes due to the fixed rate of interest. The fair value of these Medium-Term
Notes at December 31, 1999 and 1998, based on estimates of market rates for debt
with similar terms and remaining maturities, approximated their carrying amount.
The table below presents the principal amount of these Medium-Term Notes by year
of maturity (dollars in millions):
- --------------------------------------------------------------------------------
Year Ending Weighted-Average Principal
December 31, Interest Rate Amount
- --------------------------------------------------------------------------------
2000 6.3% $ 48
2001 7.0% 39
2002 7.0% 53
2003 6.5% 49
2004 6.6% 81
Thereafter 6.8% 185
================================================================================
The Company maintains investments primarily in mutual funds, approximately
$60 million and $50 million at December 31, 1999 and 1998, respectively, to fund
obligations under its deferred compensation plan, which is available to certain
employees. Any decrease in the fair value of these investments would result in a
comparable decrease in the deferred compensation plan obligation and would not
affect the Company's financial position, results of operations or cash flows.
Legal and Compliance Risk
Legal and compliance risk refers to the possibility that the Company will be
found, by a court, arbitration panel or regulatory authority, not to have
complied with an applicable legal or regulatory requirement. The Company may be
subject to lawsuits or arbitration claims by customers, employees or other third
parties in the different jurisdictions in which it conducts business. In
addition, the Company is subject to extensive regulation by the SEC, the
National Association of Securities Dealers, Inc., the NYSE, and other federal,
state and market regulators, as well as certain foreign regulatory authorities.
The Company attempts to mitigate legal and compliance risk through policies and
procedures that it believes are reasonably designed to prevent or detect
violations of applicable statutory and regulatory requirements (see note "12 -
Commitments and Contingent Liabilities" in the Notes to Consolidated Financial
Statements).
LOOKING AHEAD
During 1999, the competitive environment in financial services intensified -
several traditional brokerage firms adjusted their pricing, enhanced their
online services and, along with a number of discount brokerage firms,
substantially increased their spending on advertising and marketing programs.
While this trend of intensified competition is expected to continue in 2000,
management believes that the Company's competitive advantages will enable the
firm to pursue its strategy of attracting and retaining customer assets. As
described more fully in the Description of Business section above, these
competitive advantages include: a nationally recognized brand, a broad line of
products and services offered at prices that management believes represent
superior value, multi-channel delivery systems, and the commitment and skills
necessary
-16-
to invest in technology intended to empower customers and reduce
costs. Additionally, the Company's significant level of employee ownership
aligns the interests of management with those of stockholders.
During 2000, the Company expects to sustain its competitive advantages by
providing its customers with expanded and enhanced services, including a
broadened service offering for affluent investors. The acquisition of U.S. Trust
is designed to help complete the Company's offering to affluent investors, as
well as independent investment managers and their customers, by providing them
with access to an array of wealth management services. The Company's acquisition
of CyBerCorp is designed to help provide actively trading investors with access
to advanced order entry, routing and management technology, as well as to
support the Company's ongoing role as a leader in the evolution of customer
access to the capital markets. The Company also expects to continue its focus on
developing an enhanced help and advice offering for all customers, and to
continue its process of selective international expansion.
The Company's efforts to expand and enhance services are being driven by
evolving customer needs. A substantial portion of growth in investable assets in
coming years is anticipated to be concentrated with the "baby boom" generation.
As these investors continue to accumulate wealth, many will need more guidance
in managing their financial affairs, as well as access to more complex and
specialized services such as estate and tax planning, and trust and investment
management. As a result, the Company expects to continue evaluating the breadth
of its service offering relative to customer needs.
Management continues to believe that the key to sustaining the Company's
competitive advantages will be its ability to combine people and technology in
ways that provide investors with the access, information, guidance, advice and
control they expect - as well as superior service - all at a lower cost than
traditional providers of financial services. Accordingly, the Company expects to
remain in direct competition with traditional, online and discount brokerage
firms, banks and other providers of financial products and services.
Capitalizing on and strengthening the Company's competitive advantages
requires significant development spending and capital expenditures. Management
believes that these ongoing investments are critical to increasing the Company's
market share and achieving its long-term financial objectives, which include
annual growth in revenues of 20%, an after-tax profit margin of 12%, and a
return on stockholders' equity of 20%.
-17-
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income The Charles Schwab Corporation
(In Thousands, Except Per Share Amounts)
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Commissions $1,863,306 $1,309,383 $1,174,023
Mutual fund service fees 750,141 559,241 427,673
Interest revenue, net of interest expense of $768,403 in 1999,
$651,881 in 1998 and $546,483 in 1997 702,677 475,617 353,552
Principal transactions 500,496 286,754 257,985
Other 128,202 105,226 85,517
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,944,822 2,736,221 2,298,750
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 1,624,526 1,162,823 961,824
Occupancy and equipment 266,382 200,951 154,181
Communications 265,914 206,139 182,739
Advertising and market development 241,895 154,981 129,550
Depreciation and amortization 156,678 138,477 124,682
Professional services 151,081 87,504 69,583
Commissions, clearance and floor brokerage 96,012 82,981 91,933
Other 171,095 125,821 137,011
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,973,583 2,159,677 1,851,503
- ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income 971,239 576,544 447,247
Taxes on income 382,362 228,082 176,970
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 588,877 $ 348,462 $ 270,277
====================================================================================================================================
Weighted-Average Common Shares Outstanding - Diluted* 843,090 823,005 817,726
====================================================================================================================================
Earnings Per Share*
Basic $ .73 $ .44 $ .34
Diluted $ .70 $ .42 $ .33
====================================================================================================================================
Dividends Declared Per Common Share* $ .0560 $ .0540 $ .0467
====================================================================================================================================
* All periods have been restated for the July 1999 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
-18-
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet The Charles Schwab Corporation
(In Thousands, Except Per Share Amounts)
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,079,128 $ 1,155,928
Cash and investments required to be segregated under federal or other regulations
(including resale agreements of $6,165,043 in 1999 and $7,608,067 in 1998) 8,465,528 10,242,943
Receivable from brokers, dealers and clearing organizations 482,657 334,334
Receivable from customers - net 17,060,222 9,646,140
Securities owned - at market value 339,634 242,115
Equipment, office facilities and property - net 597,761 396,163
Intangible assets - net 45,149 46,274
Other assets 228,982 200,493
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,299,061 $22,264,390
====================================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 467,758 $ 324,597
Payable to brokers, dealers and clearing organizations 1,748,765 1,422,300
Payable to customers 23,422,592 18,119,622
Accrued expenses and other liabilities 931,011 618,249
Borrowings 455,000 351,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 27,025,126 20,835,768
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940 shares authorized; $.01 par value per share;
none issued
Common stock - 2,000,000 and 500,000 shares authorized in 1999 and 1998,
respectively; $.01 par value per share; 822,249 and 803,765 shares issued
and outstanding in 1999 and 1998, respectively* 8,224 4,019
Additional paid-in capital 539,408 213,312
Retained earnings 1,794,282 1,254,953
Deferred compensation stock trust 2,405
Unearned ESOP shares (967) (1,088)
Unamortized restricted stock compensation (70,926) (43,882)
Common stock issued to deferred compensation trust (2,405)
Foreign currency translation adjustment 3,914 1,308
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,273,935 1,428,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,299,061 $22,264,390
====================================================================================================================================
* All periods have been restated for the July 1999 two-for-one common stock split.
See Notes to Consolidated Financial Statements.
-19-
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows The Charles Schwab Corporation
(In Thousands)
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 588,877 $ 348,462 $ 270,277
Noncash items included in net income:
Depreciation and amortization 156,678 138,477 124,682
Compensation payable in common stock 27,865 28,189 24,385
Deferred income taxes (3,570) (6,219) (29,074)
Other 4,659 4,714 3,047
Change in securities owned (97,519) 40,454 (154,699)
Change in other assets (8,785) 16,547 (25,934)
Change in accrued expenses and other liabilities 528,758 208,783 153,234
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 1,196,963 779,407 365,918
- ------------------------------------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Cash and investments required to be segregated under
federal or other regulations 1,765,328 (3,466,062) 456,662
Receivable from brokers, dealers and clearing organizations (152,287) (65,978) (37,449)
Receivable from customers - net (7,419,482) (1,893,821) (2,741,796)
Drafts payable 144,006 56,028 43,908
Payable to brokers, dealers and clearing organizations 329,423 298,411 245,327
Payable to customers 5,317,093 5,010,081 1,935,507
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in customer-related balances (15,919) (61,341) (97,841)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,181,044 718,066 268,077
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (282,973) (185,494) (139,416)
Capitalized costs of developing software for internal use (68,002)
Cash payments for businesses acquired, net of cash received (5,657) (1,400) (1,200)
Cash payments for investments in businesses (17,102)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (373,734) (186,894) (140,616)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 144,000 30,000 111,000
Repayment of borrowings (40,080) (40,049) (33,649)
Dividends paid (45,502) (43,068) (37,091)
Purchase of treasury stock (150,180) (18,234)
Proceeds from stock options exercised and other 55,090 30,766 14,530
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 113,508 (172,531) 36,556
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 2,382 (160) 113
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 923,200 358,481 164,130
Cash and cash equivalents at beginning of year 1,155,928 797,447 633,317
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,079,128 $ 1,155,928 $ 797,447
====================================================================================================================================
See Notes to Consolidated Financial Statements.
-20-
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Equity The Charles Schwab Corporation
(In Thousands)
Common
Un- Stock Foreign
Deferred amortized Issued to Currency
Add- Compen- Un- Restricted Deferred Trans-
Common Stock itional sation earned Stock Compen- lation
--------------- Paid-In Retained Stock Treasury ESOP Compen- sation Adjust-
Shares* Amount Capital Earnings Trust Stock Shares sation Trust ment Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31,1996 787,805 $1,785 $200,857 $ 723,085 $ (60,277) $(5,517) $ (8,658) $ 3,280 $ 854,555
Comprehensive income:
Net income 270,277 270,277
Foreign currency
translation adjustment (2,360) (2,360)
---------
Total comprehensive
income 267,917
Dividends declared on
common stock (37,091) (37,091)
Purchase of treasury
stock (2,460) (18,234) (18,234)
Stock options exercised
and restricted stock
compensation awards 12,460 25,830 43,110 (14,179) 54,761
Three-for-two stock
split effected in the
form of a 50% stock
dividend 892 (892)
Amortization of
restricted stock
compensation awards 5,609 5,609
ESOP shares released
for allocation 14,735 117 2,748 17,600
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 797,805 2,677 241,422 955,496 (35,401) (2,769) (17,228) 920 1,145,117
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 348,462 348,462
Foreign currency
translation adjustment 388 388
---------
Total comprehensive
income 348,850
Dividends declared on
common stock (43,068) (43,068)
Purchase of treasury
stock (12,509) (150,180) (150,180)
Stock options exercised
and restricted stock
compensation awards 18,489 4 (40,872) (4,375) 185,581 (42,153) 98,185
Three-for-two stock
split effected in the
form of a 50% stock
dividend 1,338 (1,338)
Cash paid in lieu of
fractional shares as
a result of the
stock split (20) (364) (364)
Amortization of
restricted stock
compensation awards 15,499 15,499
ESOP shares released
for allocation 12,762 140 1,681 14,583
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 803,765 4,019 213,312 1,254,953 (1,088) (43,882) 1,308 1,428,622
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 588,877 588,877
Foreign currency
translation adjustment 2,606 2,606
---------
Total comprehensive
income 591,483
Dividends declared on
common stock (45,502) (45,502)
Deferred compensation
liability settled by
issuing common stock 74 1 2,404 $2,405 $(2,405) 2,405
Stock options exercised
and restricted stock
compensation awards 18,389 118 319,815 (54,072) 265,861
Two-for-one stock
split effected in
the form of a 100%
stock dividend 4,086 (4,086)
Issuance of common
stock in connection
with Canadian-
based acquisitions 21 714 714
Amortization of
restricted stock
compensation awards 27,028 27,028
ESOP shares released
for allocation 3,163 40 121 3,324
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 822,249 $8,224 $539,408 $1,794,282 $2,405 $ (967) $(70,926) $(2,405) $ 3,914 $2,273,935
====================================================================================================================================
* Share amounts are presented net of treasury shares and all periods have been restated for the July 1999 two-for-one common
stock split.
See Notes to Consolidated Financial Statements.
-21-
The Charles Schwab Corporation
Notes to Consolidated Financial Statements
(Tabular Amounts in Thousands, Except Per Share and Option Price Amounts)
1. Basis of Presentation
The consolidated financial statements include The Charles Schwab Corporation
(CSC) and its subsidiaries (collectively referred to as the Company). CSC is a
holding company engaged, through its subsidiaries, in securities brokerage and
related financial services. CSC's principal subsidiary, Charles Schwab & Co.,
Inc. (Schwab), is a securities broker-dealer with 340 domestic branch offices in
48 states, as well as branches in the Commonwealth of Puerto Rico and the U.S.
Virgin Islands. Another subsidiary, Charles Schwab Europe (CSE), is a retail
securities brokerage firm located in the United Kingdom. Other subsidiaries
include Charles Schwab Investment Management, Inc., the investment advisor for
Schwab's proprietary mutual funds, and Mayer & Schweitzer, Inc. (M&S), a market
maker in Nasdaq and other securities providing trade execution services to
broker-dealers and institutional customers.
Certain items in prior years' financial statements have been reclassified to
conform to the 1999 presentation. All material intercompany balances and
transactions have been eliminated.
2. Significant Accounting Policies
Securities transactions: Customers' securities transactions are recorded on the
date that they settle, while the related commission revenues and expenses are
recorded on the date that the trade occurs. Principal transactions are recorded
on a trade date basis.
Use of estimates: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts in the accompanying
financial statements. Such estimates relate to useful lives of equipment, office
facilities, buildings and intangible assets, fair value of financial
instruments, allowance for doubtful accounts, future tax benefits and legal
reserves. Actual results could differ from such estimates.
Estimated fair value of financial instruments: The Company considers the amounts
recorded for financial instruments on the consolidated balance sheet to be
reasonable estimates of fair value.
Cash and investments required to be segregated under federal or other
regulations consist primarily of securities purchased under agreements to resell
(resale agreements) and certificates of deposit. Certificates of deposit are
stated at cost, which approximates market.
Securities financing activities: Resale agreements are accounted for as
collateralized financing transactions and are recorded at their contractual
amounts. The Company obtains possession of collateral with a market value equal
to or in excess of the principal amount loaned under resale agreements.
Collateral is valued daily by the Company, with additional collateral obtained
or refunded when necessary.
Securities borrowed and securities loaned are reported as collateralized
financing transactions. Securities borrowed require the Company to deposit cash
with the lender and are included in receivable from brokers, dealers and
clearing organizations. For securities loaned, the Company receives collateral
in the form of cash in an amount generally equal to the market value of
securities loaned. Securities loaned are included in payable to brokers, dealers
and clearing organizations. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded when necessary.
Receivable from customers that remain unsecured for more than 30 days or
partially secured for more than 90 days are fully reserved for, and are stated
net of allowance for doubtful accounts of $11 million and $8 million at December
31, 1999 and 1998, respectively.
Equipment, office facilities and property: Equipment and office facilities are
depreciated on a straight-line basis over the estimated useful life of the asset
of three to seven years. Buildings are 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.
Equipment, office facilities and property are stated at cost net of accumulated
depreciation and amortization of $575 million and $452 million at December 31,
1999 and 1998, respectively.
Intangible assets, including goodwill and customer lists, are amortized on a
straight-line basis over three to fifteen years. Intangible assets are stated at
cost net of accumulated amortization of $203 million and $196 million at
December 31, 1999 and 1998, respectively.
Derivatives: The Company's derivatives activities primarily consist of
exchange-traded option contracts to reduce market risk on inventories in Nasdaq
and exchange-listed securities. The notional amount of such derivatives was $103
million and $74 million at December 31, 1999 and 1998, respectively. The fair
value of such derivatives was not
-22-
material to the Company's consolidated balance sheets at December 31, 1999 and
1998.
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 year. Translation adjustments are accumulated as other comprehensive
income.
Income taxes: The Company files a consolidated U.S. federal income tax return
and uses the asset and liability method in providing for income tax expense.
Under this method, deferred tax assets and liabilities are recorded for
temporary differences between the tax basis of assets and liabilities and their
recorded amounts for financial reporting purposes, using currently enacted tax
law.
Common stock split: Share and per share information presented in the financial
statements and related notes have been restated to reflect the July 1999
two-for-one common stock split, effected in the form of a 100% stock dividend.
Cash flows: For purposes of reporting cash flows, the Company considers all
highly liquid investments (including resale agreements) with maturities of three
months or less that are not required to be segregated under federal or other
regulations to be cash equivalents.
Accounting change: Statement of Position 98-1 - Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, was adopted by the
Company effective January 1, 1999. This statement requires that certain costs
incurred for purchasing or developing software for internal use be capitalized
and amortized over the software's estimated useful life of three years. In prior
years, the Company capitalized costs incurred for purchasing internal-use
software, but expensed costs incurred for developing internal-use software. In
accordance with this statement, prior years' financial statements were not
adjusted to reflect this accounting change. Adoption of this statement resulted
in the capitalization of $68 million of internal-use software development costs
during 1999, which increased net income by $41 million, or $.05 diluted earnings
per share.
New accounting standard: Statement of Financial Accounting Standards (SFAS) No.
137, which amended the effective date of SFAS No. 133 - Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1999. The
Company is required to adopt SFAS No. 133 by January 1, 2001. This statement
establishes accounting and reporting standards requiring that all derivative
instruments are recorded on the balance sheet as either an asset or a liability,
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met and such hedge accounting treatment is
elected. While the Company is currently evaluating the effects of this
statement, its adoption is not expected to have a material impact on the
Company's financial position, results of operations, earnings per share or cash
flows.
3. Securities Owned
Securities owned are recorded at market value and consist of the following:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Equity and other securities $129,830 $ 73,226
SchwabFunds(R) money market funds 117,289 88,131
Equity and bond mutual funds 92,515 80,758
- --------------------------------------------------------------------------------
Total securities owned $339,634 $242,115
================================================================================
Equity and other securities include M&S' inventories in Nasdaq and other
securities and Schwab's inventories in exchange-listed securities relating to
its specialist operations. The Company's positions in SchwabFunds money market
funds arise from certain overnight funding of customers' redemption,
check-writing and debit card activities. Equity and bond mutual funds include
investments made by the Company for funding obligations under its deferred
compensation plan and for overnight funding of certain SchwabFunds customers'
transactions.
Securities sold, but not yet purchased, of $60 million and $35 million at
December 31, 1999 and 1998, respectively, consist of equity and other
securities, and are recorded at market value in accrued expenses and other
liabilities.
4. Payable to Brokers, Dealers and Clearing Organizations
Payable to brokers, dealers and clearing organizations consist primarily of
securities loaned of $1,421 million and $1,201 million at December 31, 1999 and
1998, respectively. The market value of securities pledged by counterparties
under securities lending transactions approximated amounts due.
5. Payable to Customers
The principal source of funding for Schwab's margin lending is cash balances
in customer accounts. At December 31, 1999, Schwab was paying interest at 4.5%
on $19,565 million of cash balances in customer brokerage accounts, which were
included in payable to customers. At December 31, 1998, Schwab was paying
interest at 4.1% on $15,143 million of such cash balances.
-23-
6. Borrowings
Borrowings consist of Senior Medium-Term Notes, Series A (Medium-Term Notes).
At December 31, 1999, CSC had $455 million aggregate principal amount of
Medium-Term Notes outstanding, with fixed interest rates ranging from 5.96% to
7.50% and maturities ranging from 2000 to 2009 as follows:
- --------------------------------------------------------------------------------
2000 $ 48,000
2001 39,000
2002 53,000
2003 49,000
2004 80,500
Thereafter 185,500
================================================================================
The Medium-Term Notes carry a weighted-average interest rate of 6.73%. The
fair value of the Medium-Term Notes at December 31, 1999 and 1998, based on
estimates of market rates for debt with similar terms and remaining maturities,
approximated their carrying amounts.
At December 31, 1999, CSC had $311 million in Senior or Senior Subordinated
Medium-Term Notes, Series A available to be issued.
CSC may borrow under its committed, unsecured credit facilities. CSC
maintains a $600 million facility with a group of fourteen banks which expires
in June 2000 and a $175 million facility with a group of nine banks which
expires in June 2001. The funds under both of these facilities are available for
general corporate purposes and CSC pays a commitment fee on the unused balance
of these facilities. The financial covenants in these facilities require CSC to
maintain minimum levels of stockholders' equity, and Schwab and M&S to maintain
specified levels of net capital, as defined. The Company believes that these
restrictions will not have a material effect on its ability to meet foreseeable
dividend or funding requirements. Other than an overnight borrowing to test the
availability of the $600 million facility, these facilities were unused in 1999.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank
credit lines which total $795 million and $545 million at December 31, 1999 and
1998, respectively. CSC has access to $685 million and $545 million of these
credit lines at December 31, 1999 and 1998, respectively. There were no
borrowings outstanding under these lines at December 31, 1999 and 1998.
To satisfy the margin requirement of customer option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with eleven banks in favor of the OCC aggregating $905 million at
December 31, 1999. Schwab pays a fee to maintain these letters of credit. No
funds were drawn under these letters of credit at December 31, 1999 and 1998.
7. Taxes on Income
Income tax expense is as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $334,720 $206,500 $179,110
State 51,212 27,801 26,934
- --------------------------------------------------------------------------------
Total current 385,932 234,301 206,044
- --------------------------------------------------------------------------------
Deferred:
Federal (2,828) (6,343) (26,484)
State (742) 124 (2,590)
- --------------------------------------------------------------------------------
Total deferred (3,570) (6,219) (29,074)
- --------------------------------------------------------------------------------
Total taxes on income $382,362 $228,082 $176,970
================================================================================
The above amounts do not include tax benefits from the exercise of stock
options and the vesting of restricted stock awards, which for accounting
purposes are credited directly to additional paid-in capital. Such tax benefits
reduced income taxes paid by $213 million in 1999, $69 million in 1998 and $34
million in 1997.
The temporary differences that created deferred tax assets and liabilities,
included in other assets, and accrued expenses and other liabilities, are
detailed below:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Deferred compensation $ 60,049 $40,963
Reserves and allowances 30,185 22,264
Asset valuation differences 3,248 3,017
Other 2,128 3,081
- --------------------------------------------------------------------------------
Total deferred assets 95,610 69,325
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Depreciation and amortization (24,366) (1,713)
State and local taxes (2,469) (2,407)
- --------------------------------------------------------------------------------
Total deferred liabilities (26,835) (4,120)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 68,775 $65,205
================================================================================
The Company determined that no valuation allowance against deferred tax
assets at December 31, 1999 and 1998 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, 1999 1998 1997
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit 3.4 3.2 3.5
Other 1.0 1.4 1.1
- --------------------------------------------------------------------------------
Effective income tax rate 39.4% 39.6% 39.6%
================================================================================
-24-
8. Employee Incentive and Deferred Compensation Plans
The Company's stock incentive plans provide for granting options to
employees, officers and directors, and restricted stock awards to employees and
officers. The Company also sponsors deferred compensation plans for both
officers and non-employee directors.
The Company granted to all non-officer employees 3,783,000 options in 1999
and 3,478,000 options in 1998. The Company expects to grant such options
annually with the size of the grant based on Company performance.
Options are granted for the purchase of shares of common stock at an exercise
price not less than market value on the date of grant, and expire within either
eight or ten years from the date of grant. Options generally vest over a
four-year period from the date of grant. A summary of option activity follows:
------------------------- ------------------------- -------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
- ---------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 66,736 $ 7.65 65,151 $ 4.06 64,717 $ 2.52
Granted(1) 12,520 $40.65 20,141 $15.04 12,100 $10.01
Exercised (17,255) $ 3.22 (15,919) $ 2.00 (10,421) $ 1.40
Canceled (1,745) $18.27 (2,637) $ 9.61 (1,245) $ 4.40
- ---------------------------------------------------------------------------------------------------------
Outstanding at
end of year 60,256 $15.46 66,736 $ 7.65 65,151 $ 4.06
=========================================================================================================
Exercisable at
end of year 26,706 $ 5.56 34,535 $ 3.24 40,078 $ 2.10
=========================================================================================================
Available for
future grant at
end of year 24,752 34,761 47,944
=========================================================================================================
Weighted-average
fair value of
options granted
during the year(1) $18.51 $5.48 $4.44
=========================================================================================================
(1) In 1998, 3,600,000 options were granted with an exercise price greater than
the fair market value of the Company's common stock on the date of grant. The
weighted-average exercise price of these options is $25.00 and the
weighted-average fair value is $4.26. The remaining 16,541,000 options were
granted with an exercise price equal to the fair market value of the
Company's common stock on the date of grant. The weighted-average exercise
price of these options is $12.88 and the weighted-average fair value is
$5.74.
The fair value of each option granted is estimated as of the grant date using
the Black-Scholes option-pricing model with the following assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Dividend yield .50% .65% .75%
Expected volatility 46% 45% 44%
Risk-free interest rate 5.5% 5.6% 6.2%
Expected life (in years) 5 5-8 5
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding and
exercisable:
- ------------------------------------------------------------------------------------------------------
December 31, 1999
- ------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices of Options Life (in years) Price of Options Price
- ------------------------------------------------------------------------------------------------------
$ 1.00 to $ 5.00 11,725 2.8 $ 1.86 11,624 $ 1.83
$ 5.01 to $ 8.00 11,119 6.2 $ 5.90 9,072 $ 5.73
$ 8.01 to $13.00 12,102 7.8 $10.84 4,156 $10.66
$13.01 to $21.00 10,802 8.2 $14.24 1,727 $14.05
$21.01 to $35.00 6,533 8.9 $32.28 6 $32.56
$35.01 to $58.00 7,975 9.5 $43.70 121 $53.19
- ------------------------------------------------------------------------------------------------------
$ 1.00 to $58.00 60,256 6.9 $15.46 26,706 $ 5.56
======================================================================================================
The Company applies Accounting Principles Board Opinion No. 25 - Accounting
for Stock Issued to Employees, and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation expense has been recognized for
the Company's options. Had compensation expense for the Company's options been
determined based on the fair value at the grant dates for awards under those
plans consistent with the fair value method of SFAS No. 123 - Accounting for
Stock-Based Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts presented below:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net Income: As reported $588,877 $348,462 $270,277
Pro forma $531,832 $320,779 $255,850
================================================================================
Basic Earnings
Per Share: As reported $ .73 $ .44 $ .34
Pro forma $ .66 $ .40 $ .32
Diluted Earnings
Per Share: As reported $ .70 $ .42 $ .33
Pro forma $ .63 $ .39 $ .31
================================================================================
Restricted stock awards are restricted from sale and generally vest over a
four-year period, but some vest based upon the Company achieving certain
financial or other measures. The fair market value of shares associated with the
restricted stock awards is recorded as unamortized restricted stock compensation
in stockholders' equity and is amortized to compensation expense over the
vesting periods.
Restricted stock information is as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Restricted stock awards 1,448 3,065 2,316
Average market price of awarded shares $ 37.49 $ 13.75 $ 8.47
Restricted stock cancellations 322 402 256
Restricted shares outstanding (at year end) 5,850 5,279 4,649
Restricted stock expense and amortization $24,617 $19,765 $10,296
================================================================================
-25-
The Company's unfunded deferred compensation plan for officers permits
participants to defer the payment of certain cash compensation. The deferred
compensation liability was $106 million and $82 million at December 31, 1999 and
1998, respectively. The Company's unfunded deferred compensation plan for
non-employee directors permits participants to defer receipt of all or a portion
of their directors' fees and to receive either a grant of stock options, or upon
ceasing to serve as a director, the amount that would have resulted from
investing the deferred fee amount into CSC's common stock.
In 1999, the Company issued 74,000 shares of CSC's common stock and placed
such shares into a trust to settle the directors' deferred compensation
liability. In accordance with the Emerging Issues Task Force Issue 97-14 -
Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held
in a Rabbi Trust and Invested, assets of the trust are consolidated with those
of the Company and the value of CSC's common stock held in the stock trust is
classified in stockholders' equity in a manner similar to treasury stock. The
shares and the corresponding obligation to directors are shown as separate
components of stockholders' equity in the Company's consolidated balance sheet.
9. Employee Benefit Plans
The Company has a profit sharing and employee stock ownership plan (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 $74 million in
1999, $46 million in 1998 and $44 million in 1997.
In 1993, the Profit Sharing Plan borrowed $15 million from the Company to
purchase approximately 10 million shares of CSC's common stock. The note
receivable from the Profit Sharing Plan had a balance of $1 million at both
December 31, 1999 and 1998, bears interest at 7.9% and is due in annual
installments through 2007. Shares are released for allocation to eligible
employees' accounts based on the proportion of principal and interest payments
made during the year as compared to the total of these payments and the
remaining principal and interest. In accordance with Statement of Position No.
93-6 - Employers' Accounting for Employee Stock Ownership Plans (the Statement),
the fair value of shares released for allocation to employees through the
employee stock ownership plan (ESOP) is recognized by the Company as
compensation and benefits expense - $3 million in 1999, $15 million in 1998 and
$17 million in 1997. At December 31, 1999, a $25 million accrued liability was
recorded for 1999 retirement benefits and will be contributed to the ESOP during
the first half of 2000 for the purchase from CSC of newly issued shares of CSC's
common stock. Only released ESOP shares are considered outstanding for basic and
diluted earnings per share computations. Dividends on allocated shares and
unallocated shares are charged to retained earnings and are used to make
principal and interest payments on the ESOP note receivable, respectively. The
unallocated shares are recorded as unearned ESOP shares on the consolidated
balance sheet. Under the "grandfather" provisions of the Statement, the Company
did not apply the Statement to shares purchased by the ESOP prior to 1993.
The ESOP share information is as follows:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Allocated shares:
Purchased prior to 1993 19,216 31,723
Purchased in 1993 and after 12,100 10,892
Shares released for allocation:
Purchased in 1993 and after 96 1,208
Unreleased shares:
Purchased in 1993 and after 634 713
- --------------------------------------------------------------------------------
Total ESOP shares 32,046 44,536
================================================================================
Fair value of unreleased shares $24,239 $20,028
================================================================================
The Company is the beneficiary of a life insurance program covering some of
its employees. Under the program, the cash surrender value of insurance policies
is recorded net of policy loans in other assets. During 1999, the Company repaid
$65 million on the policy loans and received $65 million cash surrender value on
the insurance policies. At December 31, 1999 and 1998, policy loans with
interest rates of 8.2% and 7.1% totaled $15 million and $80 million,
respectively.
10. Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net income by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential reduction in EPS that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Earnings per share under the basic and diluted computations
are as follows:
-26-
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Net income $588,877 $348,462 $270,277
================================================================================
Weighted-average common
shares outstanding - basic 809,997 794,050 787,641
Common stock equivalent shares
related to stock incentive plans 33,093 28,955 30,085
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - diluted 843,090 823,005 817,726
================================================================================
Basic earnings per share $ .73 $ .44 $ .34
================================================================================
Diluted earnings per share $ .70 $ .42 $ .33
================================================================================
The computation of diluted EPS for the years ended December 31, 1999, 1998
and 1997, respectively, excludes outstanding stock options to purchase
5,335,000, 20,205,000 and 5,271,000 shares, respectively, because the exercise
prices for those options were greater than the average market price of the
common shares, and therefore the effect would be antidilutive.
11. Regulatory Requirements
Schwab and M&S are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the 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, 1999, Schwab's
net capital was $1,766 million (10% of aggregate debit balances), which was
$1,421 million in excess of its minimum required net capital and $903 million in
excess of 5% of aggregate debit balances. Aggregate debit balances as of
December 29, 1999 were used to calculate Schwab's minimum required net capital
at December 31, 1999, in accordance with applicable regulations. At December 31,
1999, M&S' net capital was $13 million, which was $12 million in excess of its
minimum required net capital.
Schwab, M&S and CSE had portions of their cash and investments segregated for
the exclusive benefit of customers at December 31, 1999, in accordance with
applicable regulations. Schwab elected to compute its reserve requirement, in
accordance with applicable regulations as of December 29, 1999 rather than
December 31, 1999. The amount held on deposit in the reserve bank account at
December 31, 1999 exceeded cash and investments required to be segregated under
federal or other regulations by approximately $200 million. This excess is
included in cash and cash equivalents.
12. 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,
1999 are as follows:
- --------------------------------------------------------------------------------
2000 $126,434
2001 120,439
2002 106,657
2003 72,605
2004 76,969
Thereafter 337,482
================================================================================
Certain leases contain provisions for renewal options and rent escalations
based on increases in certain costs incurred by the lessor. Rent expense was
$188 million in 1999, $138 million in 1998 and $104 million in 1997.
The Company may, under certain circumstances, be required to make additional
capital contributions pursuant to joint venture agreements with The Tokio Marine
Fire Insurance Co., Limited and certain of its related companies, including
contributions to assure that Charles Schwab Tokio Marine Securities Co., Ltd. is
in compliance with regulatory requirements regarding capital adequacy.
On November 9, 1998, the United States District Court for the Southern
District of New York granted final approval of the settlement agreement in the
consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation. The
settlement fully resolves alleged claims on behalf of certain persons who
purchased or sold Nasdaq securities during the period May 1, 1989 through July
17, 1996 concerning the width of spreads between the bid and ask prices of
certain Nasdaq securities. The Company recognized settlement charges in 1997 of
$39 million ($24 million after-tax), and does not expect to incur any further
charges relating to this settlement.
In the first half of 2000, a federal district court in New Orleans, Louisiana
is expected to hold a fairness hearing on a settlement between Schwab and
plaintiffs in two class action lawsuits. The lawsuits were filed on behalf of a
class consisting of all individuals nationwide who purchased or sold securities
through Schwab from 1985 until July 1999. These lawsuits alleged that Schwab
improperly retained monetary payments for routing orders to market makers and
other third parties, and did not provide best execution to customer orders.
Schwab vigorously contested the allegations and had successfully obtained
dismissal of many of the plaintiffs' claims. However, in the interests of
avoiding the expense of further litigation, Schwab agreed to settle the cases on
the following terms: plaintiffs will dismiss
-27-
the complaints with prejudice in return for certain non-monetary relief from
Schwab, including commitments to implement various systems changes relating to
trade handling and execution; to adopt certain internal procedures to review
order routing arrangements and execution quality; and to conduct a one-year
investor education campaign on trading and execution-related issues. In
addition, Schwab agreed to pay plaintiffs' attorneys' fees and costs. The
settlement would preclude any other claims on best execution or payment for
order flow issues during the class period, except for claimants who
affirmatively opt out of the settlement. Schwab believes that all claims in four
purported class action lawsuits on best execution issues, consolidated for
pretrial proceedings in the federal district court in San Francisco but in which
no classes have been certified, would be precluded as a result of the Louisiana
settlement. The plaintiffs in the San Francisco cases are opposing the Louisiana
settlement and have moved to transfer the Louisiana case to San Francisco. The
Company recognized the cost of the Louisiana settlement, which was not material,
in the second quarter of 1999.
The ultimate outcome of the legal proceedings described above and the various
other lawsuits, arbitration proceedings, and claims pending against the Company
cannot be determined at this time, and the results of these legal proceedings
cannot be predicted with certainty. There can be no assurance that these legal
proceedings will not have a material adverse effect on the Company's results of
operations in any future period, depending partly on the results for that
period, and a substantial judgment could have a material adverse impact on the
Company's financial condition and results of operations. However, it is the
opinion of management, after consultation with outside legal counsel, that the
ultimate outcome of these actions will not have a material adverse impact on the
financial condition or operating results of the Company.
13. Financial Instruments with Off-Balance-Sheet and Credit Risk
Through Schwab and M&S, the Company loans customer securities temporarily to
other brokers in connection with its securities 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 in excess of amounts prescribed by regulatory requirements 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 M&S'
obligations to deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory positions may result in
losses or gains to M&S as market values of securities fluctuate. 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 monitored
by management 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 securities to a custodian,
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, monitors
the market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral where
deemed appropriate.
-28-
14. Segment Information
Segments are defined as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company structures its segments
according to its various types of customers and the services provided to those
customers. These segments have been aggregated based on similarities in economic
characteristics, types of customers, services provided, distribution channels
and regulatory environment, into three reportable segments - Individual
Investor, Institutional Investor and Capital Markets. The Individual Investor
segment includes Schwab's domestic and international retail operations. The
Institutional Investor segment provides custodial, trading and support services
to independent investment managers, and serves company 401(k) plan sponsors and
third-party administrators. (The Company's mutual fund services are considered a
product and not a segment. Mutual fund service fees are included in both the
Individual Investor and Institutional Investor segments.) The Capital Markets
segment provides trade execution services in Nasdaq, exchange-listed and other
securities primarily to broker-dealers and institutional customers.
The accounting policies of the segments are the same as those described in
note 2 - Significant Accounting Policies. The Company evaluates the performance
of its segments based on income before taxes on income. Segment assets are not
disclosed because they are not used for evaluating segment performance and
deciding how to allocate resources to segments. However, capital expenditures
are used in evaluating segment performance and are therefore disclosed.
Intersegment revenues, defined as revenues from transactions with other segments
within the Company, are immaterial and are therefore not disclosed. Technology,
corporate and general administrative expenses are allocated to segments
generally in proportion to either their respective revenues or average full-time
equivalent employees.
Fees received from Schwab's proprietary mutual funds represented
approximately 13% of the Company's consolidated revenues in 1999, 14% in 1998
and 12% in 1997. No single customer, except for Schwab's proprietary mutual
funds, accounted for more than 10% of the Company's consolidated revenues in
1999, 1998 and 1997. Substantially all of the Company's revenues and assets are
attributed to or located in the U.S. The percentage of Schwab's total customer
accounts located in California were approximately 25% as of both December 31,
1999 and 1998, and 28% as of December 31, 1997.
Financial information for the Company's reportable segments is presented in
the table below, and the totals are equal to the Company's consolidated amounts
as reported in the consolidated financial statements. Capital expenditures are
reported in total, as opposed to net of proceeds from the sale of fixed assets.
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues
Individual investor $2,782,790 $1,954,053 $1,675,424
Institutional investor 610,965 445,899 328,895
Capital markets 551,067 336,269 294,431
- --------------------------------------------------------------------------------
Total $3,944,822 $2,736,221 $2,298,750
================================================================================
Interest Revenue, Net of Interest Expense
Individual investor $ 598,136 $ 397,334 $ 300,741
Institutional investor 100,380 65,968 43,662
Capital markets 4,161 12,315 9,149
- --------------------------------------------------------------------------------
Total $ 702,677 $ 475,617 $ 353,552
================================================================================
Income Before Taxes on Income
Individual investor $ 683,250 $ 395,009 $ 332,808
Institutional investor 164,523 99,613 48,111
Capital markets 123,466 81,922 66,328
- --------------------------------------------------------------------------------
Total $ 971,239 $ 576,544 $ 447,247
================================================================================
Capital Expenditures (1)
Individual investor $ 221,376 $ 145,394 $ 110,047
Institutional investor 34,166 24,944 18,633
Capital markets 30,050 19,905 11,518
- --------------------------------------------------------------------------------
Total $ 285,592 $ 190,243 $ 140,198
================================================================================
Depreciation and Amortization
Individual investor $ 116,394 $ 102,279 $ 91,727
Institutional investor 22,192 21,469 18,836
Capital markets 18,092 14,729 14,119
- --------------------------------------------------------------------------------
Total $ 156,678 $ 138,477 $ 124,682
================================================================================
(1) Excludes capitalized costs for developing internal-use software of $68
million in 1999.
15. Supplemental Cash Flow Information
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Cash paid:
Income taxes $135,863 $128,723 $166,773
================================================================================
Interest:
Customer cash balances $700,518 $579,406 $479,504
Stock-lending activities 30,905 38,118 36,939
Borrowings 25,290 24,114 18,790
Other 11,530 12,934 10,749
- --------------------------------------------------------------------------------
Total interest $768,243 $654,572 $545,982
================================================================================
-29-
16. Subsequent Events
On January 13, 2000, the Company announced the execution of a merger
agreement with U.S. Trust Corporation (U.S. Trust). Under the terms of the
agreement, U.S. Trust will become a wholly owned subsidiary of CSC and U.S.
Trust shareholders will receive 3.427 shares of CSC's common stock for each
common share of U.S. Trust. Based on the number of common shares of U.S. Trust
and options and other equity rights to acquire common shares of U.S. Trust
outstanding on January 12, 2000, the Company anticipates that U.S. Trust's
shareholders will receive approximately 73,000,000 shares (net of shares for
employees' payroll tax withholding) of CSC's common stock in the merger.
Following the merger, the Company expects to become a financial holding company
under the Bank Holding Company Act of 1956, as amended. The transaction is
subject to Federal Reserve Board and other regulatory approvals and to U.S.
Trust shareholder approval. The transaction, which is expected to be completed
by July 2000, is intended to be a non-taxable stock-for-stock exchange and to
qualify for pooling of interests accounting treatment.
On February 2, 2000, the Company announced the execution of a definitive
agreement to acquire CyBerCorp, Inc. (CyBerCorp). Under the terms of the
agreement, CyBerCorp will become a wholly owned subsidiary of CSC and
approximately 13,767,000 unregistered shares of CSC's common stock will be
exchanged for all of the outstanding shares, options and equity rights of
CyBerCorp. CSC has agreed to register the shares with the SEC after the closing.
The acquisition has been approved by both companies' Boards of Directors and is
subject to various closing conditions, including the approval of the transaction
by CyBerCorp's shareholders. Agreements to vote in favor of the acquisition have
been entered into by holders of approximately 95% of CyBerCorp's common stock.
The transaction, which is expected to be completed in the first quarter of 2000,
is intended to be a non-taxable stock-for-stock exchange and to be accounted for
using the purchase method. Under this accounting method, the net assets acquired
are recorded at fair value and the excess of the purchase price over the fair
value of net assets acquired is recorded as goodwill. Based on the $36.64
average of the closing prices of CSC's common stock for the seven-day period
from three days before to three days after the February 2, 2000 acquisition
announcement date, the purchase price is approximately $510 million. CSC would
record intangible assets acquired of approximately $500 million, including
approximately $470 million of goodwill. The goodwill is expected to be amortized
over a period of approximately ten years. The other intangible assets acquired,
which consist primarily of purchased technology, are expected to be amortized
over a period of approximately three years.
-30-
The Charles Schwab Corporation
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 annual 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,
who were given unrestricted access to 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
discuss accounting, auditing, internal controls over financial reporting and
other matters.
/s/Charles R. Schwab
- --------------------
Charles R. Schwab
Chairman of the Board and Co-Chief Executive Officer
/s/David S. Pottruck
- --------------------
David S. Pottruck
President and Co-Chief Executive Officer
/s/Christopher V. Dodds
- -----------------------
Christopher V. Dodds
Executive Vice President and Chief Financial Officer
-31-
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, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1999
the Company changed its method of accounting for certain internal-use software
development costs to conform with Statement of Position 98-1.
/s/DELOITTE & TOUCHE LLP
- ------------------------
Deloitte & Touche LLP
San Francisco, California
February 16, 2000
-32-
- ------------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Information (Unaudited) The Charles Schwab Corporation
(In Millions, Except Per Share Data and Ratios)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Dividends
Average Basic Diluted Declared Range Range
Expenses Common Earnings Earnings Per of Common of Price/
Excluding Net Shares- Per Per Common Stock Price Earnings
Revenues(1) Interest Income(2) Diluted Share(2) Share(2) Share Per Share Ratio(3)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 by Quarter
Fourth $1,127.4 $845.7 $170.5 843.7 $.21 $.20 $.0140 $46.75 - 26.94 67 - 38
Third stock split 883.7 679.8 124.5 844.5 .16 .15 .0140 56.50 - 32.00 91 - 52
Second 982.1 732.5 151.0 845.6 .18 .18 .0140 77.50 - 40.00 131 - 68
First 951.6 715.5 142.9 838.5 .18 .17 .0140 49.00 - 25.44 98 - 51
- ------------------------------------------------------------------------------------------------------------------------------------
1998 by Quarter
Fourth dividend increase/stock split $ 788.6 $612.8 $106.4 827.7 $.13 $.12 $.0140 $34.25 - 10.54 81 - 25
Third 705.2 542.7 97.8 820.4 .13 .12 .0134 15.33 - 9.25 41 - 25
Second 638.0 512.2 76.3 819.4 .09 .09 .0133 13.33 - 9.88 39 - 29
First 604.4 492.0 68.0 824.5 .09 .09 .0133 13.98 - 11.38 42 - 34
- ------------------------------------------------------------------------------------------------------------------------------------
1997 by Quarter (4)
Fourth dividend increase $ 620.6 $516.3 $ 63.1 823.2 $.08 $.08 $.0134 $14.75 - 9.75 45 - 30
Third stock split 611.8 484.9 76.5 819.0 .09 .09 .0111 12.19 - 8.89 37 - 27
Second 530.7 424.9 64.0 814.9 .08 .08 .0111 9.53 - 6.75 31 - 22
First 535.7 425.4 66.7 813.7 .09 .08 .0111 9.33 - 6.75 30 - 22
- ------------------------------------------------------------------------------------------------------------------------------------
1996 by Quarter
Fourth $ 482.3 $383.1 $ 59.7 809.4 $.08 $.07 $.0111 $ 7.31 - 5.00 25 - 17
Third dividend increase 430.0 333.4 57.1 808.1 .07 .07 .0111 5.97 - 4.42 22 - 16
Second 491.8 373.1 70.1 806.6 .09 .09 .0089 5.89 - 4.86 23 - 19
First 446.8 367.2 46.9 805.0 .06 .06 .0089 6.08 - 4.14 27 - 18
- ------------------------------------------------------------------------------------------------------------------------------------
1995 by Quarter
Fourth $ 394.8 $332.4 $ 42.6 809.5 $.05 $.05 $.0089 $ 5.93 - 3.69 28 - 17
Third dividend increase/stock split 385.5 307.5 47.2 808.6 .06 .06 .0089 6.44 - 4.61 32 - 23
Second 342.7 269.4 44.4 801.6 .06 .05 .0067 5.08 - 3.28 27 - 18
First dividend increase/stock split 296.9 233.5 38.4 792.7 .05 .05 .0066 3.67 - 2.45 21 - 14
- ------------------------------------------------------------------------------------------------------------------------------------
1994 by Quarter
Fourth $ 270.4 $214.4 $ 33.8 788.2 $.05 $.04 $.0052 $ 2.74 - 2.05 16 - 12
Third 248.1 196.5 31.2 784.0 .04 .04 .0052 2.29 - 1.88 14 - 11
Second 258.2 205.1 32.1 787.8 .04 .04 .0052 2.51 - 1.83 16 - 12
First dividend increase 287.9 224.3 38.2 793.8 .05 .05 .0051 2.44 - 1.93 16 - 13
- ------------------------------------------------------------------------------------------------------------------------------------
All share and per share data have been restated for the July 1999 two-for-one common stock split.
(1) Revenues are presented net of interest expense.
(2) 1999 reflects an accounting change, which increased net income by $41 million ($.05 per share for both basic and diluted
earnings per share), for certain internal-use software development costs to conform with Statement of Position 98-1.
(3) Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per share for the 12-month
period ended on the last day of the quarter presented.
(4) 1997 includes charges for a litigation settlement of $23.6 million after-tax ($.03 per share for both basic and diluted
earnings per share).
-33-
THE CHARLES SCHWAB CORPORATION
Chart Appendix List
In this appendix, the following descriptions of certain charts in portions
of the Company's 1999 Annual Report to Stockholders that are omitted from the
EDGAR Version are more specific with respect to the actual numbers, amounts and
percentages than is determinable from the charts themselves. The Company submits
such more specific descriptions only for the purpose of complying with the
requirements for transmitting portions of this Annual Report on Form 10-K
electronically via EDGAR; such more specific descriptions are not intended in
any way to provide information that is additional to the information otherwise
provided in portions of the Company's 1999 Annual Report to Stockholders.
EDGAR
Version
Page Number Chart Description
2 Bar chart titled "Assets in Schwab Customer Accounts" representing
total assets in Schwab customer accounts at year end 1999, 1998,
1997, 1996 and 1995 (years shown on the bottom axis) as follows
(billions of dollars) (bar labeled): $725.2, $491.1, $353.7, $253.2
and $181.7, respectively; and annual growth rate for 1999, 1998,
1997 and 1996 (percentages shown in shaded area between bars) as
follows: 48%, 39%, 40% and 39%, respectively.
5 Stacked bar chart titled "Revenues by Segment" representing the
composition of revenues by segment for the years ended December 31,
1999, 1998 and 1997 (years shown on the bottom axis) as follows
(millions of dollars): Individual Investor $2,783, $1,954 and
$1,676, respectively; Institutional Investor $611, $446 and $329,
respectively; Capital Markets $551, $336 and $294, respectively;
Revenues by Segment (bar labeled) $3,945, $2,736 and $2,299,
respectively.
12 Pie chart titled "Development Spending for 2000" representing the
composition of estimated development spending for the year ended
December 31, 2000 as follows (percentage of total): (pie pieces
labeled) Project Spending 52% and Media Spending 48%.
13 Bar chart titled "Net Income Plus Depreciation and Amortization"
representing the net income plus depreciation and amortization for
the years ended December 31, 1999, 1998 and 1997 (years shown
on the bottom axis) as follows (millions of dollars) (bar labeled):
$746, $487 and $395, respectively.
-34-