UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 Commission file number 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3025021
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
120 Kearny Street, San Francisco, CA 94108
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
1,381,464,486 shares of $.01 par value Common Stock
Outstanding on July 31, 2001
THE CHARLES SCHWAB CORPORATION
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2001
Index
Page
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements:
Statement of Income 1
Balance Sheet 2
Statement of Cash Flows 3
Notes 4 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 - 26
Part II - Other Information
Item 1. Legal Proceedings 27 - 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Income
(In millions, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Commissions $ 341 $ 542 $ 749 $1,330
Asset management and administration fees 408 390 819 762
Interest revenue, net of interest expense (1) 232 320 489 616
Principal transactions 55 128 150 373
Other 35 24 64 49
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,071 1,404 2,271 3,130
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 479 593 972 1,255
Other compensation - merger retention programs 15 7 30 7
Occupancy and equipment 122 100 245 189
Communications 89 87 185 177
Advertising and market development 50 77 144 181
Depreciation and amortization 85 63 171 118
Professional services 50 71 106 135
Commissions, clearance and floor brokerage 23 34 51 77
Merger-related (2) 50 69
Goodwill amortization 14 14 28 19
Restructuring and other charges (3) 145 145
Other 25 55 56 138
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,097 1,151 2,133 2,365
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes on income (loss) and extraordinary gain (26) 253 138 765
Tax expense (benefit) on income (loss) (7) 116 60 328
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary gain (19) 137 78 437
Extraordinary gain on sale of corporate trust business, net of tax of $100 121 121
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 102 $ 137 $ 199 $ 437
==================================================================================================================================
Weighted-Average Common Shares Outstanding - Diluted 1,405 1,407 1,407 1,398
==================================================================================================================================
Earnings Per Share - Basic
Income (loss) before extraordinary gain $ (.01) $ .10 $ .06 $ .33
Extraordinary gain, net of tax $ .08 $ .08
Net income $ .07 $ .10 $ .14 $ .33
Earnings Per Share - Diluted
Income (loss) before extraordinary gain $ (.01) $ .09 $ .06 $ .31
Extraordinary gain, net of tax $ .08 $ .08
Net income $ .07 $ .09 $ .14 $ .31
==================================================================================================================================
Dividends Declared Per Common Share (4) $.0110 $.0094 $.0220 $.0187
==================================================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for the three months ended June 30, 2001 and 2000
was $257 million and $331 million, respectively. Interest expense for the six months ended June 30, 2001 and 2000 was
$589 million and $636 million, respectively.
(2) Merger-related costs include professional fees, change in control related compensation expense and other expenses relating
to the merger of The Charles Schwab Corporation with U.S. Trust Corporation (USTC).
(3) Restructuring includes costs relating to workforce, facilities and systems hardware reductions. Other charges include a
regulatory fine, professional service fees for operational and risk management remediation, and the write-off of certain
software development costs.
(4) Dividends declared per common share do not include dividends declared by USTC prior to the completion of the merger.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheet
(In millions, except share and per share amounts)
(Unaudited)
June 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,574 $ 4,876
Cash and investments segregated and on deposit for federal or other
regulatory purposes (including resale agreements of $10,996 in 2001
and $7,002 in 2000) (1) 13,361 9,425
Securities owned - at market value (including securities pledged of $75 in 2001) 1,818 1,618
Receivables from brokers, dealers and clearing organizations 388 348
Receivables from brokerage clients - net 11,720 16,332
Loans to banking clients - net 3,529 3,147
Equipment, office facilities and property - net 1,152 1,133
Goodwill - net 515 509
Other assets 852 766
- ----------------------------------------------------------------------------------------------------------------------------
Total $35,909 $38,154
============================================================================================================================
Liabilities and Stockholders' Equity
Deposits from banking clients $ 4,139 $ 4,209
Drafts payable 287 544
Payables to brokers, dealers and clearing organizations 1,054 1,070
Payables to brokerage clients 23,717 25,715
Accrued expenses and other liabilities 1,313 1,277
Short-term borrowings 330 339
Long-term debt 746 770
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 31,586 33,924
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value per share;
none issued
Common stock - 3 billion shares authorized in 2001 and 2 billion shares
authorized in 2000; $.01 par value per share; 1,389,111,618 shares issued
in 2001 and 1,385,624,827 shares issued and outstanding in 2000 14 14
Additional paid-in capital 1,661 1,588
Retained earnings 2,867 2,713
Treasury stock - 6,990,782 shares in 2001, at cost (128)
Unamortized stock-based compensation (55) (71)
Accumulated other comprehensive loss (36) (14)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,323 4,230
- ----------------------------------------------------------------------------------------------------------------------------
Total $35,909 $38,154
============================================================================================================================
(1) Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated
for federal or other regulatory purposes were $13,180 million and $10,998 million at June 30, 2001 and December
31, 2000, respectively. On July 3, 2001 and January 2, 2001, the Company deposited $12 million and $1,779
million, respectively, to meet its segregated cash requirement.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statement of Cash Flows
(In millions)
(Unaudited)
Six Months Ended
June 30,
2001 2000
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 199 $ 437
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization 171 118
Goodwill amortization 28 19
Compensation payable in common stock 16 47
Deferred income taxes (21) 12
Tax benefits from stock options exercised and other stock-based
compensation 23 229
Non-cash restructuring and other charges 28
Extraordinary gain on sale of corporate trust business, net of tax (121)
Other 3 9
Net change in:
Cash and investments segregated and on deposit for federal or
other regulatory purposes (3,972) 2,596
Securities owned (excluding securities available for sale) (56) (82)
Receivables from brokers, dealers and clearing organizations (42) (63)
Receivables from brokerage clients 4,612 (3,222)
Other assets (12) (159)
Drafts payable (260) (25)
Payables to brokers, dealers and clearing organizations (13) (272)
Payables to brokerage clients (1,964) (586)
Accrued expenses and other liabilities (153) 74
- ---------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,534) (868)
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchases of securities available for sale (720) (286)
Proceeds from sales of securities available for sale 351
Proceeds from maturities, calls and mandatory redemptions of
securities available for sale 241 108
Net change in loans to banking clients (318) (263)
Purchase of equipment, office facilities and property - net (208) (274)
Cash payments for business combinations and investments,
net of cash received (23) (17)
Proceeds from sale of corporate trust business 273
- ---------------------------------------------------------------------------------------------------------
Net cash used for investing activities (404) (732)
- ---------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net decrease in deposits from banking clients (171) (243)
Net change in short-term borrowings (9) 128
Proceeds from long-term debt 311
Repayment of long-term debt (24)
Dividends paid (30) (32)
Purchase of treasury stock (144)
Proceeds from stock options exercised and other 14 62
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (364) 226
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (8)
- ---------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (2,302) (1,382)
Cash and Cash Equivalents at Beginning of Period 4,876 2,910
- ---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,574 $ 1,528
=========================================================================================================
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Amounts and Ratios)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company). CSC is a financial holding company engaged, through
its subsidiaries, in securities brokerage and related financial services.
Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 403
domestic branch offices in 48 states, as well as branches in the Commonwealth of
Puerto Rico and the U.S. Virgin Islands. U.S. Trust Corporation (USTC, and with
its subsidiaries collectively referred to as U.S. Trust) is an investment
management firm that through its subsidiaries also provides fiduciary services
and private banking services with 33 offices in 11 states. Other subsidiaries
include Charles Schwab Europe (CSE), a retail securities brokerage firm located
in the United Kingdom, Charles Schwab Investment Management, Inc., the
investment advisor for Schwab's proprietary mutual funds, Schwab Capital Markets
L.P. (SCM), a market maker in Nasdaq and other securities providing trade
execution services to broker-dealers and institutional clients, and CyberTrader,
Inc. (CyberTrader), an electronic trading technology and brokerage firm
providing services to highly active, online investors.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the opinion
of management, reflect all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in
conformity with accounting principles generally accepted in the U.S. All
adjustments were of a normal recurring nature, except as discussed in Note "2 -
Accounting Change." All material intercompany balances and transactions have
been eliminated. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 2000 Annual Report to Stockholders on Form 10-K and the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2001. The Company's
results for any interim period are not necessarily indicative of results for a
full year or any other interim period. Certain items in prior periods' financial
statements have been reclassified to conform to the 2001 presentation.
2. Accounting Change
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133 - Accounting for Derivative Instruments and Hedging
Activities. The statement requires that all derivatives be recorded on the
balance sheet at fair value. The cumulative effect of the accounting change was
not material to the Company's financial statements.
The Company uses interest rate swaps (Swaps) to hedge the interest rate
risk associated with variable rate deposits from banking clients. These Swaps
are recorded at fair value on the balance sheet, with changes in their fair
value primarily recorded in other comprehensive income. Previously, Swaps were
accounted for under the accrual method, whereby the difference between interest
revenue and interest expense was recognized over the life of the contract in net
interest revenue. Upon adoption of SFAS No. 133, the Company recorded a
derivative liability of $20 million in accrued expenses and other liabilities
and an after-tax net loss in other comprehensive income of $12 million for these
Swaps.
Other derivative instruments primarily consist of exchange-traded option
contracts to mitigate market risk on inventories in Nasdaq and exchange-listed
securities. These derivatives are recorded at fair value on the balance sheet,
with changes to their fair value recorded in earnings. These derivatives were
not material to the Company's financial statements for the six months ended June
30, 2001.
3. New Accounting Standards
Pledged Collateral: On April 1, 2001, the Company completed its adoption of SFAS
No. 140 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Company adopted SFAS No. 140 in the fourth
quarter of 2000 for recognition and reclassification of collateral and for
disclosures relating to collateral, and in the second quarter of 2001 for
transfers of financial assets and extinguishments of liabilities. The adoption
of this statement did not have a material impact on the Company's financial
position, results of operations, earnings per share or cash flows.
Under SFAS No. 140, the Company is required to report the value of
securities that it has received as collateral and which can in turn be used (or
repledged) by the Company to generate financing such as securities lending, or
to fulfill either client-originated or proprietary short sale transactions. The
Company is also required to disclose the value of such securities that it has
actually repledged as of the reporting date.
Schwab receives securities collateral in connection with its business as a
broker-dealer, including client margin lending. Additionally, Schwab and U.S.
Trust receive securities collateral under collateralized resale agreements,
principally with other broker-dealers. At June 30, 2001, the fair market value
of securities collateral received that was available to be repledged was $27.1
billion. The fair market value of securities that were actually repledged as of
that date was $1.8 billion, primarily in securities lending transactions to
broker-dealers and to fulfill client short sale transactions.
Business Combinations: SFAS No. 141 - Business Combinations, was issued in June
2001. This statement eliminates the pooling of interest method for accounting
for business combinations and requires the use of the purchase method for
business combinations initiated after June 30, 2001. Business combinations
originally accounted for under the pooling of interest method that were
completed prior to June 30, 2001 will continue to be accounted for under the
pooling of interest method. This statement also broadens the criteria for
recording intangible assets separately from goodwill. The adoption of this
statement did not have an impact on the Company's financial position, results of
operations, earnings per share or cash flows.
Goodwill and Other Intangible Assets: SFAS No. 142 - Goodwill and Other
Intangible Assets, was issued in June 2001 and establishes new standards for
accounting for goodwill and intangible assets. This statement requires that
goodwill and certain intangible assets with an indefinite useful life not be
amortized. This statement also requires that goodwill and certain intangible
assets be tested at least annually under new impairment testing criteria. The
Company plans to adopt this statement on January 1, 2002. Goodwill and certain
intangible assets existing as of June 30, 2001 will continue to be amortized
through December 31, 2001. The Company is currently evaluating the impact of
this statement on its financial position, results of operations, earnings per
share and cash flows.
4. Restructuring and Other Charges
Restructuring
In the second quarter of 2001, the Company initiated a restructuring plan
(the Plan) to reduce operating expenses due to continued economic uncertainties
and difficult market conditions. The Plan includes a workforce reduction, a
reduction in operating facilities and the removal of certain systems hardware
from service. The Company recorded a pre-tax charge of $117 million in the
second quarter of 2001 for restructuring costs. The actual costs of the Plan
could differ from the estimated costs, depending primarily on the Company's
ability to sublease properties.
Workforce: During the second quarter of 2001, the Company reduced full-time
equivalent employees by approximately 2,820, or 11%, including 2,030 through
mandatory staff reductions. Most of these employees were from Schwab's domestic
retail brokerage division, which is included in the Individual Investor segment.
The Company recorded a pre-tax charge of $54 million for workforce reduction in
the second quarter of 2001, comprised of $50 million for severance pay and
benefits and $4 million for non-cash compensation expense for officers' stock
options.
Facilities: The Plan includes a reduction of the Company's operating space,
primarily through subleases of certain space subject to current and future lease
commitments at the Company's telephone service and data centers, corporate
administrative office space, and certain branch expansion space. The Plan also
includes accelerated depreciation of leasehold improvements, furniture and
equipment at these facilities over their shortened remaining estimated useful
lives, as well as impairment losses on assets removed from service. The Company
recorded a pre-tax charge of $51 million in the second quarter of 2001 for
facilities reduction, comprised of $39 million for non-cancelable lease costs
net of estimated sublease income, $6 million for accelerated depreciation, and
$6 million for impairment losses.
Systems: The Plan includes the removal of certain computer systems hardware from
service at the Company's data center facilities. The Company recorded a pre-tax
charge of $12 million in the second quarter of 2001 for the removal of such
systems, primarily comprised of $7 million for equipment lease buyout costs and
$5 million for impairment losses on equipment.
A summary of the activity in the restructuring liability is as follows:
- --------------------------------------------------------------------------------
Three and six months Workforce Facilities Systems
ended June 30, 2001 Reduction Reduction Removal Total
- --------------------------------------------------------------------------------
Restructuring charge $ 54 $ 51 $12 $117
Utilization:
Cash payments (34) (1) (5) (40)
Non-cash charges (4) (12) (5) (21)
- --------------------------------------------------------------------------------
(1) (2) (1)
Ending balance $ 16 $ 38 $ 2 $ 56
================================================================================
(1) The Company expects to substantially utilize the remaining restructuring
liability in the third quarter of 2001.
(2) The Company expects to utilize the remaining restructuring liability
through cash payments for the net lease expense over the respective lease
terms through 2010.
Other Charges
The Company recorded other pre-tax charges of $28 million in the second
quarter of 2001. These charges include a regulatory fine assessed to USTC and
United States Trust Company of New York (U.S. Trust NY), professional service
fees for operational and risk management remediation at USTC and U.S. Trust NY,
and the write-off of certain software development costs at CSE. See Part II -
Other Information, Item 1 - Legal Proceedings for a discussion of an order
entered into between the Board of Governors of the Federal Reserve System
(Federal Reserve Board) and the Superintendent of Banks of the State of New York
and USTC and U.S. Trust NY.
5. Sale of Corporate Trust Business
In June 2001, USTC sold its Corporate Trust business to The Bank of New
York Company, Inc. (Bank of NY). During the second quarter of 2001, the Company
recognized a pre-tax extraordinary gain of $221 million on this sale, or $121
million after tax. Total proceeds received were $273 million and the Company
incurred pre-tax closing and exit costs of $30 million for severance,
professional fees, and other related disposal costs. As part of the sale
agreement, up to $22 million of the sale proceeds may be returned to Bank of NY
if certain client retention requirements are not met during the ten-month period
following the sale. This amount has been deferred and the appropriate amount
will be recognized in earnings based upon actual client retention.
6. Allowance for Credit Losses on Banking Loans and Nonperforming Assets
Loans to banking clients of $3.5 billion at June 30, 2001 and $3.1 billion
at December 31, 2000 are presented net of the related allowance for credit
losses. The allowance for credit losses on banking loans was $21 million at June
30, 2001 and $20 million at December 31, 2000. Recoveries and charge-offs were
less than $1 million for each of the three-month and six-month periods ended
June 30, 2001 and 2000.
Nonperforming assets consist of non-accrual loans of $4 million at June 30,
2001 and $1 million at December 31, 2000.
7. Comprehensive Income
Comprehensive income includes net income and changes in equity except those
resulting from investments by, or distributions to, stockholders. Comprehensive
income is as follows:
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Net income $102 $137 $199 $437
Other comprehensive income (loss):
Cumulative effect of accounting
change for adoption of
SFAS No. 133 (12)
Net gain (loss) on cash flow
hedging instruments 4 (7)
Foreign currency translation
adjustment 4 (5) (6) (9)
Change in net unrealized gain
(loss) on securities available
for sale (5) 1 3
- --------------------------------------------------------------------------------
Total comprehensive income,
net of tax $105 $133 $177 $428
================================================================================
8. 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:
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Net income $ 102 $ 137 $ 199 $ 437
================================================================================
Weighted-average
Common shares
outstanding - basic 1,378 1,359 1,378 1,344
Common stock equivalent shares
related to stock incentive plans 27 48 29 54
- --------------------------------------------------------------------------------
Weighted-average common
shares outstanding - diluted 1,405 1,407 1,407 1,398
================================================================================
Basic earnings per share:
Income (loss) before
extraordinary gain $ (.01) $ .10 $ .06 $ .33
Extraordinary gain, net of tax $ .08 $ .08
Net Income $ .07 $ .10 $ .14 $ .33
================================================================================
Diluted earnings per share:
Income (loss) before
extraordinary gain (1) $ (.01) $ .09 $ .06 $ .31
Extraordinary gain, net of tax $ .08 $ .08
Net Income $ .07 $ .09 $ .14 $ .31
================================================================================
(1) For the three months ended June 30, 2001 this computation excludes common
stock equivalent shares related to stock incentive plans of 27 million
because inclusion of such shares would be antidilutive.
The computation of diluted EPS for the six months ended June 30, 2001 and
2000, respectively, excludes outstanding stock options to purchase 60 million
and 7 million 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.
9. Regulatory Requirements
CSC is a financial holding company, which is a type of bank holding company
subject to supervision and regulation by the Federal Reserve Board under the
Bank Holding Company Act of 1956, as amended (the Act).
Under the Act, the Federal Reserve Board has established consolidated
capital requirements for bank holding companies. CSC is subject to those
guidelines. The regulatory capital and ratios of the Company, U.S. Trust and
U.S. Trust NY are as follows:
2001 2000
--------------- ---------------
June 30, Amount Ratio(1) Amount Ratio(1)
- --------------------------------------------------------------------------------
Tier 1 Capital:
Company $3,786 19.5% $3,251 12.5%
U.S. Trust $ 657 21.8% $ 400 15.2%
U.S. Trust NY $ 429 18.2% $ 249 11.4%
Total Capital:
Company $3,813 19.7% $3,285 12.7%
U.S. Trust $ 678 22.5% $ 420 15.9%
U.S. Trust NY $ 447 18.9% $ 267 12.2%
Leverage:
Company $3,786 10.5% $3,251 9.2%
U.S. Trust $ 657 11.9% $ 400 8.2%
U.S. Trust NY $ 429 10.3% $ 249 6.5%
- --------------------------------------------------------------------------------
(1) Minimum tier 1 capital, total capital and tier 1 leverage ratios are 4%, 8%
and 3%-5%, respectively, for bank holding companies and banks.
Well-capitalized tier 1 capital, total capital and tier 1 leverage ratios
are 6%, 10% and 5%, respectively. Each of CSC's other depository
institution subsidiaries exceed the well-capitalized standards set forth by
the banking regulatory authorities.
Based on their respective regulatory capital ratios at June 30, 2001 and
2000, the Company, U.S. Trust and U.S. Trust NY are considered well capitalized
(the highest category). There are no conditions or events that management
believes have changed the Company's, U.S. Trust's and U.S. Trust NY's
well-capitalized status.
Schwab and SCM are subject to the Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule). Schwab and SCM compute net capital
under the alternative method permitted by this Rule. This method requires the
maintenance of minimum net capital, as defined, of the greater of 2% of
aggregate debit balances arising from client 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 SCM 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 June 30, 2001, Schwab's net capital was $1.4 billion (12% of
aggregate debit balances), which was $1.2 billion in excess of its minimum
required net capital and $820 million in excess of 5% of aggregate debit
balances. At June 30, 2001, SCM's net capital was $78 million, which was $77
million in excess of its minimum required net capital. Certain other
subsidiaries of CSC are subject to regulatory and other requirements of the
jurisdictions in which they operate. At June 30, 2001, these subsidiaries were
in compliance with their applicable requirements.
10. Commitments and Contingent Liabilities
On July 11, 2001 USTC and U.S. Trust NY (collectively, USTC/USTNY) entered
into a cease and desist order with the Federal Reserve Board and the
Superintendent of Banks of the State of New York (State). Under the order,
USTC/USTNY neither admitted nor denied that it had violated any law, but was
required to pay a $5 million penalty to the Federal Reserve Board and a $5
million penalty to the State for alleged violations of various reporting and
recordkeeping requirements. There is no allegation that client assets were
exposed to any risk of loss, nor that there was any evidence of misappropriation
or misuse of client funds on the part of any USTC/USTNY employee. In addition,
the order requires USTC/USTNY to take a number of steps to review and upgrade
its risk management processes and systems with respect to the Bank Secrecy Act
and banking and securities laws and to provide regular reports to regulators
concerning the progress of such measures. USTC/USTNY has reached an agreement
with the regulators on a plan to upgrade risk management processes and systems.
The nature of the Company's business subjects it to claims, lawsuits,
regulatory examinations and other proceedings in the ordinary course of its
business. The ultimate outcome of such matters and legal proceedings cannot be
determined at this time, and the results of these 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 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.
For further discussion of legal proceedings, see Part II - Other
Information, Item 1 - Legal Proceedings.
11. Segment Information
The Company structures its segments according to its various types of
clients and the services provided to those clients. These segments have been
aggregated, based on similarities in economic characteristics, types of clients,
services provided, distribution channels and regulatory environment, into four
reportable segments -- Individual Investor, Institutional Investor, Capital
Markets and U.S. Trust.
Financial information for the Company's reportable segments is presented in
the following table. The Company evaluates the performance of its segments based
on adjusted operating income before taxes, which excludes the restructuring and
other charges, merger- and acquisition-related charges and the extraordinary
gain. Intersegment revenues are immaterial and are therefore not disclosed.
Total revenues and income (loss) before taxes on income (loss) and extraordinary
gain are equal to the Company's consolidated amounts as reported in the
condensed consolidated statement of income.
- --------------------------------------------------------------------------------
Three Six
Months Ended Months Ended
June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Revenues
Individual Investor $ 629 $ 890 $1,325 $1,972
Institutional Investor 211 207 428 434
Capital Markets 67 146 185 409
U.S. Trust 164 161 333 315
- --------------------------------------------------------------------------------
Total $1,071 $1,404 $2,271 $3,130
================================================================================
Income (loss) before taxes on
income (loss) and
extraordinary gain
Individual Investor $ 64 $ 206 $ 142 $ 547
Institutional Investor 64 66 131 146
Capital Markets (4) 14 8 86
U.S. Trust (1) 25 38 62 81
- --------------------------------------------------------------------------------
Operating income before taxes
on operating income and
extraordinary gain 149 324 343 860
Restructuring and other charges (2) (145) (145)
Merger- and acquisition-related
charges (3) (30) (71) (60) (95)
- --------------------------------------------------------------------------------
Total $ (26) $ 253 $ 138 $ 765
================================================================================
(1) Excludes an extraordinary pre-tax gain of $221 million from the sale of
USTC's Corporate Trust business.
(2) Restructuring includes costs relating to workforce, facilities and systems
hardware reductions. Other charges include a regulatory fine, professional
service fees for operational and risk management remediation, and the
write-off of certain software development costs.
(3) Includes professional fees, change in control related and retention program
compensation and other expenses related to the merger with USTC, and
goodwill and intangible asset amortization and retention program
compensation related to the acquisition of CyberTrader.
12. Supplemental Cash Flow Information
Certain information affecting the cash flows of the Company follows:
- --------------------------------------------------------------------------------
Six
Months Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------
Income taxes paid $ 62 $245
================================================================================
Interest paid:
Brokerage client cash balances $468 $504
Deposits from banking clients 76 73
Long-term debt 29 18
Stock-lending activities 15 25
Short-term borrowings 11 9
Other 2 1
- --------------------------------------------------------------------------------
Total interest paid $601 $630
================================================================================
Non-cash investing and financing activities:
Common stock and options issued
for purchases of businesses $ 36 $509
================================================================================
THE CHARLES SCHWAB CORPORATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Description of Business
The Company: The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide securities brokerage and
related financial services for 7.7 million active client accounts(a). Client
assets in these accounts totaled $858.3 billion at June 30, 2001. Charles Schwab
& Co., Inc. (Schwab) is a securities broker-dealer with 403 domestic branch
offices in 48 states, as well as branches in the Commonwealth of Puerto Rico and
the U.S. Virgin Islands. U.S. Trust Corporation (USTC, and with its subsidiaries
collectively referred to as U.S. Trust) is an investment management firm that
through its subsidiaries also provides fiduciary services and private banking
services with 33 offices in 11 states. Other subsidiaries include Charles Schwab
Europe (CSE), a retail securities brokerage firm located in the United Kingdom,
Charles Schwab Investment Management, Inc., the investment advisor for Schwab's
proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in
Nasdaq and other securities providing trade execution services to broker-dealers
and institutional clients, and CyberTrader, Inc. (CyberTrader), an electronic
trading technology and brokerage firm providing services to highly active,
online investors.
- ------------------------
(a) Accounts with balances or activity within the preceding eight months.
The Company provides financial services to individuals, institutional
clients and broker-dealers through four segments - Individual Investor,
Institutional Investor, Capital Markets and U.S. Trust. 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 clients. The U.S. Trust segment provides
investment management, fiduciary services and private banking services to
individual and institutional clients.
The Company's strategy is to attract and retain client assets by focusing
on a number of areas within the financial services industry - retail brokerage,
investment management, fiduciary services, private banking services, support
services for independent investment managers, 401(k) defined contribution plans,
equity securities market-making and mutual funds.
To pursue its strategy and its objective of long-term profitable growth,
the Company plans to continue leveraging its competitive advantages. These
advantages include nationally recognized brands, a broad range of products and
services, multi-channel delivery systems and an ongoing investment in
technology. While the Company's business is predominantly conducted in the U.S.,
the Company continues to evaluate its international expansion.
Brands: The Company's worldwide advertising and marketing programs support
its strategy by continually reinforcing the strengths and key attributes of
Schwab's full-service offering, U.S. Trust's wealth management services and
CyberTrader's trading technology. By maintaining a consistent level of
visibility in the marketplace, the Company seeks to establish Schwab, U.S. Trust
and CyberTrader as leading financial services brands in a focused and
cost-effective manner. The Company primarily uses a combination of network,
cable and local television, print media, athletic event sponsorship, and online
channels in its advertising.
Products and Services: The Company offers a broad range of value-oriented
products and services to meet clients' 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.
Schwab strives to demystify investing by educating and assisting clients in
the development of investment plans. This approach is designed to be offered
consistently across all of Schwab's delivery channels and provides clients 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 and certified financial
planners through the Schwab AdvisorSource(TM) service. Schwab clients and
potential clients in need of personalized wealth management services can receive
referrals to U.S. Trust's investment management, trust and private banking
capabilities as part of the AdvisorSource referral services program. Schwab also
provides clients with access to Schwab Portfolio Consultation(TM), a package of
analytical services and individual consultations with Schwab investment
specialists designed to assist clients in evaluating their asset allocations.
Additionally, Schwab offers investors investment education, research and
analysis tools which include WebShops(TM) - a series of workshops designed to
help investors increase their skills in using Schwab's online services, and The
Analyst Center(R) - an Internet-based tool which connects clients to proprietary
and third-party investment research, guidance and decision-making tools.
U.S. Trust provides an array of financial services for affluent individuals
and their families. These services include investment management, investment
consulting, trust, financial and estate planning and private banking, including
mortgage, personal lending and deposit products. U.S. Trust also provides
investment management and special fiduciary services for corporations,
endowments, foundations, pension plans and other institutional clients.
Schwab also provides custodial, trading and support services to
approximately 5,800 independent investment managers. As of June 30, 2001, these
managers were guiding the investments of 1 million Schwab client accounts
containing $239.0 billion in assets. Further, the Company provides 401(k)
recordkeeping and other retirement plan services directly through a dedicated
sales force, as well as indirectly through alliances with third-party
administrators. In the direct channel, SchwabPlan(R), the Company's 401(k)
retirement plan, offers plan sponsors a wide array of investment options,
participant education and servicing, trustee services, and participant-level
recordkeeping.
The Company also provides its clients with quick and efficient access to
the securities markets by offering trade execution services in Nasdaq,
exchange-listed and other securities through its market maker and specialist
operations; access to extended-hours trading through its participation in the
REDIBook ECN LLC, an electronic communication network; and the ability to
analyze and trade a variety of fixed income securities through Schwab's
multi-channel delivery systems.
Schwab's Mutual Fund Marketplace(R) provides clients with the ability to
invest in 2,093 mutual funds from 338 fund families. Within the Mutual Fund
Marketplace, Schwab's Mutual Fund OneSource(R) service enables clients to trade
1,142 mutual funds from 237 fund families without incurring transaction fees.
The Mutual Fund Marketplace also includes Schwab's mutual fund clearing service,
which provides mutual fund trading and clearing services to banks and
broker-dealers.
Delivery Systems: The Company's multi-channel delivery systems allow
clients to choose how they prefer to do business with the Company. To enable
clients to obtain services in person with a Company representative, the Company
maintains a network of offices. Schwab's branch offices also provide investors
with access to the Internet. U.S. Trust's clients can meet with wealth
management professionals at regional offices to obtain access to U.S. Trust's
financial services.
Telephonic access to Schwab is provided primarily through five regional
client telephone service centers and two online client support centers that
operate both during and after normal market hours. Additionally, clients are
able to obtain financial information on an automated basis through Schwab's
automated telephonic and online channels. Automated telephonic channels include
TeleBroker(R), Schwab's touch-tone telephone quote and trading service, and
Schwab by Phone(TM), Schwab's voice recognition quote and trading service.
Online channels include the Charles Schwab Web Site(TM), an information and
trading service on the Internet at www.schwab.com, CyberTrader's integrated
software-based trading platforms for highly active investors, PocketBroker(TM),
a wireless information and trading service, PC-based services such as
SchwabLink(R), a service for investment managers, as well as StreetSmart Pro(R)
and Velocity(TM), online trading systems which provide enhanced trade
information and order execution for certain of Schwab's clients who trade
frequently. While most client transactions are completed through the online
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 client experience.
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 client service, reducing processing costs, and
facilitating the Company's ability to handle significant increases in client
activity without a corresponding rise in staffing levels. The Company uses
technology to empower its clients to manage their financial affairs and is a
leader in driving technological advancements in the financial services industry.
International: The Company's international business serves both foreign
investors and non-English-speaking U.S. clients. The Company has established a
presence in the United Kingdom, Canada, Hong Kong, Japan, Australia, the Cayman
Islands and Brazil. In the U.S., the Company serves Chinese-, Korean-,
Vietnamese- and Spanish-speaking clients through a combination of designated
branch offices and Web-based and telephonic services. As of June 30, 2001,
client assets in the Company's international business totaled $22.8 billion.
New Developments During the Second Quarter of 2001: The Company responds to
changing client needs with continued product, technology and service
innovations. During the second quarter of 2001:
o As part of its plan to sell its equity investment in Epoch Partners, Inc.
to The Goldman Sachs Group, Inc. (Goldman), the Company signed an agreement
to provide Schwab clients with access to Goldman's research and equity
market offerings.
o Schwab opened three pilot Schwab Private Client offices, which are designed
to serve the needs of more affluent clients who desire a higher level of
service yet wish to retain control of their investment decisions.
o Schwab launched its MarketPlace, an internal Web site which provides
service representatives with a consistent set of market viewpoints and
investment ideas to support their discussions with clients.
o CyberTrader upgraded its two direct access-trading platforms to include
streaming news and remote trading, and enhanced its Web site to include an
industry news center and CyberTrader U, which offers a variety of
introductory and intermediate online classes for traders.
o Schwab launched several new services to help independent investment
managers manage and build their practices, including the Electronic Account
Submission system, which allows independent investment managers to
establish new client account numbers immediately upon request. In addition,
Schwab introduced Managed Account Select(TM), which enables independent
investment managers to provide clients with access to pre-screened money
managers under a simplified single-fee structure.
o USTC completed its acquisition of Resource Companies, Inc., a
Minneapolis-based investment management, trust and private banking firm
with approximately $2 billion in assets under management.
Restructuring: In the second quarter of 2001, the Company initiated a
restructuring plan (the Plan) to reduce operating expenses due to continued
economic uncertainties and difficult market conditions. The Plan includes a
workforce reduction, a reduction in operating facilities and the removal of
certain systems hardware from service. The Plan is intended to realign the
Company's workforce, facilities and systems capacity with the current market
environment, allowing the Company to enhance financial performance while
continuing to maintain suitable capacity and provide quality service to clients.
The Company recorded a pre-tax charge of $117 million in the second quarter
of 2001 for restructuring costs, comprised of $54 million for workforce
reduction, $51 million for a reduction in operating facilities, and $12 million
for the removal of certain systems hardware from service. The Company expects to
recognize $15 million to $20 million in restructuring costs during the third
quarter of 2001 as the remaining elements of the Plan are completed. The total
estimated restructuring charge is higher than the amount disclosed in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 due
to (1) costs for additional leased facilities which were identified during the
finalization of the restructuring plan in the second quarter of 2001, (2)
reductions in the estimates of sublease income due to softening in the
commercial real estate market, and (3) noncash compensation expense for the
extension of officers' stock option expiration dates through the end of their
severance period.
The Company expects that the Plan will reduce pre-tax operating expenses by
approximately $35 million in the third quarter of 2001. This amount is expected
to gradually increase to $43 million per quarter by the first quarter of 2002,
including reductions in compensation and benefits of approximately $32 million
for mandatory staff reductions, and occupancy and equipment of approximately $10
million for reductions in future lease commitments and operating facilities.
Additionally, employee attrition is estimated to result in a reduction in
compensation and benefits of approximately $10 million per quarter beginning in
the first quarter of 2002.
For further information on the Plan, see note "4 - Restructuring and Other
Charges" in the Notes to Condensed Consolidated Financial Statements. In light
of prevailing business conditions, the Company continues to evaluate its
operations and expense structure, including its project and media spending.
Further restructuring initiatives, including additional workforce and technology
capacity reductions, are likely to result in additional charges during the
second half of 2001.
Other Charges: The Company recorded other pre-tax charges of $28 million in
the second quarter of 2001. These charges include a regulatory fine assessed to
USTC and United States Trust Company of New York (U.S. Trust NY), professional
service fees for operational and risk management remediation at USTC and U.S.
Trust NY, and the write-off of certain software development costs at CSE.
Risk Management
For discussion on the Company's principal risks and some of the policies
and procedures for risk identification, assessment and mitigation, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Risk Management" in the Company's 2000 Annual Report to
Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the
year ended December 31, 2000. See Liquidity and Capital Resources of this report
for a discussion on liquidity risk; and see Item 3 - Quantitative and
Qualitative Disclosures About Market Risk for additional information relating to
market 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 interim period
are not necessarily indicative of results for a full year or any other interim
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.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are identified by
words such as "believe," "expect," "intend," "plan," "will," "may" and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. These forward-looking statements, which reflect
management's beliefs, objectives and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company's senior
management. These statements relate to, among other things, the Company's
ability to pursue its strategy of attracting and retaining client assets (see
Description of Business: The Company), the impact of the restructuring plan on
the Company's results of operations (see Description of Business:
Restructuring), the impact of decimalization on the Company's results of
operations (see Revenues - Principal Transactions), sources of liquidity and
capital (see Liquidity and Capital Resources - Liquidity), capital expenditures
and development spending (see Liquidity and Capital Resources - Cash Flows and
Capital Resources), and contingent liabilities (see Part II - Other Information,
Item 1 - Legal Proceedings). Achievement of the expressed expectations is
subject to certain risks and uncertainties that could cause actual results to
differ materially from the expressed expectations described in these statements.
Important factors that may cause such differences are noted in this interim
report and include, but are not limited to: the effect of client trading
patterns on Company revenues and earnings; changes in revenues and profit margin
due to cyclical securities markets and fluctuations in 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; changes in the rates of employee attrition; the Company's
inability to attract and retain key personnel; the timing and impact of changes
in the Company's level of investments in personnel, technology, or 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 at acceptable rates; a significant decline in the real estate
market, including the Company's ability to sublease properties; and risks
associated with international expansion and operations.
Three Months Ended June 30, 2001 Compared To Three Months Ended June 30, 2000
All references to earnings per share information in this report reflect
diluted earnings per share unless otherwise noted.
Financial Overview
While the securities markets showed intermittent signs of strengthening
during the second quarter of 2001, the economic environment remained uncertain.
In this continued difficult market environment, the Company's clients reduced
their trading activity relative to year-earlier levels. As a result, the
Company's trading revenues in the second quarter of 2001 decreased 41% from the
second quarter of 2000 and total revenues decreased 24% for the same period.
Revenues of $1.1 billion in the second quarter of 2001 declined $333
million from the second quarter of 2000 primarily due to decreases in revenues
of $261 million, or 29%, in the Individual Investor segment and $79 million, or
54%, in the Capital Markets segment. See note "11 - Segment Information" in the
Notes to Condensed Consolidated Financial Statements for financial information
by segment.
Total expenses excluding interest during the second quarter of 2001 were
$1.1 billion, down 5% from $1.2 billion during the second quarter of 2000. This
decrease was primarily caused by a significant decline in bonuses and the
Company's continued expense reduction measures, partially offset by
restructuring charges.
In June 2001, USTC sold its Corporate Trust business to The Bank of New
York Company, Inc. (Bank of NY). During the second quarter of 2001, the Company
recognized a pre-tax extraordinary gain of $221 million on this sale, or $121
million after tax. Total proceeds received were $273 million and the Company
incurred pre-tax closing and exit costs of $30 million for severance,
professional fees and other related disposal costs. As part of the sale
agreement, up to $22 million of the sale proceeds may be returned to Bank of NY
if certain client retention requirements are not met during the ten-month period
following the sale. This amount has been deferred and the appropriate amount
will be recognized in earnings based upon actual client retention.
In evaluating the Company's financial performance, management uses adjusted
operating income, which excludes non-operating charges and the extraordinary
gain. The Company's after-tax operating income for the second quarter of 2001
was $97 million, down 51% from the second quarter of 2000, and its after-tax
operating profit margin for the second quarter of 2001 was 9.1%, down from 14.2%
for the second quarter of 2000. A reconciliation of the Company's operating
income to net income is shown in the following table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
2001 2000 Change
- --------------------------------------------------------------------------------
Operating income, after tax $ 97 $199 (51%)
Non-operating items:
Extraordinary gain (1) 221
Tax effect (100)
- --------------------------------------------------------------------------------
Net extraordinary gain 121
Non-operating charges:
Restructuring (2) (117)
Other charges (3) (28)
Merger- and acquisition-related costs (4) (30) (71) (58)
- --------------------------------------------------------------------------------
Total non-operating charges (175) (71) 146
Tax effect 59 9 n/m
- --------------------------------------------------------------------------------
Net non-operating charges (116) (62) 87
- --------------------------------------------------------------------------------
Non-operating items (after tax) 5 (62) n/m
- --------------------------------------------------------------------------------
Net income $ 102 $137 (26%)
================================================================================
(1) The Company recorded an extraordinary gain, net of closing and exit costs,
from the sale of USTC's Corporate Trust business to Bank of NY.
(2) The restructuring plan includes a workforce reduction, a reduction in
operating facilities, and the removal of certain systems hardware from
service.
(3) Other pre-tax charges include a regulatory fine assessed against USTC and
U.S. Trust NY, professional service fees for operational and risk
management remediation at USTC and U.S. Trust NY, and the write-off of
certain software development costs at CSE.
(4) Includes pre-tax professional fees, change in control related and retention
program compensation and other expenses related to the merger with USTC,
and goodwill and intangible asset amortization and retention program
compensation related to the acquisition of CyberTrader.
n/m Not meaningful.
The Company's operating income before taxes for the second quarter of 2001
was $149 million, down $175 million, or 54%, from the second quarter of 2000 due
to decreases of $142 million, or 69%, in the Individual Investor segment, $2
million, or 3%, in the Institutional Investor segment, $18 million in the
Capital Markets segment and $13 million, or 34%, in the U.S. Trust segment.
These decreases were primarily due to lower levels of trading activity, lower
levels of margin loans to clients and lower average revenue per share traded in
the Capital Markets segment.
Including the non-operating charges, the Company's loss before taxes and
the extraordinary gain was $26 million for the second quarter of 2001, compared
to income before taxes of $253 million for the second quarter of 2000. The
Company's net income for the second quarter of 2001 decreased 26% to $102
million, or $.07 per share, down from $137 million, or $.09 per share, for the
second quarter of 2000. The Company's after-tax profit margin for the second
quarter of 2001 was 9.5%, which was slightly lower than the 9.8% margin in the
second quarter of 2000.
The annualized return on stockholders' equity for the second quarter of
2001 was 9%, down from 15% for the second quarter of 2000 primarily due to the
decline in net income as discussed above, as well as a 19% increase in average
stockholders' equity from the second quarter of 2000 to the second quarter of
2001.
The Company's client trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
Daily Average Trades 2001 2000 Change
- --------------------------------------------------------------------------------
Revenue Trades
Online 134.5 199.0 (32%)
TeleBroker(R)and Schwab by PhoneTM 7.6 7.0 9
Regional client telephone service
centers, branch offices and other 18.3 28.7 (36)
- --------------------------------------------------------------------------------
Total 160.4 234.7 (32%)
================================================================================
Mutual Fund OneSource(R) Trades
Online 34.9 33.2 5%
TeleBroker and Schwab by Phone .4 1.0 (60)
Regional client telephone service
centers, branch offices and other 17.3 19.1 (9)
- --------------------------------------------------------------------------------
Total 52.6 53.3 (1%)
================================================================================
Total Daily Average Trades
Online 169.4 232.2 (27%)
TeleBroker and Schwab by Phone 8.0 8.0
Regional client telephone service
centers, branch offices and other 35.6 47.8 (26)
- --------------------------------------------------------------------------------
Total 213.0 288.0 (26%)
================================================================================
Assets in client accounts were $858.3 billion at June 30, 2001, a decrease
of $72.9 billion, or 8%, from a year ago as shown in the following table. This
decrease from a year ago included net new client assets of $123.6 billion offset
by net market losses of $196.5 billion related to client accounts.
- --------------------------------------------------------------------------------
Growth in Client Assets and Accounts
(In billions, at quarter end, June 30, Percent
except as noted) 2001 2000 Change
- --------------------------------------------------------------------------------
Assets in client accounts
Schwab One(R), other cash
equivalents and deposits
from banking clients $ 27.0 $ 26.1 3%
Proprietary funds (SchwabFunds(R)
and Excelsior(R)):
Money market funds 122.7 97.8 25
Equity and bond funds 30.6 30.0 2
- --------------------------------------------------------------------------------
Total proprietary funds 153.3 127.8 20
- --------------------------------------------------------------------------------
Mutual Fund Marketplace(R)(1):
Mutual Fund OneSource(R) 93.0 113.4 (18)
Mutual Fund clearing services 21.0 7.8 169
All other 74.4 74.8 (1)
- --------------------------------------------------------------------------------
Total Mutual Fund Marketplace 188.4 196.0 (4)
- --------------------------------------------------------------------------------
Total mutual fund assets 341.7 323.8 6
- --------------------------------------------------------------------------------
Equity and other securities (1) 405.7 517.8 (22)
Fixed income securities 95.4 83.7 14
Margin loans outstanding (11.5) (20.2) (43)
- --------------------------------------------------------------------------------
Total client assets $858.3 $931.2 (8%)
================================================================================
Net growth in assets
in client accounts
(for the quarter ended)
Net new client assets $ 11.3 $ 36.6
Net market gains (losses) 41.2 (57.6)
- ---------------------------------------------------------------------
Net growth (decline) $ 52.5 $(21.0)
=====================================================================
New client accounts
(in thousands, for the
quarter ended) 265.9 400.1 (34%)
Active client
accounts (in millions) (2) 7.7 7.2 7%
================================================================================
Active online Schwab client
accounts (in millions) (3) 4.3 4.1 5%
Online Schwab client assets $349.2 $413.5 (16%)
================================================================================
(1) Excludes money market funds and all proprietary money market, equity and
bond funds.
(2) Active accounts are defined as accounts with balances or activity within
the preceding eight months.
(3) Active online accounts are defined as all accounts within a household that
has had at least one online session within the past twelve months.
REVENUES
Revenues declined $333 million, or 24%, in the second quarter of 2001
compared to the second quarter of 2000, due to a $201 million, or 37%, decrease
in commission revenues, an $88 million, or 28%, decrease in interest revenue net
of interest expense (referred to as net interest revenue) and a $73 million, or
57%, decrease in principal transaction revenues. These declines were slightly
offset by an $18 million, or 5%, increase in asset management and administration
fees and an $11 million, or 46%, increase in other revenue. As trading volumes
decreased significantly during the second quarter of 2001, the Company's
non-trading revenues represented 63% of total revenues as compared to 52% for
the second quarter of 2000 as shown in the following table.
- --------------------------------------------------------------------------------
Three Months
Ended
June 30,
Composition of Revenues 2001 2000
- --------------------------------------------------------------------------------
Commissions 32% 39%
Principal transactions 5 9
- --------------------------------------------------------------------------------
Total trading revenues 37 48
- --------------------------------------------------------------------------------
Asset management and administration fees 38 28
Net interest revenue 22 23
Other 3 1
- --------------------------------------------------------------------------------
Total non-trading revenues 63 52
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Commissions
The Company earns commission revenues by executing client trades primarily
through the Individual Investor and Institutional Investor segments. These
revenues are affected by the number of client accounts that trade, the average
number of commission-generating trades per account, and the average commission
per trade.
Commission revenues for the Company were $341 million for the second
quarter of 2001, down $201 million, or 37%, from the second quarter of 2000. As
shown in the following table, the total number of revenue trades executed by the
Company has decreased 32% as the number of client accounts that traded and
client trading activity per account have declined. Average commission per
revenue trade decreased 6%. This decline was mainly due to reduced pricing of
equity trades made through automated telephone channels to align them with
online pricing, as well as the impact of CyberTrader's lower pricing.
- --------------------------------------------------------------------------------
Three Months
Ended
Commissions Earned on June 30, Percent
Client Revenue Trades 2001 2000 Change
- --------------------------------------------------------------------------------
Client accounts that traded during
the quarter (in thousands) 1,426 1,898 (25%)
Average client revenue trades
per account 7.08 7.78 (9)
Total revenue trades
(in thousands) 10,098 14,772 (32)
Average commission per
revenue trade $ 34.50 $ 36.65 (6)
Commissions earned on client
revenue trades (in millions) (1) $ 348 $ 541 (36)
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
client trades. Excludes commissions on trades relating to specialist
operations and U.S. Trust commissions on trades.
Asset Management and Administration Fees
Asset management and administration fees include mutual fund service fees,
as well as fees for other asset-based financial services provided to individual
and institutional clients. 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 client assets invested in third-party funds and upon the
average daily net assets of the Company's proprietary funds. Mutual fund service
fees are earned primarily through the Individual Investor and Institutional
Investor segments. The Company also earns asset management and administration
fees for financial services, including investment management and consulting,
trust and fiduciary services, financial and estate planning, and private banking
services, provided to individual and institutional clients. These fees are
primarily based on the value and composition of assets under management and are
earned primarily through the U.S. Trust segment, as well as the Individual
Investor and Institutional Investor segments.
Asset management and administration fees were $408 million for the second
quarter of 2001, up $18 million, or 5%, from the second quarter of 2000, as
shown in the following table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
Asset Management June 30, Percent
and Administration Fees 2001 2000 Change
- --------------------------------------------------------------------------------
Mutual fund service fees:
Proprietary funds
(SchwabFunds(R)and Excelsior(R)) $200 $165 21%
Mutual Fund OneSource(R) 73 81 (10)
Other 7 7
Asset management and related services 128 137 (7)
- --------------------------------------------------------------------------------
Total $408 $390 5%
================================================================================
The increase in asset management and administration fees was primarily due
to increases in client assets in the Company's proprietary funds, partially
offset by decreases in U.S. Trust's client assets and client assets in Schwab's
Mutual Fund OneSource.
Net Interest Revenue
Net interest revenue is the difference between interest earned on assets
(mainly margin loans to clients, investments required to be segregated for
clients, securities available for sale, and private banking loans) and interest
paid on liabilities (mainly brokerage client cash balances and banking
deposits). 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 and
hedging strategies. Most of the Company's net interest revenue is earned by
Schwab through the Individual Investor and Institutional Investor segments, as
well as by U.S. Trust through the U.S. Trust segment.
Net interest revenue was $232 million for the second quarter of 2001, down
$88 million, or 28%, from the second quarter of 2000 as shown in the following
table (in millions):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30, Percent
2001 2000 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to clients $211 $464 (55%)
Investments, client-related 161 69 133
Private banking loans 58 54 7
Securities available for sale 21 18 17
Other 38 46 (17)
- --------------------------------------------------------------------------------
Total 489 651 (25)
- --------------------------------------------------------------------------------
Interest Expense
Brokerage client cash balances 195 263 (26)
Deposits from banking clients 34 38 (11)
Long-term debt 14 15 (7)
Stock-lending activities 5 11 (55)
Short-term borrowings 5 4 25
Other 4 n/m
- --------------------------------------------------------------------------------
Total 257 331 (22)
- --------------------------------------------------------------------------------
Net interest revenue $232 $320 (28%)
================================================================================
n/m Not meaningful.
Client-related and other daily average balances, interest rates and average
net interest spread for the second quarters of 2001 and 2000 are summarized in
the following table (dollars in millions):
- --------------------------------------------------------------------------------
Three Months Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Margin loans to clients:
Average balance outstanding $11,464 $20,756
Average interest rate 7.38% 8.99%
Investments (client-related):
Average balance outstanding $14,377 $ 5,283
Average interest rate 4.50% 5.23%
Private banking loans:
Average balance outstanding $ 3,269 $ 2,832
Average interest rate 7.12% 7.61%
Securities available for sale:
Average balance outstanding $ 1,317 $ 1,164
Average interest rate 6.45% 6.14%
Average yield on interest-earning assets 5.95% 8.09%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $22,247 $20,957
Average interest rate 3.52% 5.04%
Interest-bearing banking deposits:
Average balance outstanding $ 3,296 $ 3,050
Average interest rate 4.14% 4.99%
Other interest-bearing sources:
Average balance outstanding $ 1,154 $ 1,841
Average interest rate 4.58% 4.80%
Average noninterest-bearing portion $ 3,730 $ 4,187
Average interest rate on funding sources 3.20% 4.32%
Summary:
Average yield on interest-earning assets 5.95% 8.09%
Average interest rate on funding sources 3.20% 4.32%
- --------------------------------------------------------------------------------
Average net interest spread 2.75% 3.77%
================================================================================
The decrease in net interest revenue from the second quarter of 2000 was
primarily due to lower levels of margin loans to clients, partially offset by
higher average balances of client-related investments.
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 client trades, market price volatility, average revenue
per share traded and changes in regulations and industry practices.
Principal transaction revenues were $55 million for the second quarter of
2001, down $73 million, or 57%, from the second quarter of 2000. This decrease
was primarily due to lower average revenue per share traded.
The exchanges and Nasdaq completed phasing in decimal pricing for all
equity securities on April 9, 2001. This change, which only affects the Capital
Markets segment, has caused a significant decrease in average revenue per share
traded. Accordingly, management considers it likely that decimalization will
continue to adversely impact this segment's revenues.
Expenses Excluding Interest
Beginning in the fourth quarter of 2000, the Company implemented a number
of expense reduction measures, including hiring restrictions. Although these
reduction measures continued through the second quarter of 2001, the Company
experienced increases in certain expenses during the second quarter of 2001 when
compared to the second quarter of 2000. This was due to the Company's continued
investment in people, technology and facilities made during 2000.
During the second quarter of 2001, the Company initiated a restructuring
plan to reduce operating expenses due to continued economic uncertainties and
difficult market conditions. The Company recorded a pre-tax charge of $117
million in the second quarter of 2001 for restructuring charges.
Compensation and benefits expense was $479 million for the second quarter
of 2001, down $114 million, or 19%, from the second quarter of 2000 primarily
due to a decline in 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):
- --------------------------------------------------------------------------------
Three Months
Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------
Compensation and benefits expense as a
% of total revenues 45% 42%
Variable compensation as a
% of compensation and benefits expense 10% 26%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 6% 11%
Full-time equivalent employees
(at end of quarter) (1) 22.4 24.3
Revenues per average full-time equivalent
employee $46.0 $59.6
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
Occupancy and equipment expense was $122 million for the second quarter of
2001, up $22 million, or 22%, from the second quarter of 2000. This increase was
primarily due to facilities expansion to support the Company's growth in
employees and enhancements in systems capacity during 2000.
Advertising and market development expense was $50 million for the second
quarter of 2001, down $27 million, or 35%, from the second quarter of 2000. This
decrease was primarily a result of reductions in television and print media
spending as part of the Company's expense reduction measures.
Depreciation and amortization expense was $85 million for the second
quarter of 2001, up $22 million, or 35%, from the second quarter of 2000. The
increase was primarily due to an increase in information technology equipment
and software during 2000. The increase was also due to amortization of
additional leasehold improvements for new branches and office space, as well as
internally-developed software.
Merger-related expense for the second quarter of 2000 was $50 million.
There were no such charges for the second quarter of 2001. Merger-related
expense consists of professional fees and change in control related compensation
from the merger with USTC.
Other charges, included in restructuring and other charges, were $28
million for the second quarter of 2001 and include a regulatory fine,
professional service fees for operational and risk management remediation, and
the write-off of certain software development costs. There were no such charges
for the second quarter of 2000.
Other expenses were $25 million for the second quarter of 2001, down $30
million, or 55%, from the second quarter of 2000. This decrease was due to lower
trade-related errors (primarily resulting from system downtime), travel and
related costs and trading volume-related regulatory expenses.
The Company's effective income tax rate was 47.7% for the second quarter of
2001, up slightly from 45.9% for the second quarter of 2000.
Six Months Ended June 30, 2001 Compared To Six Months Ended June 30, 2000
All references to earnings per share information in this report reflect
diluted earnings per share unless otherwise noted.
Financial Overview
During the first half of 2001, the securities markets experienced a
continued slowdown, with the Nasdaq Composite Index decreasing 13% and the
Standard & Poor's 500 Index decreasing 7% from December 31, 2000. In this
difficult market environment, the Company's clients reduced their trading
activity relative to year-earlier levels. As a result, the Company's trading
revenues in the first half of 2001 decreased 47% from the first half of 2000 and
total revenues decreased 27% for the same period.
Revenues of $2.3 billion in the first half of 2001 declined $859 million
from the first half of 2000 due to decreases in revenues of $647 million, or
33%, in the Individual Investor segment, $6 million, or 1%, in the Institutional
Investor segment and $224 million, or 55%, in the Capital Markets segment. These
decreases were slightly offset by an increase of $18 million, or 6%, in the U.S.
Trust segment.
Total expenses excluding interest during the first half of 2001 were $2.1
billion, down 10% from $2.4 billion during the first half of 2000. This decrease
was primarily caused by a significant decline in bonuses and the Company's
continued expense reduction measures, partially offset by restructuring charges.
In evaluating the Company's financial performance, management uses adjusted
operating income, which excludes non-operating charges and the extraordinary
gain. The Company's after-tax operating income for the first half of 2001 was
$217 million, down 58% from the first half of 2000, and its after-tax operating
profit margin for the first half of 2001 was 9.6%, down from 16.7% for the first
half of 2000. A reconciliation of the Company's operating income to net income
is shown in the following table (in millions):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
2001 2000 Change
- --------------------------------------------------------------------------------
Operating income, after tax $ 217 $522 (58%)
Non-operating items:
Extraordinary gain (1) 221
Tax effect (100)
- --------------------------------------------------------------------------------
Net extraordinary gain 121
Non-operating charges:
Restructuring (2) (117)
Other charges (3) (28)
Merger- and acquisition-related costs (4) (60) (95) (37)
- --------------------------------------------------------------------------------
Total non-operating charges (205) (95) 116
Tax effect 66 10 n/m
- --------------------------------------------------------------------------------
Net non-operating charges (139) (85) 64
- --------------------------------------------------------------------------------
Non-operating items (after tax) (18) (85) (79)
- --------------------------------------------------------------------------------
Net income $ 199 $437 (54%)
================================================================================
(1) The Company recorded an extraordinary gain, net of closing and exit costs,
from the sale of USTC's Corporate Trust business to Bank of NY.
(2) The restructuring plan includes a workforce reduction, a reduction in
operating facilities, and the removal of certain systems hardware from
service.
(3) Other pre-tax charges include a regulatory fine assessed against USTC and
U.S. Trust NY, professional service fees for operational and risk
management remediation at USTC and U.S. Trust NY, and the write-off of
certain software development costs at CSE.
(4) Includes pre-tax professional fees, change in control related and retention
program compensation and other expenses related to the merger with USTC,
and goodwill and intangible asset amortization and retention program
compensation related to the acquisition of CyberTrader.
n/m Not meaningful.
The Company's operating income before taxes for the first half of 2001 was
$343 million, down $517 million, or 60%, from the first half of 2000 due to
decreases of $405 million, or 74%, in the Individual Investor segment, $15
million, or 10%, in the Institutional Investor segment, $78 million, or 91%, in
the Capital Markets segment and $19 million, or 23%, in the U.S. Trust segment.
These decreases were primarily due to the factors described in the comparison
between the three-month periods.
Including the non-operating charges, the Company's income before taxes and
extraordinary gain for the first half of 2001 was $138 million, down $627
million, or 82%, from the first half of 2000. The Company's net income for the
first half of 2001 decreased 54% to $199 million, or $.14 per share, down from
$437 million, or $.31 per share, for the first half of 2000. The Company's
after-tax profit margin for the first half of 2001 was 8.8%, which was lower
than the 14.0% margin in the first half of 2000.
The annualized return on stockholders' equity for the first half of 2001
was 9%, down from 27% for the first half of 2000 primarily due to the decline in
net income as discussed above, as well as a 34% increase in average
stockholders' equity from the first half of 2000 to the first half of 2001.
The Company's client trading activity is shown in the following table (in
thousands):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
Daily Average Trades 2001 2000 Change
- --------------------------------------------------------------------------------
Revenue Trades
Online 149.9 227.8 (34%)
TeleBroker(R)and Schwab by Phone(TM) 8.3 9.3 (11)
Regional client telephone service
centers, branch offices and other 19.8 35.3 (44)
- --------------------------------------------------------------------------------
Total 178.0 272.4 (35%)
================================================================================
Mutual Fund OneSource(R) Trades
Online 36.8 40.3 (9%)
TeleBroker and Schwab by Phone .4 1.5 (73)
Regional client telephone service
centers, branch offices and other 17.9 23.1 (23)
- --------------------------------------------------------------------------------
Total 55.1 64.9 (15%)
================================================================================
Total Daily Average Trades
Online 186.7 268.1 (30%)
TeleBroker and Schwab by Phone 8.7 10.8 (19)
Regional client telephone service
centers, branch offices and other 37.7 58.4 (35)
- --------------------------------------------------------------------------------
Total 233.1 337.3 (31%)
================================================================================
During the first six months of 2001, net new client assets and new accounts
decreased from the first six months of 2000 as shown in the table below.
- --------------------------------------------------------------------------------
Six Months
Ended
Growth in Client Assets and Accounts June 30, Percent
(In billions, except as noted) 2001 2000 Change
- --------------------------------------------------------------------------------
Net growth in assets
in client accounts
Net new client assets $ 42.2 $ 89.9
Net market losses (55.6) (4.7)
- -------------------------------------------------------------
Net growth (decline) $(13.4) $ 85.2
=============================================================
New client accounts
(in thousands) 546.3 897.2 (39%)
================================================================================
REVENUES
Revenues declined $859 million, or 27%, in the first half of 2001 compared
to the first half of 2000, due to a $581 million, or 44%, decrease in commission
revenues, a $223 million, or 60%, decrease in principal transaction revenues and
a $127 million, or 21%, decrease in net interest revenue. These declines were
slightly offset by a $57 million, or 7%, increase in asset management and
administration fees. As trading volumes decreased significantly during the first
half of 2001, the Company's non-trading revenues represented 60% of total
revenues as compared to 46% for the first half of 2000 as shown in the following
table.
- --------------------------------------------------------------------------------
Six Months
Ended
June 30,
Composition of Revenues 2001 2000
- --------------------------------------------------------------------------------
Commissions 33% 42%
Principal transactions 7 12
- --------------------------------------------------------------------------------
Total trading revenues 40 54
- --------------------------------------------------------------------------------
Asset management and administration fees 36 24
Net interest revenue 22 20
Other 2 2
- --------------------------------------------------------------------------------
Total non-trading revenues 60 46
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Commissions
Commission revenues for the Company were $749 million for the first half of
2001, down $581 million, or 44%, from the first half of 2000. As shown in the
following table, the total number of revenue trades executed by the Company has
decreased 35% as the number of client accounts that traded and client trading
activity per account have declined. Average commission per revenue trade
decreased 12%. This decline was due to the factors described in the comparison
between the three-month periods.
- --------------------------------------------------------------------------------
Six Months
Ended
Commissions Earned on June 30, Percent
Client Revenue Trades 2001 2000 Change
- --------------------------------------------------------------------------------
Client accounts that traded during
the period (in thousands) 2,224 3,016 (26%)
Average client revenue trades
per account 10.00 11.38 (12)
Total revenue trades
(in thousands) 22,247 34,315 (35)
Average commission per
revenue trade $34.13 $38.63 (12)
Commissions earned on client
revenue trades (in millions) (1) $ 759 $1,325 (43)
================================================================================
(1) Includes certain non-commission revenues relating to the execution of
client trades. Excludes commissions on trades relating to specialist
operations and U.S. Trust commissions on trades.
Asset Management and Administration Fees
Asset management and administration fees were $819 million for the first
half of 2001, up $57 million, or 7%, from the first half of 2000, as shown in
the following table (in millions):
- --------------------------------------------------------------------------------
Six Months
Ended
Asset Management June 30, Percent
and Administration Fees 2001 2000 Change
- --------------------------------------------------------------------------------
Mutual fund service fees:
Proprietary funds
(SchwabFunds(R)and Excelsior(R)) $390 $324 20%
Mutual Fund OneSource(R) 145 164 (12)
Other 17 15 13
Asset management and related services 267 259 3
- --------------------------------------------------------------------------------
Total $819 $762 7%
================================================================================
The increase in asset management and administration fees was primarily due
to increases in client assets in the Company's proprietary funds, partially
offset by a decrease in client assets in Schwab's Mutual Fund OneSource.
Net Interest Revenue
Net interest revenue was $489 million for the first half of 2001, down $127
million, or 21%, from the first half of 2000 as shown in the following table (in
millions):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30, Percent
2001 2000 Change
- --------------------------------------------------------------------------------
Interest Revenue
Margin loans to clients $ 513 $ 865 (41%)
Investments, client-related 320 169 89
Private banking loans 116 104 12
Securities available for sale 42 35 20
Other 87 79 10
- --------------------------------------------------------------------------------
Total 1,078 1,252 (14)
- --------------------------------------------------------------------------------
Interest Expense
Brokerage client cash balances 460 504 (9)
Deposits from banking clients 74 73 1
Long-term debt 29 25 16
Stock-lending activities 14 24 (42)
Short-term borrowings 10 7 43
Other 2 3 (33)
- --------------------------------------------------------------------------------
Total 589 636 (7)
- --------------------------------------------------------------------------------
Net interest revenue $ 489 $ 616 (21%)
================================================================================
Client-related and other daily average balances, interest rates and average
net interest spread for the first halves of 2001 and 2000 are summarized in the
following table (dollars in millions):
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------
Interest-Earning Assets (client-related and other):
Margin loans to clients:
Average balance outstanding $12,860 $20,211
Average interest rate 8.04% 8.61%
Investments (client-related):
Average balance outstanding $13,171 $ 6,498
Average interest rate 4.90% 5.22%
Private banking loans:
Average balance outstanding $ 3,167 $ 2,763
Average interest rate 7.39% 7.54%
Securities available for sale:
Average balance outstanding $ 1,329 $ 1,155
Average interest rate 6.34% 6.03%
Average yield on interest-earning assets 6.54% 7.70%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding $22,375 $20,841
Average interest rate 4.14% 4.87%
Interest-bearing banking deposits:
Average balance outstanding $ 3,315 $ 3,043
Average interest rate 4.52% 4.83%
Other interest-bearing sources:
Average balance outstanding $ 1,299 $ 2,103
Average interest rate 4.66% 4.40%
Average noninterest-bearing portion $ 3,538 $ 4,640
Average interest rate on funding sources 3.72% 4.09%
Summary:
Average yield on interest-earning assets 6.54% 7.70%
Average interest rate on funding sources 3.72% 4.09%
- --------------------------------------------------------------------------------
Average net interest spread 2.82% 3.61%
================================================================================
The decrease in net interest revenue from the first half of 2000 was
primarily due to the factors described in the comparison between the three-month
periods.
Principal Transactions
Principal transaction revenues were $150 million for the first half of
2001, down $223 million, or 60%, from the first half of 2000. This decrease was
due to lower average revenue per share traded, primarily caused by the change to
decimal pricing, and lower share volume handled by SCM.
Expenses Excluding Interest
Beginning in the fourth quarter of 2000, the Company implemented a number
of expense reduction measures which continued through the first half of 2001,
and which have contributed to the 10% decline in total expenses excluding
interest (see the factors described in the comparison between the three-month
periods).
Compensation and benefits expense was $972 million for the first half of
2001, down $283 million, or 23%, from the first half of 2000 primarily due to a
decline in variable compensation expense resulting from the Company's financial
performance, partially offset by an increase in compensation expense related to
a greater number of average employees during the first half of 2001. The
following table shows a comparison of certain compensation and benefits
components and employee data (in thousands):
- --------------------------------------------------------------------------------
Six Months
Ended
June 30,
2001 2000
- --------------------------------------------------------------------------------
Compensation and benefits expense as a
% of total revenues 43% 40%
Variable compensation as a
% of compensation and benefits expense 10% 32%
Compensation for temporary employees,
contractors and overtime hours as a
% of compensation and benefits expense 7% 10%
Full-time equivalent employees
(at end of period) (1) 22.4 24.3
Revenues per average full-time equivalent
employee $93.2 $139.3
================================================================================
(1) Includes full-time, part-time and temporary employees, and persons employed
on a contract basis.
Occupancy and equipment expense was $245 million for the first half of
2001, up $56 million, or 30%, from the first half of 2000. This increase was due
to the factors described in the comparison between the three-month periods.
Depreciation and amortization expense was $171 million for the first half
of 2001, up $53 million, or 45%, from the first half of 2000. This increase was
due to the factors described in the comparison between the three-month periods.
Merger-related expense for the first half of 2000 was $69 million. There
were no such charges for the first half of 2001.
Restructuring and other charges were $145 million for the first half of
2001. There were no such charges for the first half of 2000.
Other expenses were $56 million for the first half of 2001, down $82
million, or 59% from the first half of 2000. This decrease was due to the
factors described in the comparison between the three-month periods, as well as
a decrease in local business taxes on stock option exercises.
The Company's effective income tax rate was 44.6% for the first half of
2001, up slightly from 42.9% for the first half of 2000.
Liquidity and Capital Resources
Upon completion of the merger with USTC, CSC became a financial holding
company, which is a type of bank holding company subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956, as amended. CSC
conducts 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. See note "9 -
Regulatory Requirements" in the Notes to Condensed Consolidated Financial
Statements.
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, CSC's depository institution subsidiaries and SCM 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, maintaining CSC's depository institution subsidiaries' capital
guidelines and maintaining Schwab's and SCM's net capital. Based on their
respective regulatory capital ratios at June 30, 2001, the Company and its
depository institution subsidiaries are considered well capitalized.
CSC has liquidity needs that arise from its issued and outstanding $694
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 2001 to 2010 and fixed interest
rates ranging from 6.04% to 8.05% with interest payable semiannually. The
Medium-Term Notes are rated A2 by Moody's Investors Service, A by Standard &
Poor's Ratings Group and A+ by Fitch IBCA, Inc. CSC has a prospectus supplement
on file with the Securities and Exchange Commission enabling CSC to issue up to
$750 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At
June 30, 2001, all of these notes remained unissued.
CSC has authorization from its Board of Directors to issue up to $1.2
billion in commercial paper. At June 30, 2001, no commercial paper has been
issued. CSC's ratings for these short-term borrowings are P-1 by Moody's
Investors Service and A-1 by Standard & Poor's Ratings Group.
CSC maintains a $1.2 billion committed, unsecured credit facility with a
group of twenty-three banks which is scheduled to expire in June 2002. The funds
under this facility are available for general corporate purposes and CSC pays a
commitment fee on the unused balance of this facility. The financial covenants
in this facility require CSC to maintain a minimum level of tangible net worth,
and Schwab and SCM to maintain specified levels of net capital, as defined.
Management believes that these restrictions will not have a material effect on
its ability to meet foreseeable dividend or funding requirements. This facility
was unused during the first six months of 2001.
CSC also has direct access to $645 million of the $825 million uncommitted,
unsecured bank credit lines, provided by six banks, that are primarily utilized
by Schwab to manage short-term liquidity. The amount available to CSC under
these lines is lower than the amount available to Schwab because the credit line
provided by one of these banks is only available to Schwab, while the credit
line provided by another one of these banks includes a sub-limit on credit
available to CSC. These lines were not used by CSC during the first six months
of 2001.
Schwab
Liquidity needs relating to client trading and margin borrowing activities
are met primarily through cash balances in brokerage client accounts, which were
$22.0 billion and $25.2 billion at June 30, 2001 and December 31, 2000,
respectively. Management believes that brokerage client cash 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 June 30, 2001, Schwab's net capital was $1.4 billion (12% of
aggregate debit balances), which was $1.2 billion in excess of its minimum
required net capital and $820 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 client margin loans.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$1.4 billion subordinated revolving credit facility maturing in September 2002,
of which $370 million was outstanding at June 30, 2001. At quarter end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
maturing in 2003. 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 $825 million at June 30, 2001 ($645 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 14 days during the first half of 2001, with the daily amounts
borrowed averaging $34 million. These lines were unused at June 30, 2001.
To satisfy the margin requirement of client option transactions with the
Options Clearing Corporation (OCC), Schwab had unsecured letter of credit
agreements with twelve banks in favor of the OCC aggregating $855 million at
June 30, 2001. Schwab pays a fee to maintain these letters of credit. These
letters of credit were unused at June 30, 2001.
U.S. Trust
U.S. Trust's liquidity needs are generally met through earnings generated
by its operations.
U.S. Trust is subject to the Federal Reserve Board's risk-based and
leverage capital guidelines. These regulations require banks and bank holding
companies to maintain minimum levels of capital. In addition, CSC's depository
institution subsidiaries are subject to limitations on the amount of dividends
they can pay to USTC.
In addition to traditional funding sources such as deposits, federal funds
purchased and repurchase agreements, CSC's depository institution subsidiaries
have established their own external funding sources. At June 30, 2001, U.S.
Trust had $50 million in Trust Preferred Capital Securities outstanding with a
fixed interest rate of 8.41%. Certain of CSC's depository institution
subsidiaries have established credit facilities with the Federal Home Loan Bank
System (FHLB) totaling approximately $537 million. At June 30, 2001, $2 million
in long-term debt was outstanding under these facilities.
CSC provides U.S. Trust with a $300 million short-term credit facility
maturing in 2003. Borrowings under this arrangement do not qualify as regulatory
capital for U.S. Trust. No funds were drawn under this facility at June 30,
2001.
SCM
SCM's liquidity needs are generally met through earnings generated by its
operations. Most of SCM's assets are liquid, consisting primarily of cash and
cash equivalents, marketable securities, and receivables from brokers, dealers
and clearing organizations.
SCM's liquidity is affected by the same net capital regulatory requirements
as Schwab (see discussion above). At June 30, 2001, SCM's net capital was $78
million, which was $77 million in excess of its minimum required net capital.
SCM may borrow up to $70 million under a subordinated lending arrangement
with CSC maturing in 2002. Borrowings under this arrangement qualify as
regulatory capital for SCM. The amount outstanding under this facility was $60
million at June 30, 2001. In addition, CSC provides SCM with a $50 million
short-term credit facility. Borrowings under this arrangement do not qualify as
regulatory capital for SCM. No funds were drawn under this facility at June 30,
2001.
Cash Flows and Capital Resources
Net income plus depreciation and amortization including goodwill
amortization was $398 million for the first half of 2001, down 31% from $574
million for the first half of 2000. Depreciation and amortization expense
related to equipment, office facilities and property was $162 million for the
first half of 2001, as compared to $110 million for the first half of 2000, or
7% and 4% of revenues for each period, respectively. Amortization expense
related to intangible assets was $9 million for the first half of 2001, as
compared to $8 million for the first half of 2000. Goodwill amortization expense
was $28 million for the first half of 2001, as compared to $19 million for the
first half of 2000. This increase was primarily due to goodwill amortization
related to the acquisition of CyberTrader.
The Company's capital expenditures were $208 million in the first half of
2001 and $274 million in the first half of 2000, or 9% of revenues for each
period. Capital expenditures in the first half of 2001 were for certain
facilities expansion, equipment relating to the Company's information technology
systems and software. Capital expenditures as described above include the
capitalized costs for developing internal-use software of $47 million in the
first half of 2001 and $46 million in the first half of 2000. Schwab opened 19
new domestic branch offices during the first half of 2001, compared to 23 during
the first half of 2000. The number of U.S. Trust offices increased by 2 during
the first half of 2001, compared to 3 during the first half of 2000. Capital
expenditures may vary from period to period as business conditions change.
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,
improving productivity, upgrading existing and developing new systems, and
ensuring compliance with appropriate risk management policies and industry
practices. As discussed in the Company's 2000 Annual Report to Stockholders on
Form 10-K, management anticipated that 2001 development spending would stay at
approximately the 2000 level. Due to a continued economic slowdown and
management's continued focus on cost containment, the Company further reduced
its development spending in the first half of 2001. Management currently
anticipates that full year 2001 development spending will be approximately 15%
to 25% lower than 2000 levels.
The Company repaid $24 million of long-term debt during the first half of
2001.
During the first half of 2001, 2,845,100 of the Company's stock options,
with a weighted-average exercise price of $5.12, were exercised with cash
proceeds received by the Company of $14 million and a related tax benefit of $23
million. The cash proceeds are recorded as an increase in cash and a
corresponding increase in stockholders' equity. The tax benefit is recorded as a
reduction in income taxes payable and a corresponding increase in stockholders'
equity.
During the first half of 2001, CSC repurchased 8 million shares of its
common stock for $144 million. During the first half of 2000, the Company did
not repurchase any common stock. At June 30, 2001, the authorization granted by
the Board of Directors allows for future repurchases of 12 million shares of
CSC's common stock.
During the first halves of 2001 and 2000, the Company paid common stock
cash dividends of $30 million and $32 million, respectively.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's total financial capital (long-term debt
plus stockholders' equity) at June 30, 2001 was $5.1 billion, up $69 million, or
1%, from December 31, 2000. At June 30, 2001, the Company had long-term debt of
$746 million, or 15% of total financial capital, that bear interest at a
weighted-average rate of 7.34%. At June 30, 2001, the Company's stockholders'
equity was $4.3 billion, or 85% of total financial capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial Instruments Held For Trading Purposes
The Company held municipal, other fixed income and government securities
and certificates of deposit with a fair value of approximately $47 million and
$27 million at June 30, 2001 and 2000, 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 SCM, the Company maintains inventories in
exchange-listed, Nasdaq and other equity securities on both a long and short
basis. The fair value of these securities at June 30, 2001 was $99 million in
long positions and $82 million in short positions. The fair value of these
securities at June 30, 2000 was $123 million in long positions and $112 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 $1,700,000
and $1,100,000 at June 30, 2001 and 2000, respectively, due to the offset of
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 fair value of these securities at
June 30, 2001 and 2000 would not be material to the Company's financial
position, results of operations or cash flows. The notional amount and fair
value of option contracts were not material to the Company's consolidated
balance sheets at June 30, 2001 and 2000.
Financial Instruments Held For Purposes Other Than Trading
The Company maintains investments primarily in mutual funds related to its
deferred compensation plan, which is available to certain employees. These
investments were approximately $70 million and $63 million at June 30, 2001 and
2000, respectively. These securities, and the associated market risk, are not
material to the Company's financial position, results of operations or cash
flows.
Debt Issuances
At June 30, 2001, CSC had $694 million aggregate principal amount of
Medium-Term Notes, with fixed interest rates ranging from 6.04% to 8.05%. At
June 30, 2000, CSC had $766 million aggregate principal amount of Medium-Term
Notes, with fixed interest rates ranging from 5.96% to 8.05%. At June 30, 2001
and 2000, U.S. Trust had $50 million Trust Preferred Capital Securities
outstanding, with a fixed interest rate of 8.41%. In addition at June 30, 2001
and 2000, U.S. Trust had $2 million and $13 million FHLB long-term debt
outstanding, respectively. The FHLB long-term debt had fixed interest rates
ranging from 6.69% to 6.76% at June 30, 2001 and 6.59% to 6.76% at June 30,
2000.
The Company has fixed cash flow requirements regarding these long-term debt
obligations due to the fixed rate of interest. The fair value of these
obligations at June 30, 2001 and 2000, based on estimates of market rates for
debt with similar terms and remaining maturities, approximated their carrying
amount.
Net Interest Revenue Simulation
The Company uses net interest revenue simulation modeling techniques to
evaluate and manage the effect of changing interest rates. The simulation model
(the model) includes all interest-sensitive assets and liabilities and Swaps
utilized by U.S. Trust to hedge its interest rate risk. Key variables in the
model include assumed margin loan and brokerage client cash balance growth,
changes to the level and term structure of interest rates, the repricing of
financial instruments, prepayment and reinvestment assumptions, loan, banking
deposit, and brokerage client cash balance pricing and volume assumptions. The
simulations involve assumptions that are inherently uncertain and as a result,
the simulations cannot precisely estimate net interest revenue or precisely
predict the impact of changes in interest rates on net interest revenue. Actual
results may differ from simulated results due to the timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and
management strategies, including changes in asset and liability mix.
As demonstrated by the simulations presented below, the Company is
positioned so that the consolidated balance sheet produces an increase in net
interest revenue when interest rates rise and, conversely, a decrease in net
interest revenue when rates fall (i.e., interest-earning assets are repricing
more quickly than supporting liabilities). Historically, this position has
partially offset decreases in trading activity, and therefore commission
revenues, which have resulted during periods of rising interest rates. The
change in simulated net interest revenue sensitivity from 2000 to 2001 was
primarily an intentional move to a more neutral risk position. This move
reflects the fact that as margin loans have decreased as a percentage of
interest-earning assets, the Company has reinvested those funds in longer-term
investments. In addition, U.S. Trust's interest-bearing liabilities are
positioned to reprice more quickly than the related interest-earning assets,
which acts as a natural offset to Schwab's asset-sensitive interest-rate risk
exposure.
The simulations in the following table assume that the asset and liability
structure of the consolidated balance sheet would not be changed as a result of
the simulated changes in interest rates. As the Company actively manages its
consolidated balance sheet and interest rate exposure, in all likelihood the
Company would take steps to manage any additional interest rate exposure that
could result from changes in the interest rate environment. The following table
shows the results of a gradual 200 basis point increase or decrease in interest
rates and the effect on simulated net interest revenue over the next twelve
months at June 30, 2001 and 2000.
- --------------------------------------------------------------------------------
Impact on Net Interest Revenue
Percentage Increase (Decrease)
June 30, 2001 2000
- --------------------------------------------------------------------------------
Increase of 200 basis points 5.8% 8.7%
Decrease of 200 basis points (5.9%) (8.7%)
================================================================================
The impact of the Company's hedging activities upon net interest revenue
for the quarters ended June 30, 2001 and 2000 was immaterial to the Company's
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 11, 2001 USTC and U.S. Trust NY (collectively, USTC/USTNY) entered
into a cease and desist order with the Federal Reserve Board and the
Superintendent of Banks of the State of New York (State). Under the order,
USTC/USTNY neither admitted nor denied that it had violated any law, but was
required to pay a $5 million penalty to the Federal Reserve Board and a $5
million penalty to the State for alleged violations of various reporting and
recordkeeping requirements. There is no allegation that client assets were
exposed to any risk of loss, nor that there was any evidence of misappropriation
or misuse of client funds on the part of any USTC/USTNY employee. In addition,
the order requires USTC/USTNY to take a number of steps to review and upgrade
its risk management processes and systems with respect to the Bank Secrecy Act
and banking and securities laws and to provide regular reports to regulators
concerning the progress of such measures.
USTC/USTNY has reached an agreement with the regulators on a plan to
upgrade risk management processes and systems. At this time, USTC/USTNY has made
progress in implementing new processes and systems and is well underway to
implementing the measures required by the order. USTC/USTNY expects that the
measures it is undertaking will significantly strengthen its ability to manage
the compliance obligations associated with a leading nationwide private banking
and investment management business and thereby enhance its ability to provide
clients with the highest levels of service.
CSC is not a party to the order and the order does not allege that CSC has
violated any law. Since the merger with U.S. Trust a year ago, CSC has devoted
considerable resources to supporting and monitoring U.S. Trust's risk management
program. CSC has increased the level of support and resources devoted to U.S.
Trust since the entry of the order.
As a financial holding company regulated by the Federal Reserve Board, the
ability of CSC to acquire companies and enter new lines of business without
seeking the Federal Reserve Board's prior approval is dependent upon the status
of its subsidiary depository institutions. For this reason, CSC has entered into
an agreement with the Federal Reserve Bank of San Francisco that commits CSC to
support the remedial measures being taken by USTC/USTNY. This agreement confirms
CSC's current ability to engage in acquisition and new business lines. If
USTC/USTNY is unable to remedy the issues identified by the regulators within
six months, or such additional time as the Federal Reserve may grant, CSC may be
required to take additional steps, potentially including the limitation of other
business activities and, in extraordinary circumstances, divestiture of U.S.
Trust. At this time, CSC expects that the measures USTC/USTNY is taking, with
the support of CSC, will be sufficient to ensure USTC/USTNY will remedy the
issues in a timely manner.
In January 2001, three purported class action complaints were filed against
U.S. Trust NY and numerous other defendants. In subsequent months, a number of
related individual cases were filed. U.S. Trust Company, N.A.(USTNA) was also
named as a defendant in a number of these complaints. The plaintiffs in all of
these cases are former personal injury plaintiffs (Payees) who are entitled to a
stream of future payments under "structured settlement" agreements, most of
which were reached in the early 1980s. The settlement payments are obligations
of Stanwich Financial Services Corp. (Stanwich), as Trustor of certain Trusts,
and Stanwich has defaulted on certain of those obligations. USTNA served as
Trustee of the Trusts from approximately December 1992 to March 1994, and U.S.
Trust NY served as Trustee from approximately September 1998 until its recent
resignation. At the time of the structured settlements, U.S. Treasury securities
were purchased with the settlement monies. Thereafter, at some time during the
period from March 1994 to September 1998, while an unrelated trust company was
the Trustee of the Trusts, the securities were pledged as collateral for loans
and then lost through foreclosure.
The class actions and all but two of the individual cases have been filed
in California (the California cases), and have been consolidated for certain
purposes. The other two individual cases have been filed in Montana (the Montana
cases). In the complaints now applicable to the California cases, the plaintiffs
allege that, as Trustee of the Trusts during their respective tenures, U.S.
Trust NY and USTNA owed certain duties to the Payees, and breached those duties
in various ways. The plaintiffs in these cases seek unspecified compensatory
damages, punitive damages and other relief. The two complaints in the Montana
cases make similar allegations and seek similar relief. In the California cases,
U.S. Trust NY and USTNA have answered the complaints, denying the material
allegations and raising certain affirmative defenses, and has filed
cross-complaints for indemnity against other defendants in the case. In the
Montana cases, U.S. Trust NY and USTNA have not yet filed their initial
pleadings. U.S. Trust NY and USTNA intend to vigorously defend both the
California and the Montana cases.
On June 11, 2001, the United States Court of Appeals for the Fifth Circuit
dismissed the appeals challenging the earlier settlement of two Louisiana
payment for order flow and best execution lawsuits against Schwab that had been
pending since 1995. As a result, the settlements, the terms of which are
described in the Company's 2000 Annual Report to Shareholders on Form 10-K, are
now final.
The nature of the Company's business subjects it to claims, lawsuits,
regulatory examinations and other proceedings in the ordinary course of its
business. The ultimate outcome of such matters and the legal proceedings
described above cannot be determined at this time, and the results of these
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 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.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 7, 2001, and a
total of 1,298,641,360 shares were present in person or by proxy at the Annual
Meeting. The Company's stockholders voted upon the following proposals:
Proposal No. 1 - Election of Four Directors:
Shares Broker
Shares For Withheld Non-Votes
Donald G. Fisher 1,143,687,214 154,954,146 0
Anthony M. Frank 1,281,296,781 17,344,579 0
Jeffrey S. Maurer 1,230,839,652 67,801,708 0
Arun Sarin 1,281,265,262 17,376,098 0
The following directors did not stand for reelection at the 2001 Annual Meeting
of Stockholders because their terms continued after the Annual Meeting: Charles
R. Schwab, David S. Pottruck, Nancy H. Bechtle, C. Preston Butcher, Frank C.
Herringer, Stephen T. McLin, H. Marshall Schwarz, George P. Shultz, and Roger O.
Walther.
Proposal No. 2 - Approval of an Amendment to the Company's Certificate of
Incorporation to Increase the Number of Authorized Shares of Common Stock from 2
billion to 3 billion:
Broker
Shares For Shares Against Abstentions Non-Votes
1,272,161,889 21,440,858 5,038,613 0
Proposal No. 3 - Approval of the 2001 Stock Incentive Plan:
Broker
Shares For Shares Against Abstentions Non-Votes
952,014,678 131,362,866 6,558,216 208,705,600
Proposal No. 4 - Approval of the Annual Executive Individual Performance Plan,
as amended:
Broker
Shares For Shares Against Abstentions Non-Votes
1,210,909,534 79,921,118 7,810,708 0
Item 5. Other Information
On May 29, 2001, Linnet F. Deily, Vice Chairman - Office of the President
of Schwab and Vice Chairman of the Company and Schwab resigned.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q.
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Exhibit
Number Exhibit
- --------------------------------------------------------------------------------
10.219 The Charles Schwab Corporation 2001 Stock Incentive Plan,
approved at the Annual Meeting of Stockholders on May 7, 2001.
10.220 The Charles Schwab Corporation Annual Executive Individual
Performance Plan, as amended and restated, approved at the Annual
Meeting of Stockholders on May 7, 2001 (supersedes Exhibit 10.211).
10.221 The SchwabPlan Retirement Savings and Investment Plan, restated and
amended as of April 1, 2001 (supersedes Exhibit 10.216).
12.1 Computation of Ratio of Earnings to Fixed Charges.
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHARLES SCHWAB CORPORATION
(Registrant)
Date: August 10, 2001 /s/ Christopher V. Dodds
----------------------- ----------------------------
Christopher V. Dodds
Executive Vice President and
Chief Financial Officer