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, 1996 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)
101 Montgomery Street, San Francisco, CA 94104
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (415) 627-7000
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.
175,165,934 shares of $.01 par value Common Stock
Outstanding on August 6, 1996
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1996
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 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
Part II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
FORWARD-LOOKING STATEMENTS In addition to the historical information
contained throughout this interim report, there are forward-looking statements
that reflect management's expectations for the future. These statements
relate to the Company's strategy, sources of liquidity and capital
expenditures. Many factors could cause actual results to differ materially
from these statements. These factors include: the actions of both current
and potential new competitors, changes in the amount or timing of anticipated
investments by the firm, fundamentally cyclical financial markets, the nature
of the Company's revenues and expenses, evolving industry regulation, rapid
changes in technology, customer trading patterns, and the myriad domestic and
international political and economic factors that affect securities markets
and therefore may influence the behavior of the individual investor.
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues
Commissions $261,149 $179,245 $502,062 $330,192
Mutual fund service fees 75,384 51,601 144,219 97,840
Interest revenue, net of interest expense(1) 62,405 49,639 121,349 95,687
Principal transactions 73,119 52,739 134,753 96,035
Other 19,726 9,494 36,181 19,817
- -------------------------------------------------------------------------------------------------------------------
Total 491,783 342,718 938,564 639,571
- -------------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 200,481 139,184 396,189 262,345
Communications 44,346 30,097 87,300 56,460
Occupancy and equipment 33,117 27,309 63,093 50,829
Commissions, clearance and floor brokerage 21,773 19,252 41,306 34,851
Depreciation and amortization 23,353 14,558 48,104 28,692
Advertising and market development 17,844 12,295 40,047 23,193
Professional services 10,210 10,202 23,645 15,849
Other 21,960 16,534 40,511 30,684
- -------------------------------------------------------------------------------------------------------------------
Total 373,084 269,431 740,195 502,903
- -------------------------------------------------------------------------------------------------------------------
Income before taxes on income 118,699 73,287 198,369 136,668
Taxes on income 48,604 28,868 81,331 53,873
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 70,095 $ 44,419 $117,038 $ 82,795
===================================================================================================================
Weighted-average number of common and
common equivalent shares outstanding(2) 179,250 178,127 179,069 177,144
===================================================================================================================
Per Share
Primary Earnings per Share $ .39 $ .25 $ .65 $ .47
===================================================================================================================
Fully Diluted Earnings per Share $ .39 $ .25 $ .65 $ .47
===================================================================================================================
Dividends Declared per Common Share $ .040 $ .030 $ .080 $ .060
===================================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for the three months ended
June 30, 1996 and 1995 was $101,152 and $87,666, respectively. Interest expense for the six months ended
June 30, 1996 and 1995 was $200,161 and $166,869, respectively.
(2) Amounts shown are used to calculate primary earnings per share.
See Notes to Condensed Consolidated Financial Statements.
- 1 -
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
June 30, December 31,
1996 1995
---- ----
(Unaudited)
-----------
Assets
Cash and equivalents (including resale agreements of $27,000 in 1996
and $250,000 in 1995) $ 615,236 $ 429,298
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $4,126,464 in 1996
and $4,384,298 in 1995) 5,168,759 5,426,619
Receivable from brokers, dealers and clearing organizations 153,538 141,916
Receivable from customers (less allowance for doubtful accounts
of $4,401 in 1996 and $3,700 in 1995) 4,665,322 3,946,295
Securities owned - at market value 135,612 113,522
Equipment, office facilities and property (less accumulated depreciation
and amortization of $239,699 in 1996 and $212,035 in 1995) 279,768 243,472
Intangible assets (less accumulated amortization of $168,600 in 1996
and $162,358 in 1995) 74,602 80,863
Other assets 121,163 170,023
- ------------------------------------------------------------------------------------------------------------------------
Total $11,214,000 $10,552,008
========================================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 157,082 $ 212,961
Payable to brokers, dealers and clearing organizations 610,790 581,226
Payable to customers 9,057,056 8,551,996
Accrued expenses and other 331,724 326,785
Long-term debt (including current maturities) 300,084 246,146
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 10,456,736 9,919,114
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - 9,940,000 shares authorized; $.01 par value
per share; none issued
Common stock - 500,000,000 shares authorized in 1996 and 200,000,000
shares authorized in 1995; $.01 par value per share; 178,459,416 shares
issued in 1996 and 1995 1,785 1,785
Additional paid-in capital 191,291 180,302
Retained earnings 623,696 520,532
Treasury stock - 3,367,825 shares in 1996 and 4,427,255 shares in 1995,
at cost (41,948) (50,968)
Unearned ESOP shares (6,589) (9,397)
Unamortized restricted stock compensation (8,604) (7,074)
Foreign currency translation adjustment (2,367) (2,286)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 757,264 632,894
- ------------------------------------------------------------------------------------------------------------------------
Total $11,214,000 $10,552,008
========================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 2 -
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
Cash flows from operating activities
Net income $ 117,038 $ 82,795
Noncash items included in net income:
Depreciation and amortization 48,104 28,692
Deferred income taxes (1,844) (236)
Other 13,651 10,242
Change in securities owned - at market value (22,090) (29,707)
Change in other assets 50,710 17,021
Change in accrued expenses and other 15,949 35,994
- -----------------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 221,518 144,801
- -----------------------------------------------------------------------------------------------------------------
Change in customer-related balances (excluding the effects of
business acquired):
Payable to customers 503,871 731,510
Receivable from customers (719,446) (40,154)
Drafts payable (56,688) 12,026
Payable to brokers, dealers and clearing organizations 29,387 135,551
Receivable from brokers, dealers and clearing organizations (11,214) (22,004)
Cash and investments required to be segregated under
Federal or other regulations 259,392 (832,058)
- -----------------------------------------------------------------------------------------------------------------
Net change in customer-related balances 5,302 (15,129)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 226,820 129,672
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (78,976) (42,879)
Cash payments for business acquired (3,709) (48,292)
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (82,685) (91,171)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from long-term debt 54,000 20,000
Purchase of treasury stock (1,024)
Dividends paid (13,983) (10,296)
Other 2,894 6,372
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 41,887 16,076
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (84) (492)
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and equivalents 185,938 54,085
Cash and equivalents at beginning of period 429,298 380,616
- -----------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 615,236 $ 434,701
=================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
- 3 -
THE CHARLES SCHWAB CORPORATION
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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
holding company engaged, through its subsidiaries, in securities
brokerage and related investment services. CSC's principal
operating subsidiary, Charles Schwab & Co., Inc. (Schwab), is a
securities broker-dealer with a network of over 230 branch offices
and four regional customer telephone service centers. Another
subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in
Nasdaq securities, provides trade execution services to broker-
dealers, including Schwab, and institutional customers.
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 generally accepted accounting principles. All adjustments
were of a normal recurring nature. 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
1995 Annual Report to Stockholders, which are incorporated by
reference in the Company's 1995 Annual Report on Form 10-K and the
Company's Quarterly Report on Form 10-Q for the period ended March
31, 1996.
Prior periods' financial statements have been reclassified to
conform to the 1996 presentation.
Statement of Financial Accounting Standard No. 121
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121 - Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. The statement requires that long-lived assets and
certain identifiable intangibles to be held and used by or disposed
of by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of the new standard did
not have an effect on the Company's financial position, results of
operations, earnings per share or cash flows.
SFAS No. 123
Effective January 1, 1996, the Company adopted SFAS No. 123 -
Accounting for Stock-Based Compensation. The new standard
establishes accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee
compensation plans. Under the new standard, the Company may either
adopt the new fair value-based accounting method or continue using
the intrinsic value-based method under Accounting Principles Board
(APB) Opinion No. 25 and provide pro forma disclosures of net
income and earnings per share as if the accounting provision of the
new standard had been adopted. The Company elected to continue to
follow APB Opinion No. 25 and implement the disclosure requirements
of the new standard. Such adoption did not have an effect on the
Company's results of operations, earnings per share or cash flows.
SFAS No. 125
On June 28, 1996, the Financial Accounting Standards Board
issued SFAS No. 125 - Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, effective for
transfers of financial assets made after December 31, 1996. This
new statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Earlier adoption or retroactive application of this
statement is not permitted. The Company believes that the
effect of the adoption of SFAS No. 125 will not have a material
effect on its financial position, results of operations, earnings
per share or cash flows.
Commitments and Contingencies
In the normal course of its margin lending activities, Schwab
may be liable for the margin requirement of customer margin
securities transactions.
M&S has been named as one of thirty-three defendant market-
making firms in a consolidated class action which is pending in
Federal District Court in the Southern District of New York
pursuant to an order of the Judicial Panel on Multidistrict
Litigation. On December 16, 1994, the plaintiffs filed a
consolidated amended complaint purportedly on behalf of certain
persons who purchased or sold Nasdaq securities during the period
May 1, 1989 through May 27, 1994. A second consolidated amended
complaint was filed on August 22, 1995. The consolidated complaint
does not set forth any specific conduct by M&S and does
- 4 -
not request any specific amount of damages, although it requests that
the actual damages be trebled where permitted by statute. The
consolidated complaint generally alleges an illegal combination and
conspiracy among the defendant market makers to fix and maintain
the spreads between the bid and ask prices of Nasdaq securities.
The ultimate outcome of this consolidated action cannot currently
be determined.
Schwab has been named as a defendant in eleven class action
lawsuits filed in state courts in Minnesota, Illinois, New York,
Louisiana, Texas, Florida and California. The class actions were
filed between August 12, 1993 and November 17, 1995, and purport
to be brought on behalf of customers of Schwab who purchased or
sold securities for which Schwab received payments from the market
maker, stock dealer or other third party who executed the
transaction. The complaints generally allege that Schwab failed to
disclose and remit such payments to members of the class, and
generally seek damages equal to the payments received by Schwab.
On June 30, 1995, a class was certified in Civil District Court
for the Parish of Orleans in Louisiana for Louisiana residents who
purchased or sold securities through Schwab between February 1,
1985 and February 1, 1995 for which Schwab received monetary
payments from the market maker or stock dealer who executed the
transaction. The class certification was affirmed by the Louisiana
Court of Appeals on February 29, 1996. On August 16, 1995,
another class was certified in Civil District Court for the Parish
of Natchitoches in Louisiana for residents of all states who
purchased or sold securities through Schwab since 1985 for which
Schwab received monetary payments from the market maker or other
third party who executed the transaction. Schwab has appealed this
class certification to the Louisiana Court of Appeals. On
October 11, 1995, the action filed in the Fifteenth Judicial
Circuit Court in and for Palm Beach County, Florida, was
voluntarily dismissed by plaintiff. On April 19, 1996, the
Minnesota Supreme Court unanimously upheld the dismissal of the
three class actions filed against Schwab in the Fourth Judicial
District Court, Hennepin County, Minnesota, finding that the claims
asserted were preempted by federal law. The ultimate outcome of
the remaining actions cannot currently be determined.
There are other various lawsuits pending against the Company
which, in the opinion of management, will be resolved with no
material impact on the Company's financial position or results of
operations.
Regulatory Requirements
Schwab and M&S are subject to the SEC's Uniform Net Capital Rule
and each compute net capital under the alternative method permitted
by this Rule, which requires the maintenance of minimum net
capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar
amount, which is based on the type of business conducted by the
broker-dealer. The minimum dollar amount for both Schwab and M&S
is $1 million. Under the alternative method, a broker-dealer may
not repay subordinated borrowings, pay cash dividends, or make any
unsecured advances or loans to its parent or employees if such
payment would result in net capital of less than 5% of aggregate
debit balances or less than 120% of its minimum dollar amount
requirement. At June 30, 1996, Schwab's net capital was
$509 million (11% of aggregate debit balances), which was
$413 million in excess of its minimum required net capital and
$269 million in excess of 5% of aggregate debit balances. At
June 30, 1996, M&S' net capital was $15 million (523% of aggregate
debit balances), which was $14 million in excess of its minimum
required net capital.
Schwab and ShareLink Limited, a subsidiary of ShareLink
Investment Services plc, had portions of their cash and investments
segregated for the exclusive benefit of customers at June 30, 1996,
in accordance with applicable regulations. M&S had no such cash
reserve requirement at June 30, 1996.
Cash Flow Information
Certain information affecting the cash flows of the Company
follows (in thousands):
Six Months
Ended
June 30,
1996 1995
---- ----
Income taxes paid $ 52,811 $ 43,111
======== ========
Interest paid:
Customer cash
balances $173,213 $151,147
Long-term debt (including
current maturities) 7,673 5,406
Other 14,995 8,429
-------- --------
Total interest paid $195,881 $164,982
======== ========
- 5 -
Subsequent Events
On July 16, 1996, M&S and twenty-three other Nasdaq market
makers entered into a Stipulation and Order resolving a civil
complaint filed by the Department of Justice alleging violations of
the federal antitrust laws in connection with certain customs and
practices. Under the Stipulation, the parties agreed that the
defendants would not engage in certain types of market making
activities and would take specific steps to assure compliance with
the agreement. No fines or damages were assessed. The Stipulation
and Order is subject to approval by the United States District
Court of the Southern District of New York, following a public
hearing, and if that Court approves the Order, the complaint will
be dismissed.
On July 17, 1996, the Board of Directors increased the quarterly
cash dividend from $.04 per share to $.05 per share payable
August 15, 1996 to stockholders of record August 1, 1996.
- 6 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) provide brokerage and
related investment services to customers with 3.8 million active(a)
accounts and assets that totaled $216.7 billion at June 30, 1996.
With a network of over 230 branch offices, the Company's principal
subsidiary, Charles Schwab & Co., Inc. (Schwab), is physically
represented in 46 states, the Commonwealth of Puerto Rico and the
United Kingdom. Mayer & Schweitzer, Inc. (M&S), a market maker in
Nasdaq securities, provides trade execution services to broker-
dealers and institutional customers.
The Company remains focused on achieving profitable growth
within several markets of the financial services industry - retail
brokerage, mutual funds, support services for independent
investment managers, equity securities market making, electronic
brokerage and 401(k) defined contribution plans. The Company faces
heavy competitive pressure in these markets from full commission
and discount brokerage firms, as well as from mutual fund
companies. Increasingly, competition has also come from banks,
software development companies, insurance companies and others as
they expand their product lines. The Company's strategy for
increasing stockholder value while operating in this competitive
environment includes several key elements, all of which reflect a
focus on providing value to customers.
First, Schwab continues to offer a broad range of products and
services at prices that management believes represent superior
value to customers. The Company has historically used varying
levels of discount pricing, such as with its Mutual Fund
OneSource (registered trademark) service, to enhance
the value of its products and services and support its
efforts to gain market share. Management expects to continue
aggressive use of discount pricing in the marketing of new products
and services. Second, the Company's products and services are
delivered through diverse and complementary customer service
delivery systems including the branch office network, Schwab's
regional customer telephone service centers, and electronic
brokerage channels such as the SchwabLink(registered trademark)
service for financial advisors, Telebroker(registered trademark) -
Schwab's touchtone telephone trading service, and PC-based online
services such as StreetSmart (registered trademark),
e.Schwab(trademark) and SchwabNOW!(trademark) - Internet trading
via Schwab's World Wide Web site. Another key element is the
firm's ongoing investment in technology to provide fast and
consistent customer service and reduce processing costs. The
Company has traditionally been willing to be a forerunner in
placing technology, such as Telebroker, e.Schwab and SchwabNOW!, in
the hands of customers. Finally, the Company's nationwide
advertising and marketing programs are designed to distinguish the
Schwab brand as well as the Company's products and services.
Management expects to continue to invest in all of these areas in
order to position the Company for future expansion, and to enable
customers to choose the type and level of service most appropriate
to their investing activity.
The Company's business, like that of other securities brokerage
firms, is directly affected by the fluctuations in volumes and
price levels that occur in fundamentally cyclical financial
markets. Transaction-based revenues continue to represent a
majority of the Company's revenues. Since these revenues are
heavily influenced by fluctuations in the volume of securities
transactions, it is not unusual for the Company to experience
significant variations in quarterly revenue levels.
(a) Accounts with balances or activity within the preceding twelve months.
- 7 -
The Company actively manages its expenses in anticipation of and
in response to changes in financial market conditions and customer
trading patterns. Certain of the Company's expenses, including
variable compensation, portions of communications, and commissions,
clearance and floor brokerage vary directly with changes in
financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors and
overtime hours, professional services, advertising and market
development, and travel and entertainment can be and are adjusted
over the short term to help the Company achieve its financial
objectives. Additionally, developmental spending (e.g., branch
openings, product and service rollouts and technology enhancements)
is discretionary and can be altered to reflect market conditions.
Finally, certain expenses such as salaries and wages, occupancy and
equipment, and depreciation and amortization do not vary directly,
at least in the short term, with fluctuations in revenue or
securities trading volumes. Given the nature of the Company's
revenues and expenses, and the environmental factors discussed
above, the Company's earnings and common stock price may be subject
to significant volatility. The Company's results for any interim
period are not necessarily indicative of results for a full year.
In addition to the historical information contained throughout
this interim report, the preceding forward-looking statements
relating to the Company's strategy, as well as those that follow
concerning sources of liquidity and capital expenditures, reflect
management's expectations for the future. Many factors could cause
actual results to differ materially from these statements. These
factors include: the competitive environment, changes in the
amount or timing of anticipated investments by the firm,
fundamentally cyclical financial markets, the nature of the
Company's revenues and expenses, evolving industry regulation,
rapid changes in technology, customer trading patterns, and the
myriad domestic and international political and economic factors
that affect securities markets and therefore may influence the
behavior of the individual investor.
Three Months Ended June 30, 1996
Compared To Three Months Ended
June 30, 1995
Summary
Net income for the second quarter of 1996 totaled $70 million,
up 58% from second quarter 1995 net income of $44 million.
Earnings per share for the second quarter of 1996 increased 56% to
$.39 per share from $.25 per share for the second quarter of 1995.
Second quarter 1996 revenues were $492 million, up 43% from
$343 million for the second quarter of 1995, due to increases in
all revenue categories primarily resulting from higher trading
volume and an increase in customer assets. The Company's ongoing
strategy of placing technology in the hands of customers and
providing customers with diverse delivery systems has facilitated
the growth in electronic trading at Schwab. During the second
quarter of 1996, customers averaged a total of 34,600 trades per
day through electronic brokerage channels, an increase of 77% from
the 19,500 average trades per day for the same period last year.
Trades executed via Telebroker(registered trademark) and SchwabLink
(registered trademark)averaged 14,900 and 7,800 per day, respectively,
during the second quarter of 1996, compared to average daily trades
of 8,900 and 5,000, respectively, for the same period last year.
Assets in customer accounts totaled $216.7 billion at June 30,
1996, an increase of $63.6 billion, or 42%, from a year ago
primarily due to increases in customers' equity securities of
$25.1 billion, or 41%, to $87.0 billion, and increases in customer
assets in Schwab's Mutual Fund Marketplace(registered trademark) of
$24.6 billion, or 61%, to $65.0 billion. Customer assets in cash
and money market funds at June 30, 1996 increased
- 8 -
$9.0 billion, or 27%, over the year-ago level to $42.2 billion. Schwab
added 264,000 new customer accounts during the second quarter of 1996,
an increase of 48% from the 178,800 new accounts added during the
second quarter of 1995.
Total operating expenses excluding interest during the second
quarter of 1996 were $373 million, up 38% from $269 million for the
second quarter of 1995, reflecting the Company's continued growth
in staff, capacity expansion and investments in technology and
advertising.
The after-tax profit margin for the second quarter of 1996 was
14%, up from 13% for the second quarter of 1995. The annualized
return on stockholders' equity for the second quarter of 1996 was
39%, up from 33% for the second quarter of 1995.
Commissions
Commission revenues for the Company were $261 million for the
second quarter of 1996, up $82 million, or 46%, from the second
quarter of 1995. Schwab earns commissions when acting as an agent
as opposed to principal transaction revenues when acting as a
principal or a market maker.
Commissions earned on retail agency trades, which exclude
commissions from institutional customers such as corporations and
specialists, comprised 97% and 96% of Schwab's total commissions
for the second quarter of 1996 and 1995, respectively, and totaled
$246 million on a daily average retail agency trade level of 54,100
in the second quarter of 1996, compared with commission revenues of
$172 million on a daily average retail agency trade level of 36,200
for the comparable period in 1995.
Schwab's total retail agency commission revenues increased 43%
from the second quarter of 1995 as its customer base continued to
grow and customer accounts in general were more active, as detailed
in the following table:
- -------------------------------------------------------------------
Three Months
Ended
Retail Agency June 30, Percent
Commission Revenues 1996 1995 Change
- -------------------------------------------------------------------
Number of customer
accounts that traded
(in thousands) 849 709 20%
Average transactions
per account 4.02 3.32 21
Total number of transactions
(in thousands) 3,409 2,352 45
Average commission per
transaction $72.23 $73.08 (1)
Total commission
revenues (in millions) $ 246 $ 172 43
==================================================================
Note: The above table excludes customer transactions in
Schwab's Mutual Fund OneSource(registered trademark) service.
Mutual Fund Service Fees
Mutual fund service fees increased $24 million, or 46%, to
$75 million in the second quarter of 1996 from the comparable
period in 1995. The increase was primarily attributable to
significant increases in customer assets in funds purchased through
Schwab's Mutual Fund OneSource(registered trademark) service, and
customer assets in Schwab's proprietary funds, collectively
referred to as the SchwabFunds(registered trademark). Most of
these fees are earned for record keeping and shareholder services
provided to funds in the Mutual Fund OneSource service, and for
transfer agent, shareholder and investment management services
provided to proprietary money market funds.
Customer assets held by Schwab that have been purchased through
the Mutual Fund OneSource service, excluding SchwabFunds, totaled
$33.5 billion at June 30, 1996, compared to $18.1 billion at
June 30, 1995, an 85% increase. Customer assets invested in the
SchwabFunds, substantially all of which are in money market funds,
increased 32% to $36.3 billion at June 30, 1996 from $27.5 billion
at June 30, 1995.
- 9 -
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense, increased
$12 million, or 26%, to $62 million from the prior year's second
quarter as shown in the following table (in millions):
- -----------------------------------------------------------------
Three Months
Ended
June 30,
1996 1995
- -----------------------------------------------------------------
Interest Revenue
Investments, customer-related $ 74 $ 71
Margin loans to customers 84 61
Other 5 5
- -----------------------------------------------------------------
Total 163 137
- -----------------------------------------------------------------
Interest Expense
Customer cash balances 87 79
Long-term debt (including
current maturities) 5 2
Other 9 6
- -----------------------------------------------------------------
Total 101 87
- -----------------------------------------------------------------
Interest Revenue, Net of
Interest Expense $ 62 $ 50
=================================================================
The increase in interest revenue, net of interest expense, from
the prior year's second quarter was primarily due to higher levels
of interest-earning assets - a $1.5 billion, or 53%, increase in
average margin loans to customers and a $1.0 billion, or 22%,
increase in average investment balances, partially offset by a
higher level of funding sources - a $1.9 billion, or 31%, increase
in interest-bearing customer cash balances, and a decrease in
average net interest margin.
Customer-related daily average balances, interest rates and
average net interest margin for the second quarters of 1996 and
1995 are summarized in the following table (dollars in millions):
- -----------------------------------------------------------------------------------------
Three Months Ended
June 30,
1996 1995
- -----------------------------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $5,655 $4,640
Average interest rate 5.24% 6.11%
Margin loans to customers:
Average balance outstanding $4,483 $2,939
Average interest rate 7.54% 8.38%
Average yield on interest-earning assets 6.26% 6.99%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $8,079 $6,167
Average interest rate 4.32% 5.13%
Other interest-bearing sources:
Average balance outstanding $ 721 $ 411
Average interest rate 4.11% 4.27%
Average noninterest-bearing portion $1,338 $1,001
Average interest rate on funding sources 3.74% 4.40%
Summary:
Average yield on interest-earning assets 6.26% 6.99%
Average interest rate on funding sources 3.74% 4.40%
- -----------------------------------------------------------------------------------------
Average net interest margin 2.52% 2.59%
=========================================================================================
Principal Transactions
During the second quarter of 1996, principal transaction
revenues increased $20 million, or 39%, from the comparable period
in 1995 to $73 million. This increase was primarily due to higher
trading volume handled by M&S, a significant participant in the
Nasdaq market. Nasdaq's daily average share volume during the
second quarter of 1996 was 603 million shares, of which M&S handled
approximately 8%.
During 1994, the Department of Justice (DOJ) and the Securities
and Exchange Commission (SEC) commenced investigations related to
the activities of broker-dealers, including M&S, who act as market
makers in Nasdaq securities. The DOJ investigation has concluded
(See Part I - Financial Information, Item 1., Subsequent Events
note). On August 8, 1996, the SEC issued a report of its investigation
and filed proceedings against the National Association of Securities Dealers,
Inc. (NASD) for allegedly failing to enforce compliance with its rules
and the federal
- 10 -
securities laws. Simultaneously, the NASD agreed to settle the proceedings,
without admitting or denying the SEC's findings, by consenting to a censure
and to certain remedial undertakings. No market makers in Nasdaq securities,
including M&S, were named as parties in the proceedings, although the
SEC has stated that further enforcement proceedings are not precluded.
In addition, beginning in 1994, both the SEC and the NASD issued
for comment certain proposed rules, which, if adopted, would alter
the manner in which orders related to Nasdaq securities are
processed and would introduce new market-wide order handling
systems. The forgoing rulemaking proposals, if approved, together
with other potential regulatory actions and improvements in
technology, could impact the manner in which business is currently
conducted in the Nasdaq market. These changes in market customs
and practices could have a material adverse impact on M&S' revenues
from principal transactions.
Expenses Excluding Interest
Total operating expenses excluding interest for the second
quarter of 1996 were $373 million, up 38% from $269 million for the
second quarter of 1995. Compensation and benefits expense for the
second quarter of 1996 increased $61 million, or 44%, to
$200 million from the prior year's second quarter primarily due to
increases in the number of employees and variable compensation.
During the second quarters of 1996 and 1995, variable compensation
represented 31% and 28%, respectively, of total compensation and
benefits. At June 30, 1996, the Company had full-time, part-time
and temporary employees, and persons employed on a contract basis
that represented the equivalent of approximately 9,400 full-time
employees, compared to approximately 7,300 at June 30, 1995.
Compensation associated with temporary employees, contractors and
overtime hours accounted for $20 million and $14 million of total
compensation and benefits during the second quarters of 1996 and
1995, respectively.
Communications expense increased $14 million, or 47%, to
$44 million from the prior year's second quarter primarily due to
higher customer trading and call volumes, which contributed to
higher telephone, postage, and financial news and securities
quotation services expenses.
Depreciation and amortization expense increased $9 million, or
60%, to $23 million from the prior year's second quarter primarily
due to the depreciation on recently acquired data processing
equipment and the amortization of related software. In addition, a
portion of the 1996 increase was due to the amortization of
goodwill and other intangibles resulting from businesses acquired
during the second half of 1995.
The Company's effective income tax rate for the second quarter
of 1996 was 40.9% compared to 39.4% for the comparable period in
1995.
Six Months Ended June 30, 1996
Compared to Six Months Ended
June 30, 1995
Summary
Net income for the first half of 1996 totaled $117 million, up
41% from first half of 1995 net income of $83 million. Earnings
per share for the first half of 1996 increased 38% to $.65 per
share from $.47 per share for the first half of 1995.
Revenues for the first half of 1996 were $939 million, up 47%
from $640 million for the first half of 1995, due to increases in
all revenue categories primarily resulting from higher trading
volume and an increase in customer assets.
The Company's ongoing strategy of placing technology in the
hands of customers and providing customers with diverse delivery
systems has facilitated the growth in electronic trading at Schwab.
During the first half of 1996, customers averaged a total of 33,400
trades per day through electronic brokerage channels, an increase
of 81% from 18,500 average trades per day for the same period last
year. Trades executed via Telebroker(registered trademark)
- 11 -
and SchwabLink(registered trademark) averaged 14,100 and 8,300 per day,
respectively, during the first half of 1996, compared to average
daily trades of 8,100 and 5,300, respectively, for the same period
last year.
Total operating expenses excluding interest during the first
half of 1996 were $740 million, up 47% from $503 million for the
first half of 1995, primarily resulting from additional staff to
support the Company's continued growth and expansion, higher
variable compensation and higher transaction-related expenses.
The decrease in the after-tax profit margin from 13% for the
first half of 1995 to 12% for the first half of 1996 reflects the
Company's investment in ShareLink Investment Services plc and
development of the Company's 401(k) defined contribution plan
offering to corporations. The annualized return on stockholders'
equity for the first half of 1996 was 34%, up from 32% for the
first half of 1995.
Commissions
Commission revenues for the Company were $502 million for the
first half of 1996, up $172 million, or 52%, from the first half of
1995.
Commissions earned on retail agency trades, which exclude
commissions from institutional customers such as corporations and
specialists, comprised 97% and 96% of Schwab's total commissions
for the first half of 1996 and 1995, respectively, and totaled
$472 million on a daily average retail agency trade level of 52,300
in the first half of 1996, compared with commission revenues of
$317 million on a daily average retail agency trade level of 35,400
for the comparable period in 1995.
Total retail agency commission revenues increased 49% from the
first half of 1995 as Schwab's customer base continued to grow and
customer accounts in general were more active, as detailed in the
following table:
- --------------------------------------------------------------------
Six Months
Ended
Retail Agency June 30, Percent
Commission Revenues 1996 1995 Change
- --------------------------------------------------------------------
Number of customer
accounts that traded
(in thousands) 1,267 1,044 21%
Average transactions
per account that traded 5.21 4.23 23
Total number of transactions
(in thousands) 6,596 4,420 49
Average commission per
transaction $71.58 $71.68 0
Total commission
revenues (in millions) $ 472 $ 317 49
====================================================================
Note: The above table excludes customer transactions in Schwab's
Mutual Fund OneSource(registered trademark) service.
During the first half of 1996, the Company added 509,000 new
accounts, an increase of 48% from 344,000 new accounts added in the
first half of 1995.
Interest Revenue, Net of Interest Expense
Interest revenue, net of interest expense, increased
$25 million, or 27%, to $121 million from the prior year's first
six months as shown in the following table (in millions):
- -----------------------------------------------------------------
Six Months
Ended
June 30,
1996 1995
- -----------------------------------------------------------------
Interest Revenue
Investments, customer-related $149 $133
Margin loans to customers 161 120
Other 11 10
- -----------------------------------------------------------------
Total 321 263
- -----------------------------------------------------------------
Interest Expense
Customer cash balances 173 151
Long-term borrowings 9 5
Other 18 11
- -----------------------------------------------------------------
Total 200 167
- -----------------------------------------------------------------
Interest Revenue, Net of
Interest Expense $121 $ 96
=================================================================
- 12 -
The increase in interest revenue, net of interest expense, for
the first half of 1996 was primarily due to higher levels of
interest-earning assets - a $1.4 billion, or 47%, increase in
average margin loans to customers and a $1.2 billion, or 27%,
increase in average investment balances, partially offset by a
higher level of funding sources - a $1.9 billion or 32% increase in
interest-bearing customer cash balances, and a decrease in average
net interest margin.
Customer-related daily average balances, interest rates, and
average net interest margin for the first six months of 1996 and
1995 are summarized in the following table (dollars in millions):
- -----------------------------------------------------------------------------------------
Six Months Ended
June 30,
1996 1995
- -----------------------------------------------------------------------------------------
Earning Assets (customer-related):
Investments:
Average balance outstanding $5,646 $4,459
Average interest rate 5.32% 6.03%
Margin loans to customers:
Average balance outstanding $4,255 $2,904
Average interest rate 7.60% 8.32%
Average yield on earning assets 6.30% 6.93%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $7,935 $6,025
Average interest rate 4.39% 5.04%
Other interest-bearing sources:
Average balance outstanding $ 660 $ 377
Average interest rate 4.18% 4.23%
Average noninterest-bearing portion $1,306 $ 961
Average interest rate on funding sources 3.80% 4.34%
Summary:
Average yield on earning assets 6.30% 6.93%
Average interest rate on funding sources 3.80% 4.34%
- -----------------------------------------------------------------------------------------
Average net interest margin 2.50% 2.59%
=========================================================================================
Principal Transactions
Principal transaction revenues increased $39 million, or 40%,
from prior year's first half to $135 million. This increase was
due to higher trading volume handled by M&S and higher revenues
relating to specialist posts.
Mutual Fund Service Fees
The changes in mutual fund service fees between the six-month
periods are generally attributable to the changes described in the
comparisons between the three-month periods.
Expenses Excluding Interest
The changes in expenses excluding interest between the six-month
periods are generally attributable to the changes described in the
comparisons between the three-month periods, except for the
fluctuations in advertising and market development expense. This
expense increased $17 million, or 73%, to $40 million from the
prior year's first half primarily due to increased print, direct
mail and media advertisements relating to campaigns covering Mutual
Fund OneSource(registered trademark). Additionally, IRA product
offerings, as well as new product and service offerings such as
e.Schwab(trademark) and the Company's rollout of the 401(k) defined
contribution plan offering to corporations also contributed to the
increase.
The Company's effective income tax rate for the first half of
1996 was 41.0% compared to 39.4% for the same period in 1995.
Liquidity and Capital Resources
Liquidity
Schwab
Liquidity needs relating to customer trading and margin
borrowing activities are met primarily through cash balances in
customer accounts, which totaled $8.8 billion at June 30, 1996, up
5% from the December 31, 1995 level of $8.4 billion. Earnings from
Schwab's operations are the primary source of liquidity for capital
expenditures and investments in new services, marketing and
technology. Management believes that customer cash balances and
operating earnings will continue
- 13 -
to be the primary sources of liquidity for Schwab in the future.
To manage Schwab's regulatory capital position, CSC provides
Schwab with a $250 million subordinated revolving credit facility
maturing in September 1997, of which $215 million was outstanding
at June 30, 1996. At quarter end, Schwab also had outstanding
$25 million in fixed-rate subordinated term loans from CSC maturing
in 1998. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintains
uncommitted unsecured bank credit lines totaling $495 million.
Schwab used such borrowings for five days during the first six
months of 1996, with the daily amounts borrowed averaging
$52 million. These lines were unused at June 30, 1996.
M&S
M&S' liquidity needs are generally met through earnings generated
by its operations. Most of M&S' assets are liquid, consisting
primarily of receivables from brokers, dealers and clearing
organizations, cash and equivalents, and marketable securities.
M&S may borrow up to $35 million under a subordinated lending
arrangement with CSC. At quarter end, M&S had outstanding
borrowings of $4 million under this facility. These borrowings
mature in December 1997. Borrowings under this arrangement qualify
as regulatory capital for M&S.
CSC
CSC's liquidity needs are generally met through cash generated
by its subsidiaries. Schwab and M&S are subject to regulatory
requirements that are intended to ensure the general financial
soundness and liquidity of broker-dealers. These regulations would
prohibit Schwab and M&S from repaying subordinated borrowings to
CSC, paying cash dividends, or making any unsecured advances or
loans to their parent or employees if such payment would result in
net capital of less than 5% of their aggregate debit balances or
less than 120% of their minimum dollar amount requirement of
$1 million. At June 30, 1996, Schwab had $509 million of net
capital (11% of aggregate debit balances), which was $413 million
in excess of its minimum required net capital. At June 30, 1996,
M&S had $15 million of net capital (523% of aggregate debit
balances), which was $14 million in excess of its minimum required
net capital. Management believes that funds generated by the
operations of CSC's subsidiaries will continue to be the primary
funding source in meeting CSC's liquidity needs and maintaining
Schwab's and M&S' net capital.
CSC has individual liquidity needs that arise from its issued
and outstanding $294 million Senior Medium-Term Notes, Series A
(Medium-Term Notes), as well as from the funding of cash dividends,
common stock repurchases and acquisitions. The Medium-Term Notes
have maturities ranging from 1996 to 2005 and fixed interest rates
ranging from 4.95% to 7.72% with interest payable semiannually.
CSC has a prospectus supplement covering the issuance of up to
$140 million in Senior or Senior Subordinated Medium-Term Notes,
Series A pursuant to a registration statement filed with the SEC.
At June 30, 1996, $56 million in securities remained unissued under
this registration statement.
In June 1996, CSC renewed its $250 million committed unsecured
credit facility with a group of nine banks to June 1997. The funds
are available for general corporate purposes. CSC pays a
commitment fee on the unused balance. The terms of this facility
require CSC to maintain a minimum level of stockholders' equity and
Schwab and M&S to maintain minimum levels of net capital, as
defined. This facility has never been used.
See "Commitments and Contingencies" note in Part I - Financial
Information, Item 1., Notes to Condensed Consolidated Financial
Statements.
- 14 -
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $165 million
for the first six months of 1996, up 48% from $111 million for the
first six months of 1995. During the first six months of 1996, the
Company invested $79 million in various capital expenditures,
including $33 million for an office building to be used for the
expansion of its operations and $46 million for equipment and
office facilities relating to the continued enhancement of data
processing and telecommunications systems and the opening of eight
new branch offices. As has been the case recently, capital
expenditures will vary from period to period as business conditions
change.
The Company issued $54 million in Medium-Term Notes during the
first six months of 1996.
During the first six months of 1996, the Company paid common
stock cash dividends totaling $14 million, up from $10 million paid
during the first six months of 1995. In July 1996, the Board of
Directors increased the quarterly cash dividend from $.04 per share
to $.05 per share.
The Company monitors both the relative composition and absolute
level of its financial capital. The Company's stockholders' equity
at June 30, 1996 totaled $757 million. In addition, the Company
had long-term debt (including current maturities) of $300 million
that bears interest at a weighted-average rate of 6.32%. These
borrowings, together with the Company's equity, provided total
financial capital of $1.1 billion at June 30, 1996, up
$178 million, or 20% from the December 31, 1995 level of
$879 million.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The legal proceedings discussed in Notes to Condensed
Consolidated Financial Statements, under "Commitments and
Contingencies" and "Subsequent Events" in Part I - Financial
Information, Item 1., as well as in "Principal Transactions" in
Management's Discussion and Analysis in Part I, Item 2., are
incorporated herein by reference.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 6,
1996, its stockholders voted upon the following proposals:
Proposal I - Election of Ten Directors:
- --------------------------------------
Shares Shares
For Against
--- -------
Charles R. Schwab 156,488,063 5,420,026
Lawrence J. Stupski 156,495,193 5,412,896
David S. Pottruck 156,263,068 5,645,021
Nancy H. Bechtle 156,495,148 5,412,941
C. Preston Butcher 156,495,073 5,413,016
Donald G. Fisher 156,512,840 5,395,249
Anthony M. Frank 156,481,307 5,426,782
James R. Harvey 156,503,980 5,404,109
Stephen T. McLin 156,486,019 5,422,070
Roger O. Walther 156,459,539 5,448,550
There were no abstentions or broker non-votes with respect to
the election of directors.
- 15 -
Proposal II - Increase in the authorized number of shares of Common
- -------------------------------------------------------------------
Stock - Approval of the increase in the number of authorized shares
- -----
of common stock from 200 million to 500 million.
Shares Shares Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
136,097,689 24,995,328 752,072 63,000
Proposal III - Amendment to the 1992 Stock Incentive Plan - Approval
- ---------------------------------------------------------
of Amendment to the 1992 Stock Incentive Plan to provide that each
nonemployee director receive an annual, automatic option grant covering
(a) 2,500 shares of common stock if the exercise price, determined as of
the grant date, is less than $35, or (b) 1,500 shares of common stock if
the exercise price, determined as of the grant date, is $35 or more.
Shares Shares Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
148,657,578 11,188,420 1,399,091 663,000
Proposal IV - Amendments to the Certificate of Incorporation -
- -------------------------------------------------------------------
Approval of Amendments to the Certificate of Incorporation to (a)
classify the Board of Directors into three classes; (b) provide
that directors may be removed only for cause and only with approval
of the holders of at least 80% of the voting power of the Company;
(c) provide that any vacancy on the Board shall be filled by the
remaining directors then in office, even if the remaining directors
constitute less than a quorum; (d) require that stockholder action
be taken only at a duly called annual meeting or special meeting of
stockholders and prohibit stockholder action by written consent;
(e) provide that advance notice of stockholder nominations for the
election of directors and the introduction of business to be
considered at a meeting shall be given as set forth in the Bylaws;
(f) eliminate cumulative voting; and (g) require the concurrence of
the holders of at least 80% of the voting power of the Company to
alter, amend or repeal, or to adopt any provision inconsistent
with, the foregoing amendments.
Shares Shares Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
104,012,051 33,923,515 1,112,959 22,859,564
A total of 161,908,089 shares were present in person or by proxy
at the Annual Meeting.
Item 5. Other Information
None.
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.
Exhibit
Number Exhibit
- ------ -------
3.5 Restated Certificate of Incorporation, as amended May 6, 1996,
of the Registrant.
3.6 Bylaws, as amended May 6, 1996, of the Registrant.
10.158 Credit Agreement dated June 28, 1996 between the Registrant
and the banks listed therein.
11.1 Computation of Earnings per Share.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule (electronic only).
(b) Reports on Form 8-K
None.
-16 -
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 13, 1996 /s/ Steven L. Scheid
--------------- --------------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer
-17 -