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, 1997 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.
176,422,461* shares of $.01 par value Common Stock
Outstanding on July 18, 1997
* Excludes the effects of the three-for-two common stock split declared July 16,
1997, payable September 15, 1997.
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1997
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 7-16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
FORWARD-LOOKING STATEMENTS In addition to historical information, this interim
report contains forward-looking statements that reflect management's
expectations. These statements relate to, among other things, Company
contingencies, strategy, revenues, profit margin, sources of liquidity and
capital expenditures. Achievement of the expressed expectations is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those expectations. See "Description of Business" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this interim report for a discussion of important factors that may
cause such differences.
THE CHARLES SCHWAB CORPORATION
Part 1 - 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,
1997 1996 1997 1996
----- ----- ----- ----
Revenues
Commissions $ 261,396 $ 261,149 $ 536,315 $ 502,062
Mutual fund service fees 101,824 75,384 196,522 144,219
Principal transactions 63,598 73,119 132,733 134,753
Interest revenue, net of interest expense(1) 82,485 62,405 159,208 121,349
Other 21,481 19,726 41,660 36,181
- ----------------------------------------------------------------------------------------------------
Total 530,784 491,783 1,066,438 938,564
- ----------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 224,119 200,481 444,957 396,189
Communications 45,511 44,346 91,212 87,300
Occupancy and equipment 38,490 33,117 73,904 63,093
Depreciation and amortization 29,686 23,353 57,459 48,104
Advertising and market development 25,954 17,844 61,789 40,047
Commissions, clearance and floor brokerage 22,217 21,773 44,661 41,306
Professional services 16,573 10,210 30,454 23,645
Other 22,491 21,960 45,939 40,511
- ----------------------------------------------------------------------------------------------------
Total 425,041 373,084 850,375 740,195
- ----------------------------------------------------------------------------------------------------
Income before taxes on income 105,743 118,699 216,063 198,369
Taxes on income 41,781 48,604 85,366 81,331
- ----------------------------------------------------------------------------------------------------
Net Income $ 63,962 $ 70,095 $ 130,697 $ 117,038
====================================================================================================
Weighted-average number of common and
common equivalent shares outstanding(2, 3) 181,091 179,250 180,959 179,069
====================================================================================================
Primary/Fully Diluted Earnings Per Share(3) $ .35 $ .39 $ .72 $ .65
====================================================================================================
Dividends Declared Per Common Share(3) $ .05 $ .04 $ .10 $ .08
====================================================================================================
(1) Interest revenue is presented net of interest expense. Interest
expense for the three months ended June 30, 1997 and 1996 was
$133,126 and $101,152, respectively. Interest expense for the six
months ended June 30, 1997 and 1996 was $256,256 and $200,161,
respectively.
(2) Amounts shown are used to calculate primary earnings per share.
(3) Excludes the effects of the three-for-two common stock split
declared July 16, 1997, payable September 15, 1997.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
June 30, December 31,
1997 1996
---- ----
Assets
Cash and cash equivalents $ 733,454 $ 633,317
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $5,125,028 in 1997
and $6,069,930 in 1996) 7,034,650 7,235,971
Receivable from brokers, dealers and clearing organizations 295,623 230,943
Receivable from customers -- net 5,911,678 5,012,815
Securities owned -- at market value 189,979 127,866
Equipment, office facilities and property -- net 332,664 315,376
Intangible assets -- net 61,943 68,922
Other assets 118,307 153,558
- --------------------------------------------------------------------------------------------------------
Total $ 14,678,298 $ 13,778,768
========================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 209,317 $ 225,136
Payable to brokers, dealers and clearing organizations 1,053,450 877,742
Payable to customers 11,768,347 11,176,836
Accrued expenses and other 365,240 360,683
Borrowings 289,180 283,816
- --------------------------------------------------------------------------------------------------------
Total liabilities 13,685,534 12,924,213
- --------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock -- 9,940 shares authorized; $.01 par value
per share; none issued
Common stock -- 500,000 shares authorized; $.01 par value per share;
178,459 shares issued in 1997 and 1996* 1,785 1,785
Additional paid-in capital 227,557 200,857
Retained earnings 836,211 723,085
Treasury stock -- 2,137 shares in 1997 and 3,391 shares in 1996,
at cost* (55,065) (60,277)
Unearned ESOP shares (3,483) (5,517)
Unamortized restricted stock compensation (15,870) (8,658)
Foreign currency translation adjustment 1,629 3,280
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 992,764 854,555
- --------------------------------------------------------------------------------------------------------
Total $ 14,678,298 $ 13,778,768
========================================================================================================
* Excludes the effects of the three-for-two common stock split declared
July 16, 1997, payable September 15, 1997.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
----- ----
Cash flows from operating activities
Net income $ 130,697 $ 117,038
Noncash items included in net income:
Depreciation and amortization 57,459 48,104
Deferred income taxes (8,553) (1,844)
Stock compensation 13,300 10,774
Other 1,643 2,877
Change in securities owned--at market value (62,113) (22,090)
Change in other assets 43,710 57,168
Change in accrued expenses and other 25,785 15,949
- -----------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 201,928 227,976
- -----------------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 595,674 503,871
Receivable from customers (900,557) (719,446)
Drafts payable (15,871) (56,688)
Payable to brokers, dealers and clearing organizations 176,030 29,387
Receivable from brokers, dealers and clearing organizations (66,250) (11,214)
Cash and investments required to be segregated under
Federal or other regulations 197,937 259,392
- -----------------------------------------------------------------------------------------
Net change in customer-related balances (13,037) 5,302
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 188,891 233,278
- -----------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property--net (69,621) (78,976)
Cash payments for business acquired (3,709)
- -----------------------------------------------------------------------------------------
Net cash used by investing activities (69,621) (82,685)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 10,000 54,000
Purchase of treasury stock (15,702) (1,024)
Dividends paid (17,571) (13,983)
Other 3,590 2,894
- -----------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (19,683) 41,887
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 550 (84)
- -----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 100,137 192,396
Cash and cash equivalents at beginning of period 633,317 454,996
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 733,454 $ 647,392
=========================================================================================
See Notes to Condensed Consolidated Financial Statements.
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 financial services. CSC's
principal subsidiary, Charles Schwab & Co., Inc. (Schwab), is a securities
broker-dealer with 254 branch offices in 47 states, the Commonwealth of Puerto
Rico and the United Kingdom, and four regional telephone service centers.
Another subsidiary, Mayer & Schweitzer, Inc. (M&S), is a market maker in Nasdaq
securities that provides trade execution services to broker-dealers, including
Schwab, and institutional customers. ShareLink, a subsidiary located in the
United Kingdom, is a retail discount securities brokerage firm.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission 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 1996 Annual Report to Stockholders, which are
incorporated by reference in the Company's 1996 Annual Report on Form 10-K, and
the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997.
Prior periods' financial statements have been reclassified to conform to
the 1997 presentation.
New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 125 -- Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, was adopted by the Company effective January 1, 1997, except for
certain financial assets for which the effective date has been delayed until
1998 by SFAS No. 127 -- Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. The adoption of this statement did not have an effect on the
Company's financial position, results of operations, earnings per share or cash
flows.
SFAS No. 128 -- Earnings per Share, was issued by the Financial Accounting
Standards Board (FASB) in February 1997. The Company is required to adopt this
statement at December 31, 1997.
This statement replaces current earnings per share (EPS) reporting
requirements and requires a dual presentation of basic and diluted EPS. Basic
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 dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
If this statement had been in effect during the current and prior year
periods, basic EPS would have been $.37 and $.41 for the quarters ended June 30,
1997 and 1996, respectively and $.75 and $.68 for the six-month periods ended
June 30, 1997 and 1996, respectively. Diluted EPS would have been the same as
primary and fully diluted EPS currently reported for the periods.
SFAS No. 129 -- Disclosure of Information about Capital Structure, was
issued by the FASB in February 1997. The Company is required to adopt this
statement at December 31, 1997. This statement establishes standards for
disclosing information about the Company's capital structure. The adoption of
this statement will not have an effect on the Company's financial position,
results of operations, earnings per share or cash flows.
SFAS No. 130 -- Reporting Comprehensive Income, and SFAS No. 131 --
Disclosures about Segments of an Enterprise and Related Information, were issued
by the FASB in June 1997 and are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income, which includes net income and changes in equity
except those resulting from investments by, or distributions to, stockholders.
SFAS No. 131 establishes standards for disclosures related to business operating
segments. The adoption of these statements will not have an effect on the
Company's financial position, results of operations, earnings per share or cash
flows.
Commitments and Contingencies
M&S has been named as one of thirty-five defendant market-making firms in
a consolidated class action, In re: Nasdaq Market-Makers Antitrust Litigation,
which is pending in the United States District Court for 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. On August 22,
1995, a second consolidated amended class action complaint was filed. On
November 26, 1996, a plaintiff class consisting of retail investors was
certified by the Court. On April 14, 1997, a plaintiff class consisting of
institutional investors was also certified. 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 certain Nasdaq
securities. The consolidated complaint seeks damages based upon joint and
several liability, as well as injunctive and declaratory relief and attorneys
fees, but does not set forth any specific amount of damages, although it
requests that the actual damages be trebled where permitted by statute.
Pre-trial discovery is ongoing. Between April 9, 1997 and June 6, 1997,
plaintiffs reached proposed settlements with three defendants and motions to
approve those settlements are pending before the Court. Although the ultimate
outcome of this consolidated action cannot be determined at this time and the
results of legal proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with outside legal counsel, that the
resolution of this action will not have a material adverse impact on the
financial condition of the Company; however, there could be a material adverse
impact on operating results in future periods, depending in part on the results
for such periods.
On July 16, 1996, the Department of Justice filed a civil action in the
United States District Court for the Southern District of New York, United
States of America v. Alex Brown & Sons, Inc., et al., against M&S and
twenty-three other market makers in Nasdaq securities alleging violations of the
federal antitrust laws in connection with certain customs and practices. On July
16, 1996, the twenty-four market-maker defendants, including M&S, entered into a
Stipulation and Order resolving the civil action. 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. On April 23, 1997, the Court
approved the Stipulation and Order. Certain objecting parties have appealed the
Court's approval of the Stipulation and Order to the United States Court of
Appeals for the Second Circuit, which has not yet set a date for hearing the
appeal. If the Stipulation and Order is finally approved, after all periods for
appeal have passed, the civil action will be dismissed.
Between August 12, 1993 and November 17, 1995, Schwab was named as a
defendant in eleven class action lawsuits in seven states. One of the actions
was voluntarily dismissed and four have been resolved favorably to Schwab on the
grounds that the claims asserted are preempted by federal law. The remaining six
cases are still pending in state courts in Texas, Illinois, California and
Louisiana. The class actions all 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 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. The action in Texas has been stayed. The actions in
Illinois and California have been dismissed on the grounds that the claims
asserted are preempted by federal law. Plaintiffs have filed appeals in both
cases.
On June 30, 1995, the action in Civil District Court for the Parish of
Orleans in Louisiana was certified on behalf of a class of 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. The action is
currently on appeal, by order of the Louisiana Supreme Court, from the trial
Court's denial of Schwab's motion to dismiss on the grounds of federal
preemption.
On August 16, 1995, the action in Civil District Court for the Parish of
Natchitoches in Louisiana was certified on behalf of a class of residents of all
states who purchased or sold securities through Schwab since 1985 for which
Schwab received monetary payments from the market maker or the third party who
executed the transaction. The class certification was affirmed by the Louisiana
Court of Appeals on December 2, 1996. The Natchitoches action is currently set
for trial on September 22, 1997, although Schwab has filed a motion to dismiss
on the grounds of federal preemption. Should the case go to trial, it
potentially could result in an adverse judgment against Schwab, in a material
amount, that would be subject to appeal. Although the results of legal
proceedings cannot be predicted with certainty, it is the opinion of management,
after consultation with outside legal counsel, that the ultimate outcome of
these actions will not have a material adverse impact on the financial condition
of the Company or its results of operations.
There are various other 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 Uniform Net Capital Rule under the
Securities Exchange Act of 1934 (the Rule) and each compute net capital under
the alternative method permitted by this Rule, which requires the maintenance of
minimum net capital, as defined, of the greater of 2% of aggregate debit
balances arising from customer transactions or a minimum dollar amount, which is
based on the type of business conducted by the broker-dealer. The minimum dollar
amount for both Schwab and M&S is $1 million. Under the alternative method, a
broker-dealer may not repay subordinated borrowings, pay cash dividends, or make
any unsecured advances or loans to its parent or employees if such payment would
result in net capital of less than 5% of aggregate debit balances or less than
120% of its minimum dollar amount requirement. At June 30, 1997, Schwab's net
capital was $624 million (10% of aggregate debit balances), which was $500
million in excess of its minimum required net capital and $315 million in excess
of 5% of aggregate debit balances. At June 30, 1997, M&S' net capital was $8
million (331% of aggregate debit balances), which was $7 million in excess of
its minimum required net capital.
Schwab and ShareLink had portions of their cash and investments segregated
for the exclusive benefit of customers at June 30, 1997, in accordance with
applicable regulations. M&S had no such cash reserve requirement at June 30,
1997.
Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
Six Months
Ended
June 30,
1997 1996
---- ----
Income taxes paid $ 67,961 $ 52,811
========== ==========
Interest paid:
Customer cash balances $ 221,877 $ 173,213
Stock-lending activities 16,929 11,031
Borrowings 9,144 7,673
Other 4,102 3,964
---------- ----------
Total interest paid $ 252,052 $ 195,881
========== ==========
Subsequent Event
On July 16, 1997, the Board of Directors approved a three-for-two split of
the Company's common stock, which will be effected in the form of a 50% stock
dividend. The stock dividend is payable September 15, 1997 to stockholders of
record August 14, 1997. Share and per share data have not been restated to
reflect this transaction.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Description of Business
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively
referred to as the Company) provide securities brokerage and related financial
services for over 4.4 million active customer accounts(a). Customer assets
totaled $306.3 billion at June 30, 1997. CSC's principal subsidiary, Charles
Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 254 branch
offices in 47 states, the Commonwealth of Puerto Rico and the United Kingdom.
Another subsidiary, Mayer & Schweitzer, Inc. (M&S), a market maker in Nasdaq
securities, provides trade execution services to broker-dealers and
institutional customers. ShareLink, a subsidiary located in the United Kingdom,
is a retail discount securities brokerage firm.
In May 1997, the Company was added to the Standard & Poor's 500 Index
under the investment banking/brokerage industry group.
The Company's strategy is to attract and retain customer assets by
focusing on a number of areas within the financial services industry -- retail
brokerage, mutual funds, support services for independent investment managers,
equity securities market-making, electronic brokerage and 401(k) defined
contribution plans. To pursue its strategy and its objective of long-term
profitable growth, the Company plans to continue to leverage its competitive
advantages. These advantages include advertising and marketing programs that
have created a national brand, a broad range of products and services, diverse
delivery systems and an ongoing investment in technology.
The Company's nationwide advertising and marketing programs are designed
to distinguish the Schwab brand as well as its products and services. These
programs helped the Company open 290,000 new customer accounts and gather $11.1
billion in net new customer assets during the second quarter of 1997.
The Company offers a broad range of products and services to meet
customers' investment and financial needs at prices that management believes
represent superior value. The Company's branch office network assists investors
in developing asset allocation strategies and evaluating their investment
choices. Branch staff also refer investors who desire additional guidance to
independent fee-compensated investment managers through the Schwab
AdvisorSource(trademark) service. The Company is continuing to enhance and
broaden the Mutual Fund OneSource(registered trademark) service, which provides
customers with the ability to invest in 750 mutual funds from 106 fund families
without incurring transaction fees. During the second quarter of 1997, the
Company began to offer futures and commodities trading to certain of its most
active customers.
The Company invests in diverse delivery systems that support the Company's
customer service standards. During the second quarter of 1997, the Company
opened 15 new domestic branch offices, and established new subsidiaries in the
Cayman Islands and Hong Kong. In addition to its branch office network, the
Company maintains four regional telephone service centers as well as electronic
brokerage channels that provide customers with online and telephonic access.
Online channels include PC-based services such as SchwabLink(registered
trademark) -- a service for investment managers, StreetSmart(registered
trademark) -- Schwab's desktop trading software, e.Schwab(trademark) -- an
online investing account, and SchwabNOW!(trademark) -- which provides
information and trading services through Schwab's World Wide Web site.
Telephonic channels include TeleBroker(registered trademark) -- Schwab's
touch-tone telephone trading service, and VoiceBroker(trademark) -- Schwab's
service that uses voice recognition technology to provide individual investors
with real-time quotes.
- --------
(a) Accounts with balances or activity within the preceding twelve months.
The Company's ongoing investment in technology is a key element in
providing fast and consistent customer service, and reducing processing costs.
The Company is a forerunner in placing technology in the hands of customers.
During the second quarter of 1997, Schwab enhanced VoiceBroker(trademark) to
provide real-time quotes on equity options. Also during the second quarter of
1997, Schwab added features to SchwabPlan(registered trademark), its
comprehensive 401(k) retirement plan offering, allowing plan participants access
to their accounts through the Internet.
The Company faces significant competition from full commission and
discount brokerage firms, as well as mutual fund companies. Increasingly,
competition has come from banks, software development companies, insurance
companies and others as they expand their product lines. Some of these
competitors have significantly greater resources than the Company. A general
trend of consolidation in financial services has attracted new competitors and
strengthened existing ones. This competition may negatively impact the Company's
revenue growth and profit margin.
The Company's business, like that of other securities brokerage firms, is
directly affected by the fluctuations in securities trading volumes and price
levels that occur in fundamentally cyclical financial markets. Since
transaction-based revenues continue to represent a majority of the Company's
revenues, the Company may experience significant variations in revenues from
period to period.
The Company adjusts its expenses in anticipation of and in response to
changes in financial market conditions and customer trading patterns. Certain of
the Company's expenses (including variable compensation, portions of
communications, and commissions, clearance and floor brokerage) vary directly
with changes in financial performance or customer trading activity. Expenses
relating to the level of temporary employees, contractors, overtime hours,
professional services, and advertising and market development are adjustable
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 in
response to market conditions. However, a significant portion of the Company's
expenses such as salaries and wages, occupancy and equipment, and depreciation
and amortization do not vary directly, at least in the short term, with
fluctuations in revenues or securities trading volumes. Given the nature of the
Company's revenues and expenses, and the economic and competitive factors
discussed above, the Company's earnings and 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.
In addition to historical information, this interim report contains
forward-looking statements that reflect management's expectations. These
statements relate to, among other things, Company contingencies (see
"Commitments and Contingencies" note in the Notes to Condensed Consolidated
Financial Statements, and Principal Transactions), strategy (see Description of
Business), revenues (see Principal Transactions), profit margin (see Principal
Transactions), sources of liquidity (see Liquidity and Capital
Resources-Liquidity) and capital expenditures (see Liquidity and Capital
Resources-Cash Flows and Capital Resources). Achievement of the expressed
expectations is subject to certain risks and uncertainties that could cause
actual results to differ materially from those expectations. Important factors
that may cause such differences are noted throughout this interim report and
include, but are not limited to: the effect of customer trading patterns on
Company revenues and earnings; changes in technology; the effects of
competitors' pricing, product and service decisions and intensified competition;
evolving regulation and changing industry customs and practices adversely
affecting the Company; the uncertainties of litigation; changes in revenues and
profit margin due to cyclical securities markets and interest rates; and a
significant downturn in the securities markets over a short period of time or a
sustained decline in securities prices and trading volumes.
Three Months Ended June 30, 1997
Compared To Three Months Ended
June 30, 1996
Financial Overview
Net income for the second quarter of 1997 totaled $64 million, down 9%
from second quarter 1996 net income of $70 million. Earnings per share for the
second quarter of 1997 decreased 10% to $.35 per share from $.39 per share for
the second quarter of 1996. Share and per share data have not been restated to
reflect the effects of the three-for-two common stock split declared July 16,
1997, payable September 15, 1997.
Second quarter 1997 revenues were $531 million, up 8% from $492 million
for the second quarter of 1996, as mutual fund service fees and interest
revenue, net of interest expense (referred to as net interest revenue), each
increased by more than 30%, primarily due to an increase in customer assets.
These increases were partially offset by lower principal transaction revenues.
Second quarter 1997 commission revenues were unchanged. During the second
quarter of 1997, total daily average trades, which include revenue trades and
Mutual Fund OneSource(registered trademark) trades, totaled 96,500, up 12% from
86,400 daily average trades for the same period last year. The Company's
strategy of placing technology in the hands of customers and providing diverse
delivery systems has facilitated growth in electronic trading at Schwab. A total
of 36,800 daily average trades were generated through online brokerage channels
during the second quarter of 1997, up 88% from 19,600 daily average trades for
the same period last year. Additionally, a total of 12,700 daily average trades
were generated through TeleBroker(registered trademark) during the second
quarter of 1997, down 15% from 14,900 daily average trades for the same period
last year, reflecting the higher proportion of trades placed through online
brokerage channels.
Assets in Schwab customer accounts totaled $306.3 billion at June 30,
1997, an increase of $89.6 billion, or 41%, from a year ago as shown in the
table below. This $89.6 billion increase resulted from a $54.2 billion net
inflow of Schwab customer assets and net market gains of $35.4 billion.
- --------------------------------------------------------------------------------
Assets in Schwab
Customer Accounts June 30, Percent
(in billions) 1997 1996 Change
- --------------------------------------------------------------------------------
Cash and equivalents:
SchwabFunds(registered trademark) money
market funds $ 43.8 $ 33.5 31%
Schwab One(registered trademark) and other
cash equivalents 11.1 8.7 28
Net securities:
Mutual Fund Marketplace(registered trademark) (1):
Mutual Fund OneSource(registered trademark) 49.5 33.5 48
All other 42.9 31.5 36
- --------------------------------------------------------------------------------
Total Mutual Fund
Marketplace 92.4 65.0 42
Equity and other securities (1) 130.4 87.0 50
SchwabFunds equity and
bond funds 5.4 2.8 93
Fixed income securities 29.3 24.3 21
Margin loans outstanding (6.1) (4.6) 33
- --------------------------------------------------------------------------------
Total assets in Schwab
customer accounts $ 306.3 $ 216.7 41
================================================================================
(1) Excludes money market funds and all of Schwab's proprietary money market,
equity and bond funds.
Total operating expenses excluding interest during the second quarter of
1997 were $425 million, up 14% from $373 million for the second quarter of 1996,
primarily resulting from additional staff to support the Company's growth and
expansion, as well as an increase in advertising and market development
spending.
The after-tax profit margin for the second quarter of 1997 was 12.1%, down
from 14.3% for the second quarter of 1996. The annualized return on
stockholders' equity for the second quarter of 1997 was 27%, down from 39% for
the second quarter of 1996, reflecting the Company's higher equity base in the
second quarter of 1997.
Commissions
Commission revenues for the Company were $261 million for both the second
quarter of 1997 and of 1996. The Company earns commissions when acting as an
agent and principal transaction revenues when acting as a principal or a market
maker.
Commissions earned on customer revenue trades, excluding commissions on
trades with specialists, were $260 million for both the second quarter of 1997
and of 1996. Daily average revenue trades were 64,000 in the second quarter of
1997, compared to 57,500 for the comparable period in 1996. The Company's total
revenue trades have increased as its customer base has continued to grow.
However, this increase was offset by a decline in average commission per revenue
trade. Average commission per revenue trade declined due to a higher proportion
of trades placed through electronic brokerage channels, which provide additional
commission discounts from the Company's standard rates.
- ------------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue June 30, Percent
Trades 1997 1996 Change
- ------------------------------------------------------------
Customer accounts that
traded during the quarter
(in thousands) 1,000 937 7%
Average customer
revenue trades
per account 4.09 3.86 6
Total revenue
trades (in thousands) 4,091 3,620 13
Average commission
per revenue trade $63.59 $71.79 (11)
Commissions earned
on customer revenue
trades (in millions) $ 260 $ 260 ---
============================================================
Attracting new customer accounts is important in generating commission
revenues. Schwab added 290,000 new customer accounts during the second quarter
of 1997, an increase of 10% from the 264,000 new accounts added during the
second quarter of 1996.
Mutual Fund Service Fees
Mutual fund service fees increased $26 million, or 35%, to $102 million in
the second quarter of 1997 from the comparable period in 1996. This increase was
primarily attributable to significant increases in customer assets in funds
purchased through Schwab's Mutual Fund OneSource(registered trademark) service,
and in customer assets in Schwab's proprietary funds, collectively referred to
as the SchwabFunds(registered trademark) (see Assets in Schwab Customer Accounts
table above). Fees are earned for record keeping and shareholder services
provided to funds in the Mutual Fund OneSource service, and for transfer agent
services, shareholder services, administration and investment management
provided to the SchwabFunds.
Principal Transactions
Principal transaction revenues decreased $10 million, or 13%, to $64
million in the second quarter of 1997 from the comparable period in 1996. This
decrease was primarily due to lower average revenue per principal transaction
(see discussion below) and lower trading volume handled by M&S.
In August 1996, the Securities and Exchange Commission (SEC) adopted
certain new rules and rule amendments, known as the Order Handling Rules, which
significantly alter the manner in which orders related to both Nasdaq and listed
securities are handled. These rules became effective on January 20, 1997, with
respect to exchange-listed securities and a limited number of Nasdaq securities,
and are being phased in with respect to additional Nasdaq securities during
1997.
Additionally, in June 1997, most major U.S. securities markets, including
Nasdaq and the New York Stock Exchange, began quoting and trading securities in
increments of one-sixteenth dollar per share instead of one-eighth dollar per
share for most securities, and these markets are currently considering a further
change to decimal pricing. Mainly as a result of these regulatory changes and
changes in industry customs and practices, average revenue per principal
transaction declined during the second quarter of 1997 as compared to the second
quarter of 1996. These and future regulatory changes and changes in industry
customs and practices are expected to result in further significant declines in
average revenue per principal transaction, and are expected to have a material
adverse impact on M&S' revenues and profit margin.
During 1994, the SEC commenced an investigation into the Nasdaq market and
the activities of broker-dealers, including M&S, who act as market makers in
Nasdaq securities. M&S has provided documents and testimony and is cooperating
with the SEC investigation, which the SEC has stated is continuing.
See "Commitments and Contingencies" note in the Notes to Condensed
Consolidated Financial Statements regarding certain civil litigation relating to
various principal transaction activities.
Net Interest Revenue
Net interest revenue increased $20 million, or 32%, to $82 million in the
second quarter of 1997 from the comparable period in 1996 as shown in the
following table (in millions):
- ------------------------------------------------------------
Three Months
Ended
June 30,
1997 1996
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 111 $ 84
Investments, customer-related 96 74
Other 8 5
- ------------------------------------------------------------
Total 215 163
- ------------------------------------------------------------
Interest Expense
Customer cash balances 116 87
Stock-lending activities 10 7
Borrowings 5 5
Other 2 2
- ------------------------------------------------------------
Total 133 101
- ------------------------------------------------------------
Net Interest Revenue $ 82 $ 62
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the second quarters of 1997 and 1996 are summarized in the
following table (dollars in millions):
- -----------------------------------------------------------------
Three Months Ended
June 30,
1997 1996
- -----------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,193 $5,655
Average interest rate 5.36% 5.24%
Margin loans to customers:
Average balance outstanding $ 5,774 $4,483
Average interest rate 7.73% 7.54%
Average yield on interest-earning assets 6.42% 6.26%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $10,406 $8,079
Average interest rate 4.47% 4.32%
Other interest-bearing sources:
Average balance outstanding $ 1,108 $ 778
Average interest rate 4.56% 4.31%
Average noninterest-bearing portion $ 1,453 $1,281
Average interest rate on funding sources 3.98% 3.77%
Summary:
Average yield on interest-earning assets 6.42% 6.26%
Average interest rate on funding sources 3.98% 3.77%
- -----------------------------------------------------------------
Average net interest margin 2.44% 2.49%
=================================================================
The increase in net interest revenue from the prior year's second quarter
was primarily due to higher levels of average earning assets.
Expenses Excluding Interest
Compensation and benefits expense for the second quarter of 1997 increased
$24 million, or 12%, to $224 million from the prior year's second quarter
primarily due to an increase in salaries and wages resulting from a larger
number of employees, partially offset by a decrease in variable compensation.
During the second quarters of 1997 and 1996, variable compensation represented
20% and 31%, respectively, of total compensation and benefits expense. At June
30, 1997, the Company had full-time, part-time and temporary employees, and
persons employed on a contract basis that represented the equivalent of
approximately 11,200 full-time employees, compared to approximately 9,400 at
June 30, 1996. Compensation for temporary employees, contractors and overtime
hours accounted for $33 million and $20 million of total compensation and
benefits expense during the second quarters of 1997 and 1996, respectively.
Advertising and market development expense increased $8 million, or 45%, to
$26 million from the prior year's second quarter primarily due to increased
media, print and direct mail advertisements relating to campaigns covering
Mutual Fund OneSource(registered trademark) and online investing services, as
well as new product and service offerings.
The Company's effective income tax rate for the second quarter of 1997 was
39.5% compared to 40.9% for the comparable period in 1996.
Six Months Ended June 30, 1997
Compared To Six Months Ended
June 30, 1996
Financial Overview
Net income for the first half of 1997 totaled $131 million, up 12% from
first half 1996 net income of $117 million. Earnings per share for the first
half of 1997 increased 11% to $.72 per share from $.65 per share for the first
half of 1996.
Revenues for the first six months of 1997 were $1,066 million, up 14% from
$939 million for the first six months of 1996, due to increases in all revenue
categories except for a decline in principal transaction revenues. During the
first half of 1997, total daily average trades, which include revenue trades and
Mutual Fund OneSource trades, totaled 100,400, up 20% from 83,500 daily average
trades for the same period last year. A total of 34,800 daily average trades
were generated through online brokerage channels during the first half of 1997,
up 83% from 19,000 daily average trades for the same period last year. A total
of 13,300 daily average trades were generated through TeleBroker(registered
trademark) during the first half of 1997, down 6% from 14,100 daily average
trades for the same period last year.
Total operating expenses excluding interest during the first half of 1997
were $850 million, up 15% from $740 million for the first half of 1996,
primarily resulting from additional staff to support the Company's growth and
expansion, as well as an increase in advertising and market development
spending.
The after-tax profit margin for the first half of 1997 was 12.3%, down
from 12.5% for the first half of 1996. The annualized return on stockholders'
equity for the first half of 1997 was 28%, down from 34% for the first half of
1996, reflecting the Company's higher equity base in the first half of 1997.
Commissions
Commission revenues for the Company were $536 million for the first half
of 1997, up $34 million, or 7%, from the first half of 1996. Commissions earned
on customer revenue trades, excluding commissions on trades with specialists,
were $533 million for the first half of 1997, compared to $498 million for the
first half of 1996. Daily average revenue trades were 66,000 in the first half
of 1997, compared to 55,600 for the comparable period in 1996. The Company's
total revenue trades have increased as its customer base has continued to grow.
However, this increase was partially offset by a decline in average commission
per revenue trade. Average commission per revenue trade declined due to a higher
proportion of trades placed through electronic brokerage channels, which provide
additional commission discounts from the Company's standard rates.
- ------------------------------------------------------------
Six Months
Commissions Earned Ended
on Customer Revenue June 30, Percent
Trades 1997 1996 Change
- ------------------------------------------------------------
Customer accounts that
traded during the period
(in thousands) 1,541 1,352 14%
Average customer
revenue trades
per account 5.35 5.18 3
Total revenue
trades (in thousands) 8,251 7,009 18
Average commission
per revenue trade $64.57 $71.11 (9)
Commissions earned
on customer revenue
trades (in millions) $ 533 $ 498 7
============================================================
Schwab added a record 587,000 new customer accounts during the first half
of 1997, an increase of 15% from the 509,000 new accounts added during the first
half of 1996.
Mutual Fund Service Fees
Mutual fund service fees increased $52 million, or 36%, to $197 million in
the first half of 1997 from the comparable period in 1996. This increase between
the six-month periods is generally attributable to the factors described in the
comparison between the three-month periods.
Principal Transactions
Principal transaction revenues decreased $2 million, or 1%, to $133
million in the first half of 1997 from the comparable period in 1996. This
decrease was primarily due to lower average revenue per principal transaction
mainly due to the impact of regulatory changes and changes in industry customs
and practices (see discussion in the comparison between the three-month
periods), partially offset by higher trading volume handled by M&S.
Net Interest Revenue
Net interest revenue increased $38 million, or 31%, to $159 million in the
first half of 1997 from the comparable period in 1996 as shown in the following
table (in millions):
- ------------------------------------------------------------
Six Months
Ended
June 30,
1997 1996
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $210 $161
Investments, customer-related 190 149
Other 15 11
- ------------------------------------------------------------
Total 415 321
- ------------------------------------------------------------
Interest Expense
Customer cash balances 225 173
Stock-lending activities 18 12
Borrowings 9 9
Other 4 6
- ------------------------------------------------------------
Total 256 200
- ------------------------------------------------------------
Net Interest Revenue $159 $121
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the first six months of 1997 and 1996 are summarized in the
following table (dollars in millions):
- ------------------------------------------------------------------
Six Months Ended
June 30,
1997 1996
- ------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,211 $5,646
Average interest rate 5.32% 5.32%
Margin loans to customers:
Average balance outstanding $ 5,563 $4,255
Average interest rate 7.62% 7.60%
Average yield on interest-earning assets 6.32% 6.30%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $10,253 $7,935
Average interest rate 4.42% 4.39%
Other interest-bearing sources:
Average balance outstanding $ 1,043 $ 713
Average interest rate 4.47% 4.37%
Average noninterest-bearing portion $ 1,478 $1,253
Average interest rate on funding sources 3.91% 3.83%
Summary:
Average yield on interest-earning assets 6.32% 6.30%
Average interest rate on funding sources 3.91% 3.83%
- ------------------------------------------------------------------
Average net interest margin 2.41% 2.47%
==================================================================
The increase in net interest revenue from the prior year's first half was
primarily due to higher levels of average earning assets.
Expenses Excluding Interest
Compensation and benefits expense for the first half of 1997 increased $49
million, or 12%, to $445 million from the prior year's first half primarily due
to an increase in salaries and wages resulting from a larger number of
employees, partially offset by a decrease in variable compensation. During the
first six months of 1997 and 1996, variable compensation represented 21% and
28%, respectively, of total compensation and benefits expense. Compensation for
temporary employees, contractors and overtime hours accounted for $64 million
and $43 million of total compensation and benefits expense during the first six
months of 1997 and 1996, respectively.
Advertising and market development expense increased $22 million, or 54%,
to $62 million from the prior year's first half. This increase between the
six-month periods is generally attributable to the factors described in the
comparison between the three-month periods.
The Company's effective income tax rate for the first half of 1997 was
39.5% compared to 41.0% for the comparable period in 1996.
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 $11.4 billion and $10.9 billion at June 30, 1997 and December 31, 1996,
respectively. Earnings from Schwab's operations are the primary source of
liquidity for capital expenditures and investments in new services, marketing
and technology. Management believes that customer cash balances and operating
earnings will continue to be the primary sources of liquidity for Schwab in the
future.
To manage Schwab's regulatory capital position, CSC provides Schwab with a
$250 million subordinated revolving credit facility maturing in September 1998,
of which $220 million was outstanding at June 30, 1997. At quarter end, Schwab
also had outstanding $25 million in fixed-rate subordinated term loans from CSC
maturing in 1999. Borrowings under these subordinated lending arrangements
qualify as regulatory capital for Schwab.
For use in its brokerage operations, Schwab maintained uncommitted,
unsecured bank credit lines totaling $550 million at June 30, 1997. Schwab used
such borrowings for six days during the first six months of 1997, with the daily
amounts borrowed averaging $54 million. These lines were unused at June 30,
1997.
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, marketable securities, and
cash and cash equivalents. M&S may borrow up to $35 million under a subordinated
lending arrangement with CSC. Borrowings under this arrangement qualify as
regulatory capital for M&S. This facility was unused at June 30, 1997.
CSC
CSC's liquidity needs are generally met through cash generated by its
subsidiaries, as well as cash provided by external financing. Schwab and M&S are
subject to regulatory requirements that are intended to ensure the general
financial soundness and liquidity of broker-dealers. These regulations would
prohibit Schwab and M&S from repaying subordinated borrowings to CSC, paying
cash 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, 1997, Schwab had $624 million of net
capital (10% of aggregate debit balances), which was $500 million in excess of
its minimum required net capital. At June 30, 1997, M&S had $8 million of net
capital (331% of aggregate debit balances), which was $7 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 $288 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 1997 to 2005
and fixed interest rates ranging from 5.32% to 7.72% with interest payable
semiannually. The Medium-Term Notes are rated A3 by Moody's Investors Service
and BBB+ by Standard & Poor's Ratings Group.
As of June 30, 1997, CSC had a prospectus supplement on file with the SEC
enabling CSC to issue up to $196 million in Senior or Senior Subordinated
Medium-Term Notes, Series A. At June 30, 1997, $186 million of these notes
remained unissued.
CSC may borrow under its $350 million committed, unsecured credit facility
with a group of 11 banks through June 1998. The funds are available for general
corporate purposes for which CSC pays a commitment fee on the unused balance.
The terms of this facility require CSC to maintain a minimum level of
stockholders' equity and Schwab and M&S to maintain minimum levels of net
capital, as defined. This facility was not used in the first half of 1997.
See "Commitments and Contingencies" note in Part I - Financial
Information, Item 1., Notes to Condensed Consolidated Financial Statements.
Cash Flows and Capital Resources
Net income plus depreciation and amortization was $188 million for the
first six months of 1997, up 14% from $165 million for the first six months of
1996. Depreciation and amortization expense related to equipment, office
facilities and property totaled $52 million for the first half of 1997, as
compared to $42 million for the same period in the prior year. Amortization
expense related to intangible assets totaled $5 million and $6 million for the
first six-month periods of 1997 and 1996, respectively.
During the first six months of 1997, the Company's capital expenditures
totaled $70 million for equipment and office facilities relating to continued
enhancements of its data processing and telecommunications systems. In addition,
the Company opened 19 new branch offices during the first six months of 1997,
compared to eight branch offices opened during the comparable period in 1996. As
has been the case recently, capital expenditures will vary from period to period
as business conditions change.
The Company issued $10 million in Medium-Term Notes during the first half
of 1997.
During the first six months of 1997, the Company repurchased and recorded
as treasury stock a total of 500,000 shares of its common stock for
approximately $16 million. As of June 30, 1997, authorization granted by the
Company's Board of Directors allowed for the repurchase of an additional 871,000
shares.
In July 1997, the Board of Directors approved a three-for-two split of the
Company's common stock, which will be effected in the form of a 50% stock
dividend. The stock dividend is payable September 15, 1997 to stockholders of
record August 14, 1997. Share and per share data have not been restated to
reflect this transaction.
During the first six months of 1997, the Company paid common stock cash
dividends totaling $18 million, up from $14 million paid during the first six
months of 1996.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's stockholders' equity at June 30, 1997
totaled $993 million. In addition, the Company had borrowings of $289 million
that bear interest at a weighted-average rate of 6.50%. These borrowings,
together with the Company's equity, provided total financial capital of $1,282
million at June 30, 1997, up $143 million, or 13% from the December 31, 1996
level of $1,139 million.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The discussion of legal proceedings in Notes to Condensed Consolidated
Financial Statements, under "Commitments and Contingencies" in Part I -
Financial Information, Item 1., as well as in "Principal Transactions" in
Management's Discussion and Analysis in Part I, Item 2., is 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 12, 1997, its
stockholders voted upon the following proposals (share amounts have not been
restated to reflect the effects of the three-for-two common stock split declared
July 16, 1997, payable September 15, 1997):
Proposal No. 1 - Election of Three Directors:
Shares Shares
For Against
------ -------
David S. Pottruck 158,419,665 4,031,996
Nancy H. Bechtle 161,418,632 1,033,029
C. Preston Butcher 158,574,611 3,877,050
There were no abstentions or broker non-votes with respect to the election
of directors.
Proposal No. 2 - Amendment to the 1992 Stock Incentive Plan -- Amendment to the
1992 Stock Incentive Plan to increase the total number of shares under this
Plan.
Shares Shares Broker
For Against Abstentions Non-Votes
------ ------- ----------- ---------
125,805,463 17,034,932 908,315 18,702,951
Proposal No. 3 - Stockholder Proposal Requesting that the Board of Directors
Amend the Certificate of Incorporation -- Stockholder proposal requesting that
the Board of Directors amend the Certificate of Incorporation to reinstate
stockholder rights to act by written consent and to call special meetings.
Shares Shares Broker
For Against Abstentions Non-Votes
------ ------- ----------- -----------
31,336,211 110,559,664 1,399,828 19,155,958
A total of 162,451,661 shares were present in person or by proxy at the
Annual Meeting.
Item 5. Other Information
On July 16, 1997, George P. Schultz, former U.S. Secretary of State, was
elected to the Company's Board of Directors, expanding it to 11 members.
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
- --------------------------------------------------------------------------------
10.116 Second Amendment to the Trust Agreement for the
Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective July 1, 1992, dated
June 30, 1992.
10.168 Charles Schwab Profit Sharing and Employee Stock
Ownership Plan, as amended through December 13, 1996 (supersedes
Exhibit 10.152 to the Registrant's Form 10-Q for the quarter ended
June 30, 1995).
10.169 Third Amendment to the Trust Agreement for the
Charles Schwab Profit Sharing and Employee Stock
Ownership Plan effective January 1, 1996, dated
May 8, 1996.
10.170 The Charles Schwab Corporation 1992 Stock Incentive Plan Restated as
of May 12, 1997 (supersedes Exhibit 10.141 to the Registrant's Form
10-Q for the quarter ended September 30, 1994).
10.171 Form of Restricted Shares Award Agreement of The
Charles Schwab Corporation 1992 Stock Incentive
Plan (supersedes Exhibit 4.6 to the Registrant's
Registration Statement No. 33-54701 on Form S-8).
10.172 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.143 to
the Registrant's Form 10-Q for the quarter ended September 30,
1994).
10.173 Form of Nonstatutory Stock Option and
Performance Unit Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan.
10.174 Form of Incentive Stock Option Agreement of The Charles Schwab
Corporation 1992 Stock Incentive Plan (supersedes Exhibit 10.144 to
the Registrant's Form 10-Q for the quarter ended September 30,
1994).
10.175 Form of Restricted Shares Award Agreement with performance vesting
conditions of The Charles Schwab Corporation 1992 Stock Incentive
Plan (supersedes Exhibit 10.155 to the Registrant's Form 10-Q for
the quarter ended September 30, 1995).
10.176 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Stock Option Plan (supersedes Form of Non-Qualified
Stock Option Agreement in Exhibit 10.167 to the Registrant's Form
10-Q for the quarter ended March 31, 1997).
10.177 Form of Incentive Stock Option Agreement of
The Charles Schwab Corporation 1987 Stock Option
Plan.
10.178 Form of Restricted Shares Award Agreement of
The Charles Schwab Corporation 1987 Stock Option
Plan.
10.179 Form of Nonstatutory Stock Option Agreement of The Charles Schwab
Corporation 1987 Executive Officer Stock Option Plan (supersedes
Form of Non-Qualified Stock Option Agreement in Exhibit 10.166 to
the Registrant's Form 10-Q for the quarter ended March 31, 1997).
10.180 Form of Restricted Shares Award Agreement of The
Charles Schwab Corporation 1987 Executive
Officer Stock Option Plan.
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.
THE CHARLES SCHWAB CORPORATION
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: July 29, 1997 /s/ Steven L. Scheid
------------- -----------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer