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 September 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.
265,586,070* shares of $.01 par value Common Stock
Outstanding on October 23, 1997
* Reflects the three-for-two common stock split declared July 16, 1997,
distributed September 15, 1997.
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 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 7-17
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Commissions $ 322,679 $ 210,110 $ 858,994 $ 712,172
Mutual fund service fees 112,155 80,295 308,677 224,514
Principal transactions 61,252 57,403 193,985 192,156
Interest revenue, net of interest expense(1) 94,013 63,966 253,221 185,315
Other 21,740 18,265 63,400 54,446
- ----------------------------------------------------------------------------------------------------------------
Total 611,839 430,039 1,678,277 1,368,603
- ----------------------------------------------------------------------------------------------------------------
Expenses Excluding Interest
Compensation and benefits 255,104 171,656 700,061 567,845
Communications 45,790 40,170 137,002 127,470
Occupancy and equipment 39,279 33,177 113,183 96,270
Depreciation and amortization 34,948 24,231 92,407 72,335
Advertising and market development 29,303 16,464 91,092 56,511
Commissions, clearance and floor brokerage 26,290 18,695 70,951 60,001
Professional services 19,865 10,761 50,319 34,406
Other 34,320 18,388 80,259 58,899
- ----------------------------------------------------------------------------------------------------------------
Total 484,899 333,542 1,335,274 1,073,737
- ----------------------------------------------------------------------------------------------------------------
Income before taxes on income 126,940 96,497 343,003 294,866
Taxes on income 50,415 39,429 135,781 120,760
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 76,525 $ 57,068 $ 207,222 $ 174,106
================================================================================================================
Weighted-average number of common and
common equivalent shares outstanding(2, 3) 273,001 269,382 271,964 268,865
================================================================================================================
Primary/Fully Diluted Earnings Per Share(3) $ .28 $ .21 $ .76 $ .65
================================================================================================================
Dividends Declared Per Common Share(3) $ .033 $ .033 $ .099 $ .087
================================================================================================================
(1) Interest revenue is presented net of interest expense. Interest expense for the three months ended
September 30, 1997 and 1996 was $142,338 and $107,522, respectively. Interest expense for the nine months
ended September 30, 1997 and 1996 was $398,594 and $307,683, respectively.
(2) Amounts shown are used to calculate primary earnings per share.
(3) Reflects the three-for-two common stock split declared July 16, 1997, distributed 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)
September 30, December 31,
1997 1996
---- ----
Assets
Cash and cash equivalents $ 857,551 $ 633,317
Cash and investments required to be segregated under Federal or other
regulations (including resale agreements of $4,694,086 in 1997
and $6,069,930 in 1996) 6,588,359 7,235,971
Receivable from brokers, dealers and clearing organizations 402,588 230,943
Receivable from customers - net 7,074,611 5,012,815
Securities owned - at market value 176,173 127,866
Equipment, office facilities and property - net 335,754 315,376
Intangible assets - net 57,961 68,922
Other assets 138,486 153,558
- ---------------------------------------------------------------------------------------------------------------
Total $ 15,631,483 $ 13,778,768
===============================================================================================================
Liabilities and Stockholders' Equity
Drafts payable $ 230,892 $ 225,136
Payable to brokers, dealers and clearing organizations 1,259,607 877,742
Payable to customers 12,288,316 11,176,836
Accrued expenses and other 454,719 360,683
Borrowings 319,980 283,816
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 14,553,514 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;
267,689 issued in 1997 and 1996* 2,677 1,785
Additional paid-in capital 235,806 200,857
Retained earnings 903,033 723,085
Treasury stock - 2,306 shares in 1997 and 5,087 shares in 1996,
at cost* (43,826) (60,277)
Unearned ESOP shares (2,544) (5,517)
Unamortized restricted stock compensation (17,089) (8,658)
Foreign currency translation adjustment (88) 3,280
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,077,969 854,555
- ---------------------------------------------------------------------------------------------------------------
Total $ 15,631,483 $ 13,778,768
===============================================================================================================
* Reflects the three-for-two common stock split declared July 16, 1997, distributed September 15, 1997.
See Notes to Condensed Consolidated Financial Statements.
THE CHARLES SCHWAB CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---- ----
Cash flows from operating activities
Net income $ 207,222 $ 174,106
Noncash items included in net income:
Depreciation and amortization 92,407 72,335
Stock compensation 21,843 15,999
Deferred income taxes (19,403) (2,425)
Other 2,711 3,704
Change in securities owned - at market value (48,303) (34,443)
Change in other assets 34,343 58,871
Change in accrued expenses and other 121,178 3,851
- -------------------------------------------------------------------------------------------------------
Net cash provided before change in customer-related balances 411,998 291,998
- -------------------------------------------------------------------------------------------------------
Change in customer-related balances:
Payable to customers 1,123,564 1,137,124
Receivable from customers (2,064,932) (550,237)
Drafts payable 6,776 (60,080)
Payable to brokers, dealers and clearing organizations 385,098 294,213
Receivable from brokers, dealers and clearing organizations (178,053) (27,352)
Cash and investments required to be segregated under
Federal or other regulations 638,761 (789,611)
- -------------------------------------------------------------------------------------------------------
Net change in customer-related balances (88,786) 4,057
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 323,212 296,055
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of equipment, office facilities and property - net (103,215) (110,642)
Cash payments for business acquired (3,709)
- -------------------------------------------------------------------------------------------------------
Net cash used by investing activities (103,215) (114,351)
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from borrowings 61,000 64,000
Repayment of borrowings (24,685) (16,715)
Dividends paid (26,382) (22,740)
Purchase of treasury stock (16,230) (1,024)
Other 11,320 4,440
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,023 27,961
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (786) (76)
- -------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 224,234 209,589
Cash and cash equivalents at beginning of period 633,317 454,996
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 857,551 $ 664,585
=======================================================================================================
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 262 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. Other subsidiaries include Charles Schwab
Investment Management, Inc., the investment adviser for Schwab's proprietary
mutual funds, and ShareLink, a retail discount securities brokerage firm located
in the United Kingdom.
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 Reports on Form 10-Q for the periods ended March 31,
1997 and June 30, 1997.
Prior periods' financial statements have been reclassified to conform to
the 1997 presentation.
Stock Split
On July 16, 1997, the Board of Directors approved a three-for-two split of
the Company's common stock, effected in the form of a 50% stock dividend. The
stock dividend was distributed on September 15, 1997 to stockholders of record
on August 14, 1997. Share and per share data have been restated to reflect this
transaction.
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 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 reduction in EPS
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 $.29 and $.22 for the quarters ended
September 30, 1997 and 1996, respectively and $.79 and $.67 for the nine-month
periods ended September 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 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
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
In August 1997, the Company entered into a twenty-year noncancelable
operating lease for office space located in San Francisco, California. The lease
includes two ten-year extension options at then current market rates. Rental
payments commence in 1998. The future minimum rental commitment under this lease
is $6 million in 1998, $8 million per year for 1999 through 2001, and $131
million thereafter.
M&S has been named as one of thirty-eight 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 August 22, 1995, a second consolidated amended class action
complaint was filed purportedly on behalf of certain persons who purchased or
sold Nasdaq securities during the period May 1, 1989 through May 27, 1994. 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. 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. Pre-trial
discovery is ongoing. Between April 9, 1997 and August 7, 1997, plaintiffs
reached proposed settlements with six defendants and motions to approve those
settlements are pending before the Court.
Between August 12, 1993 and November 17, 1995, Schwab was named as a
defendant in eleven class action lawsuits in seven states. 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. 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 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 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. On August 26, 1997, the Natchitoches action was stayed
pending a determination of the preemption issue by the Louisiana Court of
Appeals.
The ultimate outcome of the legal proceedings described above and the
various other civil actions, arbitration proceedings, and claims pending against
the Company cannot be determined at this time, and the results of these legal
proceedings cannot be predicted with certainty. While a substantial judgment
could have a material adverse impact on the Company's financial condition and
results of operations, 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; however,
there could be a material adverse impact on operating results in future periods,
depending in part on the results for such periods.
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 September 30, 1997, Schwab's
net capital was $742 million (10% of aggregate debit balances), which was $593
million in excess of its minimum required net capital and $370 million in excess
of 5% of aggregate debit balances. At September 30, 1997, M&S' net capital was
$10 million (573% of aggregate debit balances), which was $9 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 September 30, 1997, in accordance with
applicable regulations. M&S had no such cash reserve requirement at September
30, 1997.
Cash Flow Information
Certain information affecting the cash flows of the Company follows (in
thousands):
Nine Months
Ended
September 30,
1997 1996
---- ----
Income taxes paid $ 112,338 $ 106,249
========== ==========
Interest paid:
Customer cash balances $ 349,912 $ 266,695
Stock-lending activities 27,086 17,046
Borrowings 18,602 16,733
Other 6,127 5,933
---------- ----------
Total interest paid $ 401,727 $ 306,407
========== ==========
Subsequent Event
On October 22, 1997, the Board of Directors increased the quarterly cash
dividend from $.033 per share to $.040 per share payable November 28, 1997 to
stockholders of record November 14, 1997.
THE CHARLES SCHWAB CORPORATION
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 4.6 million active customer accounts(a). Customer assets
totaled $344.7 billion at September 30, 1997. CSC's principal subsidiary,
Charles Schwab & Co., Inc. (Schwab), is a securities broker-dealer with 262
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. Other subsidiaries include Charles Schwab Investment
Management, Inc., the investment adviser for Schwab's proprietary mutual funds,
and ShareLink, a retail discount securities brokerage firm located in the United
Kingdom.
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 294,000 new customer accounts and gather $16.4
billion in net new customer assets during the third 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 approximately 800 mutual funds from 120 fund families
without incurring transaction fees. During the third quarter of 1997, Schwab
announced alliances with three investment banking firms to provide certain of
its customers access to initial and secondary public stock offerings managed by
these firms.
The Company invests in diverse delivery systems that support the Company's
customer service standards. During the third quarter of 1997, the Company opened
eight new branch offices. In addition to its branch office network, the Company
maintains four regional telephone service centers. The Company also offers
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 third quarter of 1997, Schwab introduced the SchwabLink Web
(trademark) site for independent fee-based investment managers, who can now use
the Internet to communicate directly with Schwab service teams, as well as
receive news and information tailored to their needs. In addition, the Company
launched a service that allows customers of its Cayman Islands and Hong Kong
subsidiaries to trade third party mutual funds online and obtain information on
mutual fund performance and fees, all through the Company's international web
site. Also during the third quarter of 1997, Schwab introduced a speech
recognition telephone trading service that enables customers to trade any of the
funds in the Mutual Fund Marketplace (registered trademark) using vocal
commands.
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. Another recent trend has been increased competition
on the basis of price, particularly in online investing services. These
competitive factors 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), 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; computer system failures; the effects of competitors' pricing,
product and service decisions and intensified competition; evolving regulation
and changing industry customs and practices adversely affecting the Company;
adverse results 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 September 30, 1997
Compared To Three Months Ended
September 30, 1996
Financial Overview
Net income for the third quarter of 1997 totaled $77 million, up 34% from
third quarter 1996 net income of $57 million. Earnings per share for the third
quarter of 1997 increased 33% to $.28 per share from $.21 per share for the
third quarter of 1996. Share and per share data have been restated to reflect
the effects of the three-for-two common stock split declared on July 16, 1997
and distributed on September 15, 1997.
Third quarter 1997 revenues were $612 million, up 42% from $430 million
for the third quarter of 1996, primarily due to a 54% increase in commission
revenues, as well as a 40% increase in mutual fund service fees and a 47%
increase in interest revenue, net of interest expense (referred to as net
interest revenue). These increases mainly resulted from higher trading volume
and an increase in customer assets. During the third quarter of 1997, total
daily average trades, which include revenue trades and Mutual Fund OneSource
(registered trademark) trades, were 112,200, up 48% from 75,700 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 46,100 daily average trades were
generated through online brokerage channels during the third quarter of 1997, up
132% from 19,900 for the same period last year. Additionally, a total of 15,000
daily average trades were generated through TeleBroker (registered trademark)
during the third quarter of 1997, up 30% from 11,500 for the same period last
year.
Assets in Schwab customer accounts totaled $344.7 billion at September 30,
1997, an increase of $113.1 billion, or 49%, from a year ago as shown in the
table below. This increase resulted from net new customer assets of $62.3
billion and net market gains of $50.8 billion.
- --------------------------------------------------------------------------------
Assets in Schwab
Customer Accounts September 30, Percent
(in billions) 1997 1996 Change
- --------------------------------------------------------------------------------
Cash and equivalents:
SchwabFunds (registered trademark) money
market funds $ 46.4 $ 36.1 29%
Schwab One (registered trademark) and other
cash equivalents 11.6 9.2 26
Net securities:
Mutual Fund Marketplace (registered trademark) (1):
Mutual Fund OneSource (registered trademark) 56.9 36.1 58
All other 48.1 33.1 45
- --------------------------------------------------------------------------------
Total Mutual Fund
Marketplace 105.0 69.2 52
Equity and other securities (1) 151.8 93.1 63
SchwabFunds equity and
bond funds 6.8 3.1 119
Fixed income securities 30.2 25.5 18
Margin loans outstanding (7.1) (4.6) 54
- --------------------------------------------------------------------------------
Total assets in Schwab
customer accounts $ 344.7 $ 231.6 49
================================================================================
(1) Excludes money market funds and all of Schwab's proprietary money market,
equity and bond funds.
Total operating expenses excluding interest during the third quarter of
1997 were $485 million, up 45% from $334 million for the third 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, higher depreciation and amortization expense, and higher other
expenses.
The after-tax profit margin for the third quarter of 1997 was 12.5%, down
from 13.3% for the third quarter of 1996. The annualized return on stockholders'
equity for the third quarter of 1997 was 30%, up from 29% for the third quarter
of 1996.
Commissions
Commission revenues for the Company were $323 million for the third
quarter of 1997, up $113 million, or 54%, from the third quarter 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 $320 million for the third quarter of 1997,
compared to $209 million for the third quarter of 1996. Daily average revenue
trades were 77,400 in the third quarter of 1997, compared to 48,700 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.
- -----------------------------------------------------------------
Three Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1997 1996 Change
- -----------------------------------------------------------------
Customer accounts that
traded during the quarter
(in thousands) 1,153 890 30%
Average customer
revenue trades
per account 4.30 3.51 23
Total revenue
trades (in thousands) 4,955 3,124 59
Average commission
per revenue trade $64.61 $66.88 (3)
Commissions earned
on customer revenue
trades (in millions) $ 320 $ 209 53
=================================================================
Attracting new customer accounts is important in generating commission
revenues. Schwab added 294,000 new customer accounts during the third quarter of
1997, an increase of 35% from the 217,000 new accounts added during the third
quarter of 1996.
Mutual Fund Service Fees
Mutual fund service fees were $112 million for the third quarter of 1997,
up $32 million, or 40%, 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 were $61 million for the third quarter of
1997, up $4 million, or 7%, from the comparable period in 1996. This increase
was primarily due to higher revenues relating to Schwab's specialists
operations, as well as a slight increase in M&S trading revenue. M&S trading
revenue increased due to higher trading volume handled by M&S, substantially
offset by lower average revenue per principal transaction.
In August 1996, the Securities and Exchange Commission (SEC) adopted
certain new rules and rule amendments, known as the Order Handling Rules, which
have significantly altered the manner in which orders related to both Nasdaq and
listed securities are handled. These rules were implemented in phases between
January 20, 1997 and October 13, 1997.
Additionally, in June 1997, most major U.S. securities markets, including
Nasdaq and the New York Stock Exchange, Inc. 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 further changes to reduce the increments by which securities are
priced. Mainly as a result of these regulatory changes and changes in industry
customs and practices, average revenue per principal transaction declined during
the third quarter of 1997 as compared to the third quarter of 1996. These and
future regulatory changes and changes in industry customs and practices are
expected to continue to result in significant declines in average revenue per
principal transaction, and are expected to have a material adverse impact on
M&S' revenues and profit margin. In response to these changes, M&S is in the
process of instituting reductions in payments to broker-dealers who direct
securities orders to M&S.
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 was $94 million for the third quarter of 1997, up $30
million, or 47%, from the comparable period in 1996 as shown in the following
table (in millions):
- ------------------------------------------------------------
Three Months
Ended
September 30,
1997 1996
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 129 $ 87
Investments, customer-related 99 76
Other 8 9
- ------------------------------------------------------------
Total 236 172
- ------------------------------------------------------------
Interest Expense
Customer cash balances 126 94
Stock-lending activities 10 6
Borrowings 5 5
Other 1 3
- ------------------------------------------------------------
Total 142 108
- ------------------------------------------------------------
Net Interest Revenue $ 94 $ 64
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the third quarters of 1997 and 1996 are summarized in the
following table (dollars in millions):
- ----------------------------------------------------------------------
Three Months Ended
September 30,
1997 1996
- ----------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,193 $ 5,693
Average interest rate 5.47% 5.30%
Margin loans to customers:
Average balance outstanding $ 6,614 $ 4,603
Average interest rate 7.73% 7.55%
Average yield on interest-earning assets 6.55% 6.30%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $10,943 $ 8,493
Average interest rate 4.56% 4.39%
Other interest-bearing sources:
Average balance outstanding $ 1,185 $ 747
Average interest rate 4.40% 4.51%
Average noninterest-bearing portion $ 1,679 $ 1,056
Average interest rate on funding sources 3.99% 3.95%
Summary:
Average yield on interest-earning assets 6.55% 6.30%
Average interest rate on funding sources 3.99% 3.95%
- ----------------------------------------------------------------------
Average net interest margin 2.56% 2.35%
======================================================================
The increase in net interest revenue from the prior year's third quarter
was primarily due to higher levels of average earning assets.
Expenses Excluding Interest
Compensation and benefits expense was $255 million for the third quarter
of 1997, up $83 million, or 49%, from the prior year's third quarter primarily
due to an increase in salaries and wages resulting from a larger number of
employees, as well as higher variable compensation. During the third quarters of
1997 and 1996, variable compensation represented 27% and 24%, respectively, of
total compensation and benefits expense. At September 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 12,000 full-time
employees, compared to approximately 9,600 at September 30, 1996. Compensation
for temporary employees, contractors and overtime hours accounted for $34
million and $19 million of total compensation and benefits expense during the
third quarters of 1997 and 1996, respectively.
Depreciation and amortization expense was $35 million for the third
quarter of 1997, up $11 million, or 44%, from the prior year's third quarter
primarily due to newly acquired data processing and telecommunication equipment
which increased the Company's customer service capacity.
Advertising and market development expense was $29 million for the third
quarter of 1997, up $13 million, or 78%, from the prior year's third quarter
primarily due to increased media advertisements relating to campaigns covering
Mutual Fund OneSource (registered trademark) and online investing services, as
well as new product and service offerings. Higher print and direct mail
advertisements also contributed to the increase.
Other expenses were $34 million for the third quarter of 1997, up $16
million, or 87%, from the prior year's third quarter. This increase was
primarily due to a provision for litigation, as well as increases in travel and
entertainment and volume-related expenses reflecting the Company's continued
growth.
The Company's effective income tax rate for the third quarter of 1997 was
39.7% compared to 40.9% for the comparable period in 1996.
Nine Months Ended September 30, 1997
Compared To Nine Months Ended
September 30, 1996
Financial Overview
Net income for the first nine months of 1997 totaled $207 million, up $33
million, or 19%, from the first nine months of 1996. Earnings per share for the
first nine months of 1997 increased 17% to $.76 per share from $.65 per share
for the first nine months of 1996.
Revenues for the first nine months of 1997 were $1,678 million, up 23%
from $1,369 million for the first nine months of 1996, primarily due to a 21%
increase in commission revenues, as well as a 37% increase in both mutual fund
service fees and net interest revenue. During the first nine months of 1997,
total daily average trades, which include revenue trades and Mutual Fund
OneSource (registered trademark) trades, were 104,400, up 29% from 80,900 for
the same period last year. A total of 38,000 daily average trades were generated
through online brokerage channels during the first nine months of 1997, up 97%
from 19,300 for the same period last year. A total of 13,700 daily average
trades were generated through TeleBroker (registered trademark) during the first
nine months of 1997, up 4% from 13,200 for the same period last year.
Total operating expenses excluding interest during the first nine months
of 1997 were $1,335 million, up 24% from $1,074 million for the comparable
period in 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 nine months of 1997 was 12.3%,
down from 12.7% for the same period in 1996. The annualized return on
stockholders' equity for the first nine months of 1997 was 29%, down from 32%
for the first nine months of 1996, reflecting the Company's higher equity base
in the first nine months of 1997.
Commissions
Commission revenues for the Company were $859 million for the first nine
months of 1997, up $147 million, or 21%, from the comparable period in 1996.
Commissions earned on customer revenue trades, excluding commissions on trades
with specialists, were $853 million for the first nine months of 1997, compared
to $707 million for the first nine months of 1996. Daily average revenue trades
were 69,900 in the first nine months of 1997, compared to 53,300 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.
- ------------------------------------------------------------------
Nine Months
Commissions Earned Ended
on Customer Revenue September 30, Percent
Trades 1997 1996 Change
- ------------------------------------------------------------------
Customer accounts that
traded during the period
(in thousands) 2,028 1,740 17%
Average customer
revenue trades
per account 6.51 5.82 12
Total revenue
trades (in thousands) 13,206 10,133 30
Average commission
per revenue trade $64.59 $69.81 (7)
Commissions earned
on customer revenue
trades (in millions) $ 853 $ 707 21
==================================================================
Schwab added a record 881,000 new customer accounts during the first nine
months of 1997, an increase of 21% from the 726,000 new accounts added during
the first nine months of 1996.
Mutual Fund Service Fees
Mutual fund service fees were $309 million for the first nine months of
1997, up $84 million, or 37%, from the comparable period in 1996. This increase
was attributable to the factors described in the comparison between the
three-month periods.
Principal Transactions
Principal transaction revenues were $194 million for the first nine months
of 1997, up $2 million, or 1%, from the comparable period in 1996. This increase
was primarily due to higher revenues relating to Schwab's specialists
operations, partially offset by a decrease in M&S trading revenue. M&S trading
revenue decreased due to lower average revenue per principal transaction (see
discussion in the comparison between the three-month periods), which was largely
offset by higher trading volume handled by M&S.
Net Interest Revenue
Net interest revenue was $253 million for the first nine months of 1997,
up $68 million, or 37%, from the comparable period in 1996 as shown in the
following table (in millions):
- ------------------------------------------------------------
Nine Months
Ended
September 30,
1997 1996
- ------------------------------------------------------------
Interest Revenue
Margin loans to customers $ 339 $ 248
Investments, customer-related 290 225
Other 23 20
- ------------------------------------------------------------
Total 652 493
- ------------------------------------------------------------
Interest Expense
Customer cash balances 350 267
Stock-lending activities 28 18
Borrowings 14 14
Other 7 9
- ------------------------------------------------------------
Total 399 308
- ------------------------------------------------------------
Net Interest Revenue $ 253 $ 185
============================================================
Customer-related daily average balances, interest rates and average net
interest margin for the first nine months of 1997 and 1996 are summarized in the
following table (dollars in millions):
- ----------------------------------------------------------------------
Nine Months Ended
September 30,
1997 1996
- ----------------------------------------------------------------------
Interest-Earning Assets (customer-related):
Investments:
Average balance outstanding $ 7,205 $ 5,662
Average interest rate 5.37% 5.31%
Margin loans to customers:
Average balance outstanding $ 5,917 $ 4,371
Average interest rate 7.66% 7.58%
Average yield on interest-earning assets 6.40% 6.30%
Funding Sources (customer-related
and other):
Interest-bearing customer cash balances:
Average balance outstanding $10,486 $ 8,122
Average interest rate 4.47% 4.39%
Other interest-bearing sources:
Average balance outstanding $ 1,091 $ 725
Average interest rate 4.45% 4.42%
Average noninterest-bearing portion $ 1,545 $ 1,186
Average interest rate on funding sources 3.94% 3.87%
Summary:
Average yield on interest-earning assets 6.40% 6.30%
Average interest rate on funding sources 3.94% 3.87%
- ----------------------------------------------------------------------
Average net interest margin 2.46% 2.43%
======================================================================
The increase in net interest revenue from the prior year's first nine
months was primarily due to higher levels of average earning assets.
Expenses Excluding Interest
Compensation and benefits expense for the first nine months of 1997 was
$700 million, up $132 million, or 23%, from the comparable period in 1996
primarily due to an increase in salaries and wages resulting from a larger
number of employees, as well as higher variable compensation. During the first
nine months of 1997 and 1996, variable compensation represented 23% and 27%,
respectively, of total compensation and benefits expense. Compensation for
temporary employees, contractors and overtime hours accounted for $98 million
and $62 million of total compensation and benefits expense during the first nine
months of 1997 and 1996, respectively.
Advertising and market development expense for the first nine months of
1997 was $91 million, up $35 million, or 61%, from the prior year's first nine
months. In addition to the factors described in the comparison between the
three-month periods, advertisements related to the Company's role as the
official investment firm for the Professional Golf Association Tour contributed
to the increase.
The Company's effective income tax rate for the first nine months of 1997
was 39.6% 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 $11.9 billion and $10.9 billion at September 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
$300 million subordinated revolving credit facility maturing in September 1999.
On October 29, 1997, the size of this facility was increased from $300 million
to $400 million. At September 30, 1997, $275 million was outstanding. 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 $595 million at September 30, 1997. Schwab
used such borrowings for ten days during the first nine months of 1997, with the
daily amounts borrowed averaging $91 million. These lines were unused at
September 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 September 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 September 30, 1997, Schwab had $742 million of net
capital (10% of aggregate debit balances), which was $593 million in excess of
its minimum required net capital. At September 30, 1997, M&S had $10 million of
net capital (573% of aggregate debit balances), which was $9 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 $319 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 2007
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 A- by Standard & Poor's Ratings Group. The rating by Standard & Poor's was
raised to A- from BBB+ on October 22, 1997.
As of September 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 September 30, 1997, $135 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 nine months 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 $300 million for the
first nine months of 1997, up 22% from $246 million for the first nine months of
1996. Depreciation and amortization expense related to equipment, office
facilities and property totaled $80 million for the first nine months of 1997,
as compared to $63 million for the same period in the prior year. Amortization
expense related to intangible assets totaled $12 million and $9 million for the
first nine-month periods of 1997 and 1996, respectively.
During the first nine months of 1997, the Company's capital expenditures
totaled $103 million for equipment relating to continued enhancements of its
data processing and telecommunications systems, as well as leasehold
improvements and additional office facilities to support the Company's growth.
In addition, the Company opened 27 new branch offices during the first nine
months of 1997, compared to nine 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 $61 million and repaid $20 million in Medium-Term Notes
during the first nine months of 1997.
In September 1997, the Board of Directors authorized the repurchase of up
to an additional 3,750,000 shares of the Company's common stock. During the
first nine months of 1997, the Company repurchased and recorded as treasury
stock a total of 780,000 shares of its common stock for approximately $16
million. As of September 30, 1997, authorization granted by the Company's Board
of Directors allowed for future repurchases of 5,026,500 shares.
In July 1997, the Board of Directors approved a three-for-two split of the
Company's common stock, effected in the form of a 50% stock dividend. The stock
dividend was distributed on September 15, 1997 to stockholders of record on
August 14, 1997. Share and per share data have been restated to reflect this
transaction.
During the first nine months of 1997, the Company paid common stock cash
dividends totaling $26 million, up from $23 million paid during the first nine
months of 1996.
The Company monitors both the relative composition and absolute level of
its capital structure. The Company's stockholders' equity at September 30, 1997
totaled $1,078 million. In addition, the Company had borrowings of $320 million
that bear interest at a weighted-average rate of 6.60%. These borrowings,
together with the Company's equity, provided total financial capital of $1,398
million at September 30, 1997, up $259 million, or 23% from the December 31,
1996 level of $1,139 million.
Year 2000
The Company is currently modifying its computer systems in order to
process data and transactions incorporating year 2000 dates without material
errors or interruptions. The success of this effort depends in part on parallel
efforts being undertaken by other securities market participants with which the
Company's systems interact. These efforts may also be affected by regulatory
changes that would require other significant systems modifications, such as the
potential shift of securities pricing from fractions to decimals and proposed
order audit trail requirements. Costs incurred to modify the Company's computer
systems will be expensed as incurred in accordance with generally accepted
accounting principles, and are not expected to have a material impact on the
Company's results of operations.
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
None.
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.
On September 29, 1997, Timothy F. McCarthy was named President and Chief
Operating Officer of Charles Schwab & Co., Inc.
As of October 29, 1997, the Company's Management Committee consists of
Charles R. Schwab, David S. Pottruck, Timothy F. McCarthy and the following
individuals:
Karen W. Chang General Investor
John Philip Coghlan Retirement Plan Services
Linnet F. Deily Services for Investment Managers
Lon Gorman Capital Markets and Trading
Daniel O. Leemon Chief Strategy Officer
Dawn Gould Lepore Chief Information Officer
Susanne D. Lyons Active Trader and Affluent
Customer
Gideon Sasson * Electronic Brokerage
Steven L. Scheid Chief Financial Officer
Tom Decker Seip International and Mutual Funds
Luis E. Valencia Chief Administrative Officer
*Effective November 1, 1997.
On October 27, 1997, Lawrence J. Stupski announced his retirement as Vice
Chairman and Director of the Company effective January 1, 1998.
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
- --------------------------------------------------------------------------------
10.181 Commercial office lease of 211 Main Street
between Main Plaza, LLC and Charles Schwab &
Co., Inc. dated August 8, 1997.
10.182 The Charles Schwab Corporation Corporate
Executive Bonus Plan, amended and restated, effective January 1,
1996 (supersedes Exhibit 10.147 to the Registrant's Form 10-K for
the year ended December 31, 1994).
10.183 Fourth Amendment to the Revolving Subordinated Loan Agreement, as of
July 25, 1997, between the Registrant and Charles Schwab & Co., Inc.
10.184 Fifth Amendment to the Revolving Subordinated Loan Agreement, as of
October 29, 1997, between the Registrant and Charles Schwab & Co.,
Inc.
10.185 The Charles Schwab Corporation Senior Executive
Severance Policy, effective December 7, 1995.
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: October 29, 1997 /s/ Steven L. Scheid
---------------- -----------------------------
Steven L. Scheid
Executive Vice President and
Chief Financial Officer